Chinese Imports Economic Importance

by | Jul 26, 2007 | Archives

Chinese imports have great economic importance and the American backlash on Chinese goods mentioned in previous messages is taking place and appears to be growing.

According to a recent USA TODAY/Gallup Poll, half of American shoppers are trying to buy U.S. food products. The survey showed that 83% of the shoppers are concerned about food from China, compared with 61% about foods from Mexico and 39% about foods from the USA.

This backlash goes beyond food. The list of products has grown from toothpaste, to pet food, to fish, to tires and is likely to grow more. For example, here is a little quirk that a reader just sent: “Hi Gary – I thought you might be interested in another story about the problems occuring with products manufactured in China. Today I purchased a new heating pad manufacturered by Sunbeam. Upon opening the package at home I discovered a tag attached to the cord which read ‘Warning: The power cord on this product contains lead, a chemical known to the State of California to cause cancer and birth defects or other reproductive harm. Wash hands after handling.’ How appalling – and blatant!! I suppose they think people won’t bother to read the small print and that this statement absolves the company from any harm. I’m not sure why the State of California should be the only one to be privy to the information on danger in cords containing lead, but whatever…. Needless to say I have returned the product, written a nasty note to Sunbeam, will write to the store where I purchased this product, and can’t wait to spread the word to friends on this latest Chinese problem – not to mention my opinion of the Sunbeam Corporation.”

This backlash has significant economic as well as social and military implications. Let’s began with the latter.

China has the largest population in the world. This huge population and dramatic economic growth means that China’s economy is close to overtaking Germany as the world’s third-biggest.

The National Bureau of Statistics estimates that China’s 2006 growth rate is 11.1 percent. This has boosted China’s total output to $2.705 trillion, bringing it close to the world’s third-largest, after the U.S. and Japan.

Yet the Chinese are still desperately poor. The US Gross National Income per person (refined as Purchasing Power Parity) for example is $43,740. The world average GNI is $6,987 per person. Ecuador’s GNI as another example is $2,630. The Chinese per person GNI is a low $1,740. That is 108th in the world.

Yet this hoard of people have huge expectations. The government opened Pandora’s Box and is surfing a Tsunami of hope. If the Chinese People are let down, their leaders will be swamped…crushed and ground in resentment and anger.

The best way out is through increasing economic expansion and a gradual rising of well distributed wealth.

China and the US currently have a wonderful reciprocity. The Chinese make inexpensive goods. Americans buy them. The Chinese feel richer. Americans feel less poor. This process is basically a mutual one with the environment (and everyone in the world) being the big loser…but for now it works. This economic cooperation could be the glue that holds a globe fraught with tension together. If the US and China are united, the balance of the world must follow.

This scenario is fraught with its own problems as China becomes more of a capitalistic democracy and the US more of a socialistic dictatorial power. Yet for now, this imperfect road of globalization may be a smoother evolution for mankind than most.

China holds great sway over several areas of serious concern, Iran, North Korea and Russia, being the worst.

China does not want the US (its biggest customer and creditor) to be in a war (especially a destructive one) with any of these other nations. By economic default a US-China axis is a huge economic, military deterrent. Imagine bolstering US technology with China’s huge military numbers.

This is a current force that few could resist.

Consider the alternative. Imagine that the West rejects Chinese goods and kills the current economic growth there. The poor and disenchanted would grow increasingly discontent. To avoid a revolution, the Chinese government in desperation would create an enemy (most likely North Korea, Russia, Vietnam or Taiwan) to divert national attention. The US is less likely to be the enemy though the Pentagon does view China as a military threat.

China has the world’s largest, (2.3 million person though technologically poor) army. The country is upgrading its military as it lags decades behind the U.S. military in terms of technology and reach.

The Chinese Commission of Science, Technology and Industry for National Defense has a 15-year plan for developing high-tech industries for both military purposes. The plan improves manufacturing technology for military industries including development of large aircraft, pressurized water nuclear reactors and high temperature gas-cooled reactor nuclear power stations and manned space missions.

The US Pentagon has warned that China is extending its military reach so it can compete with the US and pose threats to other countries.

China has had nuclear weapons since 1964. Though they are at relatively modest levels, they have gradually evolved. Today, China possesses approximately 85 nuclear-capable land-based ballistic missiles; with twenty that have sufficient range to reach the continental United States. (20 too many!)

In short, the world is hooked on economic globalization. China makes a dandy business ally for the Western world and a great trading partner, selling inexpensive goods that dampens inflation and reinvesting their huge trade balance back in Western currencies, so Western current accounts do not grow too amiss. Yes, this is a long term global shell game but it keeps everyone happy for now.

China on the other hand would be a horrible military enemy.

What are the economic implications? Where does this lead us as investors?

First, ask, will global leaders have enough sense to recognize the importance of China’s continued growth? Second, can they do anything to undo the image damage Chinese products have suffered? Third, how will nations act in defense of China’s growth going wrong?

Big problems require huge profitable solutions, and this dilemma is loaded with potential. First, investments in environmental improvements are obvious. Chinese growth has come at the cost of unbounded environmental destruction. This mess degrades the quality of goods and threatens the health of the Chinese and the world. Look for investments in businesses that help the Chinese upgrade their environment. This is why I have long recommended Hyflux Water as an example. Hyflux is a Singapore company that does a lot of municipal water purification in China. See here.

Look for businesses that can profit from upgrades in China’s quality control. This may be in the form of training, equipment and such. There will be an almost infinite variety of opportunity.

How opportunity will evolve will depend on numerous factors but some conditions are equal to those of Europe and Japan at the end of WWII. The fundamental is that hundreds of millions of people were in dire economic straits. The allies recognized that this poverty could lead to WWIII (as the poverty created by WWI had helped create WWII) if something was not done.

Since this July 2007 is the month it is estimated that Japanese car manufactures will replace US makers as the largest sellers of cars in the US, we can look at Japan’s emergence reflected through the auto industry since WWII as an example of how these huge fundamental concerns create opportunity.

After the war, the Western allies US recognized that the way to stop another war was to help the defeated nations prosper. The Marshall plan was created for Europe.

Japanese industry had also been ruined by the war. However no economic redevelopment plan was formed. Japanese economic growth waned before 1950. The Korean War changed all this and ignited Japanese business. For example in 1950 Toyota’s production had dropped as low as 300 trucks a month. The company was almost out of business. The US military ordered over 5,000 vehicles and this saved the business. The Korean War infused far more money into Japan than the Marshall Plan sent to Europe.

Japan gained another advantage because its industry had been totally destroyed during the war so it moved quickly to the most modern forms of production.

By 1970, Japanese car exports passed the million mark making Japan the world’s third largest automobile exporter. Within five years, these exports had doubled and Japan moved past West Germany to become the largest exporter of automobiles in the world.

This huge growth came from improved performance of Japanese cars, rising technological level of parts manufacturing, competitive pricing from mass production, and the long-term market development strategies of Japanese manufacturers. Japanese manufacturers became meticulous about meeting specifications for particular export markets. Expanding the after-sales service networks in export markets was another priority, and subsidiary companies and factories were set up for that purpose in Europe and North America.

Then another disaster, the oil crisis of 1973, helped Japan’s industry. The demand for small, fuel-efficient cars in the US spurred Japan’s automobile exports into a second phase of strong international growth.

In other words, the world’s needed to help Japan grow after WWII. Yet initially the Western world failed to do so. A series of crisis’s acted as flashpoints to help fill this need.

Now the world needs to help China’s affluence grow. China has to do its part in this process as well and recent problems of quality control have put the spotlight on some of this great nation’s inadequacies. This crisis could act as a flashpoint to accelerate China’s evolution and astute investors will watch for opportunity in this growth.

Until next message, I hope some of this extra profit will be yours.


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