Made in China: Why China Will Come Out on Top

Your iPod, your cell phone, your favourite cologne or perfume, your laptop, your coffee mug, your picture frame, most of your clothing... the list is virtually endless. This is just a small sample of the long list of items we purchase on a regular basis that are produced abroad. The most shocking aspect about this trend, however, is just how many goods we purchase that have been "Made in China".

The United States and Canada have long been regarded as consumer nations who rely heavily on the strength of consumerism to grow the economy. With the immense wealth that has been created here in North America through continued improvements in productivity and a capitalist system for corporations to thrive, it is no surprise that consumerism has flourished to this degree. All of this wealth came as a result of a once balanced economy that succeeded on both consumption and production. Today, however, we are not quite the industrial giants we once were. Consumerism has only continued to grow while manufacturing has been outsourced around the world with the onset of globalization.

One clear example of the retraction from manufacturing can be found in Detroit, Michigan. Detroit once thrived on domestic production and was the epitome of a great American city. Ever since production had been shipped out of Detroit, the local economy has greatly suffered. From my own recent visit, I can attest to the overwhelming poverty and the major transformation that has taken place over the past 40 or so years. While the degradation of the city is not solely the cause of globalization, it is surely a contributing factor that has helped cause Detroit's cyclical downturn.

The main issue with an economy overly reliant on consumerism is that it is absolutely unsustainable. In the past, our consumption patterns were naturally more domestic as the drivers of globalization had yet to exist. Today, though, we can buy products from all over the world. With today's highly integrated global economy, where we choose to buy from is also who we choose to support. By purchasing products from abroad, we allow other nations to compete for our business and ultimately profit from our consumption. The extent to which this happens depends greatly on the locality of the supply chain and the final retailer's country of origin.

For example, by buying clothing from The Gap we are largely supporting the U.S because the Gap (as the final retailer) profits the most from this transaction. But, if the producer of this clothing is located in India, we are also supporting the Indian economy but at a much lesser extent because they do no profit nearly as much as the retailer does. On the other hand, if we were to buy a car from Toyota, we are largely supporting the Japanese economy because both the retailer and the producer reside in Japan (most of the time) and this results in wealth being transferred from one country to another. As you can see, when these transactions happen billions of times, over and over, the wealth that has been created here in North America slowly disperses to the rest of the world. I am not opposed to this process, but I just aim to point out that this is all part of the global and free market cycle.

This natural cycle occurs because the lesser developed nations (who typically have a weaker currency) have the most competitive environment to manufacture and produce goods for the wealthier nations. As these countries continue to make gains from consumption by the wealthier nations, they experience a slow but steady growth. Through this process, economic conditions begin to improve for these countries and they eventually reach a point where their currencies increase in value. This then leads to the emergence of other foreign markets who use a relatively weaker dollar as a competitive advantage for increased manufacturing. As you can see, this is a cycle that makes complete sense. For North Americans, however, we do not want to give up the prosperity and privileged lifestyles we have become accustomed to. Ultimately, the only way to reverse the current trend is to have a relatively weaker dollar and introduce more pro-manufacturing policies. This is the only way to help balance out the current trade deficit in the U.S and slow down the dispersing of wealth that is currently taking place.

Why China?

So where does China play into this? Well, China is due to be the next major superpower if this cycle continues on. Of all the developing nations, China has been most successful in establishing an export-driven economy. They currently rank atop the list of most exports per country and this does not even incorporate Hong Kong or Taiwan who rank 11 and 17 respectively. The most recent numbers out of China show a near 50 percent increase in exports year-over-year for the month of May. Along with these impressive gains in exports, imports were also shown to have increased in May because of flourishing domestic demand.

With exports being one of the largest drivers of growth for China, its been in their best interest to keep the yuan pegged at a low valuation to keep international demand rampant. By keeping the currency pegged, China has come under much fire as the general consensus is that the yuan is very much undervalued. Under pressure from finance ministers worldwide, China's central bank has now decided it will unpeg the yuan and let the currency appreciate in value. With this new move, it is likely to have a modest effect on their robust export industry. At the same time though, this will increase the purchasing power for Chinese consumers to help guide China towards an economy less dependent on exports and more so driven by consumption.

Savings, Savings, Savings

China is also known to have one of the best savings rates in the world. With an economy that has been primarily driven by savings compared with credit, it amazes me to think about the potential for China when the use of credit becomes more commonplace. From my own research, I was shocked to find out that a majority of Chinese consumers have been making their first car purchases using cash! Comparatively, I cannot think of any more than a handful of my friends or family that actually use their savings for any major purchases, let alone a brand new car. Savings has always been known to be a key driver of future growth and prosperity which leads me to believe that China has a sound foundation from which to build a healthy economy that isn't as reliant on credit as their Western counterparts.

Communism Done Right (Please note, I am not a supporter of Communism)

What will truly be a difference maker going forward is the current neo-communist regime in China. The Chinese government has shown it has impressive foresight combined with a willingness to act in the best interest of the economy. One recent example is the move by the Chinese government to enforce banks to curb lending in what looked to be overheating in the housing market. By being able to learn from the mistakes made in the U.S., China has been swift to make radical adjustments to ensure their economy can avoid the treacherous burdens that bubbles can bring. By taking the role of watchdog versus the typical laissez-faire style practiced in the U.S., Chinese lawmakers are in great position to make decisive moves to help sustain a healthy economy that can better avoid the perils of boom/bust cycles. My belief is that China will slowly come to adopt a more Taiwanese-like capitalist system which will only further propel this nation into more prosperity, much like that experienced in the United States for the past 60 to 70 years. If the Chinese can successfully make this transition, I have no doubt that they will become the world's largest economy within the next decade.

Why China Still Has a Long Way to Come

In order to ever take the reigns as the top global superpower, there is still much work ahead for China. Currently as the world's largest economy, the United States has many unrivaled aspects that make it a difficult country to ever emulate. Even a nation like China has a long way to come before it can ever match up with the U.S. What makes the United States so great is the fact that it is a world leader in so many industries. While I do believe their industries have been able to grow with such resilience because of the U.S. system that feeds on debt, they nonetheless still stand far ahead of the competition. For example, when you look at the entertainment and sports industries, two of the most irreplicable, its easy to see that there are no worthy competitors anywhere else in the world. These industries have helped to drive global demand for American products because the world is constantly tuned into the latest trends and fads coming out of the U.S.

For China to ever be able to equate the U.S. on this front, it will take much time and continued lackluster growth in the United States. If the current situation of major unemployment, unprecedented debt, and weak economic growth continue on in the U.S., China may have a real opportunity to not only lead the world out of this recession but also find itself as the new world leader.

- The Watchdog