Unmade in China

The Hidden Truth about China's Economic Miracle

Jeremy R. Haft

• Editorial: Polity
• Año: 2015
• ISBN:
  9780745684055
• Edición: 1
• Categoría: Social Sciences
• Categoría: Asian American Studies

If you look carefully at how things are actually made in China - from shirts to toys, apple juice to oil rigs - you see a reality that contradicts every widely-held notion about the world's so-called economic powerhouse. From the inside looking out, China is not a manufacturing juggernaut. It's a Lilliputian. Nor is it a killer of American jobs. It's a huge job creator. Rising China is importing goods from America in such volume that millions of U.S. jobs are sustained through Chinese trade and investment.

In Unmade in China, entrepreneur and Georgetown University business professor Jeremy Haft lifts the lid on the hidden world of China's intricate supply chains. Informed by years of experience building new companies in China, Haft's unique, insider's view reveals a startling picture of an economy which struggles to make baby formula safely, much less a nuclear power plant. Using firm-level data and recent case studies, Unmade in China tells the story of systemic risk in Chinese manufacturing and why this is both really bad and really good news for America.

1
Three Myths

China's rise is as self-evident as the rising of the sun.

Before Copernicus, that is.

Just imagine it. You look out the window of your sixteenth-century digs, and you see how the sun moves around the earth. You learn in school how this is so. You hear the same thing from leading scholars and politicians. Your eyes, your learning, your leaders: everything tells you the sun moves around the earth. But it doesn't.

Same goes with China. Everything tells you that China is about to eclipse America. The ubiquitous “Made in China” labels. The lessons in school about declining empires. The “rising China” rhetoric you hear from pundits and politicians. The news stories about outsourcing and China's wholesale theft of our jobs. But that doesn't make it true.

Because when it comes to China's rise, our eyes, ears, hearts, and minds mislead us. The labels are an illusion, the lessons in school inapplicable, and the rhetoric and punditry steeped in falsehoods. Make no mistake. China's imminent eclipse of the United States is about as true as the earth's centering the universe. And, like ol' Copernicus, we can debunk these untruths with reason. Notions of China's economic might are premised on three widely propagated myths.

Myth #1: China's Economy is about to Surpass US

So you're sitting on the couch watching the news, and they run a story about how China is the second-largest economy in the world, poised to surpass the United States.

What's the basis for this assertion? The mother of all macroeconomic metrics, the gross domestic product. GDP tries to measure the value of how much a nation produces in goods and services during a given time period. There are two ways to calculate GDP. One is through income, tallying up how much everyone in an economy earns. But the more common way is by measuring expenditure, how much every­one spent – that means consumer spending, plus business investment, government spending, and exports (what we sold other countries in goods and services) minus imports (what we bought from other countries in goods and services).

GDP is the measurement conventionally used to size an economy. Often you'll hear “GDP” and “the economy” used interchangeably, such as “the US economy grew 1 percent in the first quarter.” What's meant here is that gross domestic product grew by 1 percent in the first quarter – or, that spending across the economy (minus imports) grew by 1 percent.

The claim that China is about to overtake the United States is typically based on GDP calculations. Here's an example from an opinion piece by Charles Kenny, a senior fellow at the Institute for Economic Development, which recently ran in the Washington Post. “America,” Kenny warns, “will soon cease to be the world's largest economy. You can argue about why, when and how bad, but the end is indeed nigh.”

(You always need to worry when you see “nigh” in a sentence.)

Kenny goes on:

According to the Penn World Tables − the best data to compare gross domestic product across countries − China's GDP was worth $10.4 trillion in 2011, compared with a US GDP of $13.3 trillion. But with China's economy growing 7 to 10 percent a year, compared with the recent US track record of less than 3 percent, China should take the lead by 2017 at the latest.¹

Well, the Penn World Tables may be a good source to compare GDP across countries, but GDP is a lousy metric to compare economies. Let's say you wanted to measure your family's wealth. Would you start on January 1 and add up everything you spend through December 31? So let's say you shell out US$100,000 over the next 12 months on food, rent, school, and other expenses. Then the value of your household wealth is US$100,000?

Not at all. To gauge your family's wealth, you'd want to look at your assets and liabilities. What you own minus what you owe. That number would be a much more accurate picture of your finances, not how much you spend in a given year.

Well, it's the same with national economies. GDP tries to show one year's economic consumption through expenditures. But that number has little bearing on how wealthy a country is: how much it owns – what its households, businesses, and government have collectively saved – minus what it owes. By describing China's economy in terms of GDP, we actually understand very little about the nature of China's true economic strength.

As the economist Derek Scissors of American Enterprise Institute reminds us, if you build a skyscraper, tear it down, build it again, tear it down again, and build it yet again, you will keep adding to GDP, but this activity would add little economic value.

A silly analogy? Consider China's property market. Since the 2008 global recession, China's government has cranked opened the floodgates of what is arguably the largest fiscal stimulus the world has ever seen. That money has flowed through China's banks into business loans that have mostly financed construction – adding significantly to China's GDP. It's now estimated that investment makes up 70 percent of China's GDP – the largest imbalance between investment and consumption among major economies in the world. All that investment is creating a big problem of overcapacity, glutting China's property market with empty houses and malls, excess infrastructure and manufacturing capacity. A recent Chinese government report, looking into the phenomenon of “ghost cities,” cites US$6.8 trillion in “ineffective investment” – deeming almost half of the total investment in China's economy from 2009 to 2013 as wasted.² Because each time another white elephant is erected, it may grow the overall GDP, but it acts more like a drag on China's economy than a boost. A building goes up, but it sits empty, causing the builder to default on the loan and the workers to be fired. GDP may be boosted, but few jobs are created.

So the popular notion that China's GDP must grow by a certain percentage a year – in order to sustain job growth – is off the mark. China's GDP growth, in and of itself, does not necessarily create jobs. In fact, it often destroys them. And if job creation is an important indicator of economic strength, then GDP is also an inappropriate metric because of the way imports are subtracted from the overall total. The math would have us believe that imports – buying goods from other countries – somehow diminish the overall value of an economy. Yet imports actually create jobs.

When goods arrive from other countries, what happens? They need to be transported, warehoused, retailed, and serviced, which supports jobs in trucking, rail, air, storage, marketing, construction, law, finance, and customer service. What's more, though you'd never know it from the “Made in China” label, many imported products from China actually contain inputs that are “Made in the USA”: the cotton in your khakis; the cardboard in your Amazon.com box; the steel in your faucet; the chip in your iPhone; the photovoltaic polysilicon in your solar panel; the nacelle in your wind turbine. From the perspective of jobs, subtracting imports from the overall GDP number is misleading. It misses all the jobs it takes to bring those imported products to market, as well as all the jobs to make the components that go into those imported goods.

But, putting aside the notion that GDP is an inappropriate metric with which to size economies, China's GDP numbers, in particular, are pure fiction. Even China's top officials disregard them. There's a famous story about how Li Keqiang, China's current premier and an economist by training, characterized China's GDP statistics as “man-made” at a dinner with US Ambassador Clark Randt, when Li was head of the Communist Party in Liaoning province in 2007. Li said he considered just three metrics to judge the growth of his provincial economy: electricity consumption, rail cargo volume, and bank lending. “By looking at these three figures,” a US diplomatic cable reported, “Li said he can measure with relative accuracy the speed of economic growth. All other figures, especially GDP statistics, are ‘for reference only,’ [Li] said smiling.”³

It's charming that Li finds China's false GDP metrics so amusing. I wish our economists did, too. Year after year, China's provincial GDP numbers actually exceed the national GDP numbers by several hundred billion dollars. The parts add up to more than the whole. In 2009, the total GDP numbers from China's provinces topped the national GDP number by a whopping US$430 billion; in 2010, by US$570 billion; in 2011, by US$750 billion; in 2012, by US$930 billion.⁴

This disconnect between provincial and national statistics has been a long-term problem. In 1985, the provincial statistics agencies were separated from China's National Statistics Bureau (NSB), allowing each province to tally up its own GDP numbers. Since then, there's been a widening gap between provincial and national GDP.

Some economists blame the discrepancy in provincial and national numbers on different statistical methods employed by each bureau, as well as the problem of double counting. When a company is located in two provinces, it's difficult to determine where these firms' statistics should be booked – so both provinc...