What Is at Stake in China-US Relations? 


An Estimate of Jobs and Money Involved in the Bilateral Economic Tie 

Farok J. Contractor

Rutgers University

Alarm bells are ringing about President Donald Trump's pronouncements
against China as well as his threats to impose a 45% tariff against Chinese
imports after declaring the country to be a "currency manipulator." For all
the concern, however, I have not seen a single calculation of the dollar
costs, or impact on jobs, if Trump's policies were actually implemented. 


This article is an attempt to estimate the answers to the following
questions: In the event of a break in the bilateral relations,

1)      How many jobs in the US and China are at risk? 

2)      What would be the extra purchase price for consumers if,
hypothetically, imports from China were replaced by US manufactured

3)      Is it possible, or even likely, to "bring back" production from
China to the US?

4)      What would be the consequences if China retaliated against US-made
products and services? What if China pulled out its $1.2-1.8 trillion
investment in US securities? And what about American companies' investments
in China?

5)      How undervalued is the Yuan (RMB) really?



Below is a short article published in YaleGlobal that summarizes my numbers
and estimates to answer the above questions. But some may want to know my
assumptions, data sources and methodology. For that please go to a longer
version of the piece at

or Rutgers Business Review, March 2017


Disrupting US-China Relations Will Incur High Costs

Efficient production lines, millions of jobs and affordable consumer
products of all types depend on stable US-Chinese relations

Farok J. Contractor

YaleGlobal, Tuesday, February 28, 2017

NEW BRUNSWICK: Alarm bells are ringing about President Donald Trump's angry
pronouncements against China, calling the nation a "currency manipulator"
and threatening tariffs on Chinese imports. Official designation must come
from the Treasury Department, and so far, these claims have been backed with
little calculation of costs or jobs gained or lost.

Trump highlights the lopsided trade imbalance between China and the US - a
deficit of $338 billion. So China has more to lose, but until 2014 plowed
their surpluses back into US government Treasury bonds and securities. US
consumers could expect higher prices, and China could retaliate on US-made
products and services and sell its $1 trillion-plus investments in US
securities - although this would hurt China too, as any attempt to unload
large amounts of US securities would immediately reduce the dollar's value.

Estimating the numbers of workers involved in US-China trade is a tricky
task. Taking data from the World Bank surveys on the "labor share of export
value," and inferring from that the labor content in each country's exports,
offers a rough estimate of 16.39 million Chinese workers engaged in exports
to the US and 1.24 million American workers engaged in exports to China.

Calculations: The number of workers producing exports for China and the
United States is inferred from a number of sources: a) US Census, b) World
tabase.pdf> , c) The Economist
nly-strengthen-asias-hold-manufacturing-tightening-grip> , d) BLS
<> , e) YaleGlobal
ence> , f) National Association of Manufacturers <> 


Foreign direct investment: Besides imports, consumers can obtain foreign
products through foreign direct investment. A Chinese buying a Buick is not
buying a car made in the US, but one made by the Shanghai subsidiary
established by General Motors in 1997. An American who purchases a small
refrigerator at Walmart is likely buying from Haier, a Chinese company whose
US subsidiary, Haier America, Inc., produces refrigerators in South
Carolina. Both products include parts imported from other firms along the
supply chain, and this is among the many complications in understanding
foreign direct investment data.

Chinese FDI in the US accelerated after 2010, according a 2016 report by the
National Committee on US-China Relations and the Rhodium Group
<> . By 2015, investment by Chinese companies in US
operations had reached an annual level of $15.3 billion - $3.4 billion from
Chinese government enterprises and $11.9 billion from presumably privately
held Chinese companies.

The value of Chinese acquisitions of American firms was eight times the
number of built-from-scratch investments, suggesting a Chinese strategy to
gain technological and market knowledge. FDI from most emerging nations has
a knowledge-seeking motivation.

Americans need not be alarmed for two reasons: The biggest Chinese
investments are in innocuous sectors such as real estate, hospitality, and
business services where proprietary technology is not an issue. The largest
Chinese investment to date has been in pig farming. Even in sensitive
sectors such as computer technology and life sciences, the White
House-guided Committee on Foreign Investment has embargoed foreign
investment in sectors deemed sensitive or if the intelligence services or
Commerce Department indicate danger to competitiveness of American firms.

US firms, as far as FDI is concerned, have more to lose in the event of
trade disputes. Chinese FDI in the US in 2015 amounted to $15.3 billion, but
US investment in China was almost five times as big, at $74.6 billion. For
2015, there were 6,677 American company affiliates in China compared with
around 1,200 Chinese-owned companies in the US.

Many more FDI jobs are at stake in China - up to 1.6 million according to
Chinese Ministry of Commerce - because of greater use of cheap labor. The
Rhodium Group estimates the 1,200 or more Chinese affiliates in the US
employ directly around 90,000 Americans. Alternative estimates, including
direct as well as indirect employment, suggest between 317,730 and 357,000
US workers connected with Chinese FDI in the US. The US Commerce Departme
<> nt reports that up to 10 million US residents
work for foreign companies directly and indirectly, and Chinese FDI
represents only about 3.5 percent of FDI  in the US. 

In sum, with total US employment at 122 million and Chinese employment at
775 million, bilateral-FDI represents a small, albeit significant fraction
of overall jobs for either nation.

Adding up the numbers for exports as well as FDI between China and the US,
the maximum number of jobs at risk in China is up to 18 million, and in the
US it is less than 1.6 million.

Such estimates represent maximum impact on jobs in the worst-case scenarios
- and short of a calamitous dispute between the countries, the worst is
unlikely to happen.  Still, the above estimates give an idea of the numbers
of jobs at stake.


Extra costs to US consumers: The United States is one of the few nations
that could produce almost everything domestically that it now imports from
China - with higher costs for households and hundreds of billions in
transition costs for businesses.

US consumers are patriotic, but they also care about their pocketbooks.  A
Boston Consulting Group report <>
found that more than 80 percent of US respondents said they prefer US-made
items and are willing to pay more. But confronted with a tangible choice in
an Associated Press survey
tems-made-in-the-usa> , only 30 percent preferred US jeans priced at $85
over imported jeans for $50.

Moreover, of every dollar
gust/us-made-in-china/>  a consumer pays for a Chinese-made product, 55
cents is kept by US businesses for services such as marketing and sales.
Only 45 cents goes to the Chinese producer. And only 2.7 percent of US
consumer spending overall goes to products made in China, according to the
Federal Reserve Bank and other studies. This sounds small, but the
calculation works out that the additional cost for US consumers would be
about $295 billion in 2016 alone, or $2,380 for each household. 


Is re-shoring realistic? In the absence of dire national emergency, US
consumers won't prefer paying additional costs. The $2,380 estimate assumes
replacing Chinese imports with US manufacturing. But a more realistic
scenario is that if Chinese products were embargoed, production would move
to other low-wage nations such as Vietnam or Bangladesh, as is already

In 2015 General Electric's appliance division tried to "re-shore"
manufacturing to the US assuming that automation and productivity
ence>  could offset higher US wages. But GE encountered another challenge -
the parts-supply base for appliance components had disappeared from the US.
Chinese parts suppliers are efficient and low-cost. Adding the transport
costs of parts shipped from China to US assembly lines, plus management and
additional inventory costs, made producing appliances in the US more costly.

In June 2016 GE sold their appliances division to the Chinese company Haier
for $5.4 billion. Restoring all elements of the supply chain in the US would
require decades and is a theoretical dream.


China's $2 trillion in US securities: The Chinese government holds $1.3
trillion in US Treasury bonds, and Chinese entities collectively own about
$2 trillion in US securities, second only to Japan, not counting the
ownership of more than 1,200 US-based companies through FDI. The total may
be higher, considering investments through Hong Kong and Caribbean tax
havens where owners' identities are often murky.

In an emergency, the Chinese could precipitously sell their US security
holdings, panicking US bond and equity markets, eventually resulting in a
plunge in the dollar's value. But then, the Chinese would receive a lower
return. The scenario is unlikely, short of a military confrontation. For the
past 25 years, the Chinese government has regarded the US as its principal
foreign market.

China has every incentive for keeping the US economy going strong. Simply
put, it's a matter of self-interest. The $2 trillion in investments in US
securities do not earn a high return, but the investment is safe. In effect,
the holdings demonstrate Chinese support for US-China trade and the global
trading system.

While the Chinese may not be thrilled about entanglement with the US
economy, both nations have a mutual self-interest. Together, they account
for 40 percent of world GDP.

Participation in global trade has created employment for more than 100
million Chinese. The US gains from the relationship with up to 1.6 million
jobs that depend on China, $295 billion annually in lower consumer prices,
as well as investment in US securities and low interest rates.

Trump may be right in asserting that China has benefited more from the
relationship than has the US. But international trade theory and practice
never suggest consistent and perfect trade balances. Theory holds that
nations are better off by participating in international trade. And his
claim that the loss of US jobs is ".the greatest theft in the history of the
world," true only in small part, fails to consider that three out four US
ican-manufacturing/>  have been lost due to automation, information
technology and other productivity boosters.

Proposals to return jobs to the US are economically non-viable. Should the
US carry out threats to levy a tariff on Chinese products, production is
unlikely to return to the US. Other low-wage nations are ready to compete
including Vietnam, India or Bangladesh, where hundreds of millions of people
work for less than $1 per hour. With rising wages and a shortage of skilled
workers, thousands of Chinese factories have already relocated to such
low-wage nations. Disruption of global value chains would add hundreds of
billions per year to US businesses, increasing prices for US buyers - with
extra costs falling disproportionately on lower-income Americans.

The two great nations need each other. They can pursue a relationship that
is "bipolar," fraught with anxiety, or they can continue historic
cooperation and lead to develop the 21st-century global economy.


The Yuan: Four Facts

Farok J. Contractor

President Donald Trump described China as the "grand champions" of currency
manipulation just hours after his treasury secretary pledged a more
methodical approach to analyzing Beijing's foreign exchange practices.

Consider four facts that undercut the allegations:

*	From 2005 to 2015, the yuan actually appreciated by some 40 percent
against the dollar, making the nation's exports less competitive while
giving imports a boost - utterly contrary to allegations of currency
*	Since 2015 the yuan
s-fdi-statistics>  has been pressured with selling and devaluation as the
wealth bottled up in China seeks to diversify into assets and other
currencies. This has resulted in a minor devaluation since 2015 from about
6.1 renminbi equaling US$1 6.8 renminbi.
*	The Chinese government has been vigorously resisted this selling
pressure. Their agents in foreign exchange markets buy up their own currency
to try and prop up the value and prevent devaluation. Instead of allowing
devaluation, the Chinese government is propping up the currency's value.
When the Chinese agents buy yuan, they must offer their counterparts in the
foreign exchange market something in return - namely dollars. The dollars
are coming from previously accumulated dollar reserves of the People's Bank
of China - the country's central bank. The Chinese have run through as much
as $1 trillion of their dollar reserves and, despite valiant efforts, did
not succeed. But the currency has more or less stabilized in recent months
with currency controls by fiat - and more restrictions on transfers of funds
overseas. This has had the desired effect of not allowing the yuan to
devalue below 6.9 per US dollar.
*	Higher wages along China's eastern seaboard, rising by 10 to 15
percent per annum, have undermined the competitive low cost of Chinese
exports. With labor costs rising dramatically, some Chinese exporters no
longer are profitable even at the 6.8 yuan per dollar exchange rate and are
moving operations to Vietnam, Bangladesh and Africa.

Yes, the yuan was undervalued in 2005. Today - following a 10-year
appreciation and significant wage inflation - the Chinese currency is no
longer substantially undervalued. The Chinese can only be as mystified as US
citizens might be about pronouncements related to past concerns that no
longer are true




Farok J. Contractor, Ph.D.
Management & Global Business 
Rutgers Business School
1 Washington Park
Newark, New Jersey 07102-1897, USA
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