The China Syndrome

THE SUN RISES OVER SHANGHAI, cresting the towering skyscrapers that have become a signal of China’s recent rapid growth. The morning sun brings rise to a new day in a country where over one billion people have recently awoken from their long economic slumber. Like any other day, this one will be spent producing the products that we in the U.S. use every single day.

It is no secret that the U.S. is currently operating under a trade deficit with China. As it stands right now, the U.S. imports $202 billion more than it exports from China. There are several intrinsic reasons for the deficit. The population of China is more than four times that of the U.S. That means that China has an overabundant work force.

China also does not have the wage controls that we are used to in the U.S. Over 100 million members of the Chinese labor force live in rural areas and are forced to commute to industrial areas and compete for factory work. This drives the already low wages down even further. The cost for companies to produce their products can remain much lower compared with those costs in the U.S.

American consumers have fallen in love with the influx of cheap products that continue to roll in from China. This has added to the great demand for Chinese-produced items, which has energized China’s once Stone Age economy. With the economy in full swing, China has been able to become the industrialized and modern nation that we have seen.

A Growing Concern — Paying the Price for Success

This kind of growth does not come without a price. With the rise in the industrialization of its factories and other means of production, along with general and sweeping lifestyle changes of its population, China has now become one of the leading consumers of foreign oil. This is straining the already dwindling world oil supplies, while sending the global costs skyrocketing past record highs.

China also does not pose strict environmental and pollution restrictions on its manufacturers the way we do. This only adds to the ease and affordability of Chinese production, while doing nothing to curb the use of fossil fuels and other polluting energy sources.

The problem with China’s overuse of energy has many components. Chief among them is the ongoing free-rider problem that has come no closer to being corrected: Individuals receive all the benefits of cheap energy while paying almost none of the cost. While one individual or firm can do little on its own to correct the free-rider problem, the Chinese government is doing even less.

Due to the rising economy, China is going through a period of rapid and unpopular inflation. Prices of almost all other goods, which used to be fixed by the government, have now been set free. In order to pacify an unhappy population, fuel and energy prices have remained fixed. The price of gasoline has not risen since May 2006 and remains one of the least expensive across the globe. While the United States is taxing its population’s fuel consumption, China’s is being subsidized.

Also aiding the inexpensive fuel in China is the fact the fuel costs are in American dollars. As the strength of the dollar falls, many Asian currencies are on the rise. This gives China an even greater purchasing power for its fixed-priced fuels. These practices are doing nothing to force any sort of efficiency or conservation onto the general population. Fuel is being consumed at increasing levels and there doesn’t appear to be an end in sight.

How We Hurt Ourselves

We see how these problems negatively effect fuel consumption and pollution in China, but we also see something very telling right here. It seems that U.S. environmental and trade policies do not act independently of each other. This should lead us to examine our current policies and see how they are or are not working.

As mentioned before, current restrictions on American manufacturers reduce output and raise consumer prices. The purpose of these restrictions is an attempt to keep the output of pollution down. The government does this because of increased pressure from environmental groups.

The government also poses energy regulations on manufacturers. This is done in the form of taxes and other restrictions. Besides the environmental reasons for limiting energy consumption, we are also facing a time of unparalleled energy use, and much of our supply of these natural resources is running out.

The government is attempting to limit pollution by thrusting these laws onto manufacturers, yet the regulations do little to curb usage. If anything, the demand for energy is just being moved across the globe. Factories in China are able to more than make up for the amount of production that is being lost in the U.S., and that does little to help the environment. The price is being paid by the American worker.

The U.S. also allows a great amount of freedom in regard to its trading practices. The problem is, as long as trade with Chinese and other foreign companies is allowed to continue relatively unabated, manufacturers here will never be able to match the inexpensive prices set by their foreign competitors.

Our environmental practices are doing little to cut down on energy usage, and the U.S. is being priced out of many sectors of the market. It looks as if either environmental laws or trade laws — or both — must be fixed in order for American companies to have even a chance to compete.

Until next time,
Jamie Ellis

October 25, 2007

The Daily Reckoning