Unlike Paulson, Bush brought up the currency issue. In a meeting with reporters after Wu Yi visited the White House, he fingered the yuan as a primary reason for the US$223 billion trade deficit. There’s some truth to that, of course. But only some. If the yuan rises enough, many of China’s low-cost manufacturing jobs will just migrate to lower-cost Asian countries such as Vietnam. In fact, it’s already happening in the apparel industry, and I’m fairly certain that it will soon happen in steel and non-ferrous metals. In the long run, I think the US is going to start thinking about its trade deficit with China as a trade deficit with Asia, as a whole. Those jobs simply are not going to move to North America.
The deeper question, it seems to me, is whether the US has $223 in domestically produced goods – or even US$123 billion in domestically produced goods – that the Chinese want, and can afford to buy. Boeing aircraft and medical devices are two of the highest value products exported to China, but they are hardly mass market products appropriate to an economy where the annual per capita income barely exceeds US$1000. For once, an American politician decided to offer an idea on this sticky front. According to SCMP’s ever-admirable Richard Cheung:
Mr Bush singled out US beef as an area in which he wanted more. “One area where I am disappointed is beef,” he said. “They need to eat more US beef. It’s good for them and they will like it.”
Problem is, they probably won’t like it. The Chinese eat beef, but not much of it, and certainly not in the large portions that most Americans eat it.
This isn’t conjecture; it’s hard facts. KFC operates more than 1700 stores in China; McDonald’s has 700. Profit margins in Chinese KFC’s are around 24%; in Chinese McDonald’s, they’re in the single digits. There might be structural and operational issues at play here, but the more important reason is one that Bush or his staff would learn talking to any Chinese teenager: the Chinese don’t like beef hamburgers, in particular, and large servings of beef, in general. McDonald’s, like Bush, hasn’t managed to learn this, despite a long-term presence in China. Last year, in fact, they launched a marketing campaign to promote beef offerings, presumably in the wake of KFC’s domination of the fast food chicken market, but with little impact. Like the US economy in general, it hasn’t managed to distinguish between what it wants the Chinese to buy, and what the Chinese want and can afford to buy. A related question: even if the US finds products that the Chinese want and can afford to buy, will they buy them in enough volume to make a difference to the trade deficit? Currently, the Chinese want and can afford US soybeans, but overall Chinese purchases of US soybeans barely account for US$10 billion in trade.