Ben Muse: Chinese opportunities

The President of the Dallas Fed, whose experience with China goes back to 1979, talks about the implications of Chinese growth: China's Economic Growth - Speech by Richard W. Fisher - News & Events - FRB Dallas.

Let's start with the bottom line:

Here is the bottom line: We’re better off if China is rich than if it’s poor. China’s ascension is our opportunity. We have much to sell the Chinese, and they, us. Trade with China is helping raise our productivity and lower our prices. Competition with China keeps us on our toes and sharpens our wits, forcing us to move up the value-added ladder to new and better jobs with higher pay. And as they become more like us, their incentives become more in line with ours every day. This is cause for celebration, not condemnation. And to that, I’ll raise a glass of Chinese beer and say “Good on ’ya.”

They need what we have to sell:

What can we sell them? Well, let’s remember that U.S. exports to China have nearly tripled since we struck our WTO agreement with China, far exceeding our internal expectation when we negotiated the deal. America’s exports to China are lower than we want, but they have risen at about 10 times as fast as our exports to the rest of the world. We start with food, raw materials and transportation. Soybeans are our No. 2 export to China, totaling $2.3 billion. In 2004, we also sold them $1.6 billion in aircraft.

From there, we must move up the value-added ladder to medical services, financial services, legal services, entertainment and recreation, education, consulting, technology—these are areas of expertise in which the U.S. has a big lead on the rest of the world. They constitute our new comparative advantage.

Our medical industry, for example, is the best in the world. As China gets richer, surely its citizens will behave just like others and demand more medical attention. Currently, health expenditures per capita in China are just $63, which aggregates to one-half of 1 percent of GDP. Health is what economists call a “superior good”—something folks spend proportionately more on as income grows, as is abundantly clear in our own economy and in Europe’s.

The same is true of financial services. There’s not much need for financial advice when you have no money. But as income grows, demand for these services grows more than proportionately, and that will happen in China, too. Again, it plays to our advantage—if we take it. Because the U.S. got rich before the rest of the world, we had to learn how to efficiently finance an economy. We have created all kinds of financial products to satisfy this need, from basic banking services to underwriting and distribution mechanisms for financing industry and service providers, to mortgages and other means to finance housing, credit mechanisms to facilitate consumption and mutual funds to channel savings—there are about 2,000 different financial products in the United States today.

China’s banking system and securities markets are woefully handicapped by the old, stereotypical disincentives of communist government. American financial services can help the Chinese transition from central planning to market-based efficiency.

The same is true of legal services. As part of their WTO accession obligations, restrictions on foreign law firms have been gradually lifted. As of the latest count in December 2003, there were 116 foreign law firms from 16 countries operating in China—40 from America. Many more operate there now. Some of the firms represented here today have offices in China—Haynes and Boone, Vinson & Elkins, King & Wood and Jones Day, to name just a few.

HierosGamos legal directories lists 167 areas of law in which U.S. firms offer services in 19 Chinese cities. Obvious areas of practice are maritime, antitrust and unfair competition (defending U.S. antidumping claims!), bankruptcy, business appraisals, consumer law, copyright, customs, dispute resolution, employment and labor, estate and financial planning, ethics, franchising, foreign investment, human rights, immigration, import/export, intellectual property, joint ventures, mergers and acquisitions, offshore trusts, patents, project financing, trademarks and workers’ compensation.

Law leads me naturally to the entertainment industry. The world already loves our movies. Indeed, they love them so much, they steal and copy them—the sincerest form of flattery I suppose, but not one we can tolerate. Just getting China to abide by intellectual property rights would ultimately help pay both a lot of U.S. attorneys and screenwriters. We have much to sell them in this area.

Next there’s education. Educating the world—not just China—is an opportunity for America. It’s a comparative advantage and one upon which we should build. The U.S. has seven of the top 10 universities in the world; China has just one in the top 40—Beijing University, ranked roughly 20th. Of course, you can also outsource higher education. America’s colleges and universities enrolled 586,000 foreign students in 2003—more than second place Britain and third place Germany combined.

It is important to grasp that educating the world also benefits us. Why? Because many of the foreign students we train wind up staying here, building a base for our higher value-added production. Estimates from the 2000 census indicate that at the doctorate level, 51 percent of U.S. engineers and 45 percent of workers in life sciences, physical sciences, mathematical sciences and computer sciences were foreign-born. This helps us on the sell side; it stocks our technology base. Semiconductor parts were our No. 1 export good in 2004; we sold $43 billion worth, $2.6 billion of them going to China. Then, there’s our technology services—such as those in oil field and drilling technology. China needs our 3-D seismic technology to help locate oil for a booming market.