China and the U.S.: Ever-tighter economic ties

Relations between the U.S. and China have never been especially warm. But over the past several decades, as China has developed into the world's second-largest economy, the two nations' financial futures have become all the more intertwined.

That's why many economic experts and analysts are carefully watching as China's economy slows down. On Monday, two surveys showed China's manufacturing growth slowed in August, which may mean authorities will have to inject stimulus to reach their 7.5 percent annual growth target.

China is in the midst of an epic transition from a manufacturing and investment-driven economy to one based on services and consumption. Experts don't expect that transition to be seamless for either the Chinese people or their leadership.

"There are a number of very difficult reforms ahead of them," said Elizabeth Economy, director for Asia Studies at the Council on Foreign Relations. She expects challenges to arise as China deals with major changes in its banking, educational and legal systems, and has to grapple with such issues as the protection of intellectual property rights.

But these reforms, and China's shift toward a consumer-led economy, could also end up benefiting the U.S.

Economy said the long-time dream of some American export firms, "of 1 billion Chinese consumers," may finally become a reality.

"As the Chinese middle class is growing and the upper-middle class is growing, they have demonstrated themselves to be real consumers, along the lines of Americans," she noted. "They like to try new products, which creates opportunities for U.S. companies."

And as the government in Beijing complies with the World Trade Organization and other international regulatory guidelines, China might start making substantial investments, as well as mergers and acquisitions, linked to U.S. companies in the near future.

"There are opportunities for China, really for the first time, to contribute to actual job-making on the ground in the United States," said Economy. "And that's a big shift. The numbers are still small, but nonetheless it's potentially a very positive trend."

Of course, serious concerns remain about Chinese investment in the U.S.

Last year's sale of U.S. pork producer Smithfield Foods to a Chinese firm raised fresh worries about ongoing food quality and safety issues in China, and what the new foreign ownership might mean for the U.S. food supply.

But Economy said any lessening of food quality at Smithfield would also end up undermining the Chinese company's desire "to have a high-end producer in their portfolio."

China's growing population and ongoing food insecurity have also created international concerns about Chinese companies buying entire food harvests in some countries, while attempting to purchase farmland outside of China.

Countries such as Brazil and Argentina have revised their land laws in the face of widespread Chinese investment, fearful that Chinese companies might attempt to buy up significant portions of their agricultural acreage.

And then there's the issue of technology. Economy mentioned the potential for Chinese tech firms to overwhelm their American counterparts.

While technology deals should be welcomed, "we don't want Chinese companies buying up U.S. technology companies," she warned, "stripping them of the technology and shutting down companies here in the United States, so that they can't compete with China."

Another concern is that any major negative changes in the Chinese economy could cause a financial drag on the U.S. But William Yu, an economist at UCLA's Anderson School of Management, doesn't buy into that argument.

Yu looked at 20 years of Chinese and U.S economic data, and determined that a 1 percentage-point slowdown in China's overall GDP would contribute just a 0.05 percent slowdown to the American economy.

Still, the Council on Foreign Relations' Economy expects a variety of issues will make U.S.-Chinese relations contentious for years to come.

"Everybody needs to be cognizant of any company's track record, as it comes to invest in the United States," she noted. "But I don't think that we should demonize all Chinese companies. We should look at them as individual companies. Some are good actors, some are not. We should try to not be paranoid about Chinese investment."

  • Bruce Kennedy

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