China Trade Surplus: Gusher Profits for U.S. Corporations August 13, 2005
Alarmist headlines blare the "bad news": China's trade surplus with the U.S. is at record highs. But if this is so bad for the U.S., why are U.S. corporate profits at record highs? Could the two facts be related? Of course they are. U.S. companies' manufacturing of goods in China is creating enormous profits, not for the Chinese but for American corporations.
As every American shopper knows, American companies are having just about everything made in China these days-- to the tune of about $230 billion a year. In doing so, they have slashed manufacturing costs in half or more, even including the cost of shipping. But have you ever noticed the price of these items dropping in half as a result of these cost savings? Of course not. The companies have been retaining the savings as corporate profits.
Just how big are corporate profits nowadays? Try $1.1 trillion--fully 10% of the entire U.S. GDP. As a result, U.S. corporations are sitting on a cash horde of some $634 billion, which is rising by tens of billions each year.
Various factors have been identified as the proximate causes of this unprecedented profit gusher: per unit labor costs have actually dropped 5% since June 2001, the largest drop on record; the low cost of borrowing money, and improving productivity--in other words, the usual suspects: lower costs equal higher profits. Of course there is truth in these three reasons: the cost of borrowing money has never been lower, the influx of 400 million Chinese workers into the world economy has devalued labor worldwide--as simple supply and demand would dictate--and productivity has improved modestly.
But the elephant in the room no one talks about is the enormous U.S corporate profits being made by moving manufacturing to China. John Q. Citizen naively assumes China is making huge profits selling stuff to American consumers, but this is simply incorrect; how many items do we buy made by Chinese corporations? Virtually nothing; maybe a few million dollars' worth of Haier dorm-room fridges and some foodstuffs, but everything else is made in China either by or for American corporations.
In other words, the Chinese don't own all the manufacturing--foreign corporations own or co-own a significant share. Direct foreign investment in China reached $153 billion in 2004. And those manufacturers which are Chinese-owned aren't necessarily profiting by the manufacturing boom. By all accounts, Chinese contract manufacturers--that is, those Chinese-owned factories which make goods for U.S. companies under contract--must compete fiercely with each other for the business, which means that they all operate on razor-thin profit margins in the neighborhood of 3%.
Surely some of these enormous cost savings have been passed onto American consumers? Indeed, it has been estimated that American consumers have saved $100 billion since 1978 as a result of lower cost goods made in China. But as this same essay in Foreign Affairs details, corporate profits made from manufacturing in China far exceed these relatively meager savings. Recall that the U.S. economy is about $12 trillion, with some 75% of that being consumer spending. Thus we can estimate total U.S. consumer spending since 1978 as being about $200 trillion (in current dollars, $8 trillion per year multiplied by 27 years.) Given the size of consumer spending since 1978, then the $100 billion in savings shrivels to near meaninglessness.
Which is to say that American corporations have pocketed the really big money--as evidenced by their $1.1 trillion in profits annually. As one example of savings, he Foreign Affairs essay noted that Ford saved over 40% by having its car radios made in China. That number seems low, as anecdotal evidence suggests that many manufacturers are having items made in China for 25% of their previous costs.
So how much corporate profit is directly attributable to the move by U.S. corporations to manufacture their products in China? I have been unable to find any statistics--who wants to publicly identify such a politically sensitive source of outsized profits?--but let's be charitable and guess that American corporations are pocketing $2 for every $1 they spend having stuff made in China.
Could U.S. companies be reaping $400 billion in profits by having all their goods made in China for $200 billion? Could the Chinese be making a paltry $6 billion making all that stuff? Until I find hard evidence to the contrary, then all data suggests that the beneficiaries of the manufacturing boom in China are multinational corporations, not the American consumers or the Chinese workers (average pay, $100 per month) or even the owners of Chinese factories.
This is nothing new, of course; as Fernand Braudel so painstakingly showed in his three-volume history Civilization & Capitalism, capital knows no boundaries; it flows, as it has flowed for hundreds of years, to the biggest returns. But that's another entry.
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copyright © 2005 Charles Hugh Smith. All rights reserved in all media.
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