beyondbrics

After another whopping monthly trade surplus, the global imbalance drum is beating loudly again. The bigger China’s surplus, so the logic goes, the more lop-sided the economic relationship with the US. So ‘Buy American’, say some, to stop money being sucked out of America and funneled into Chinese coffers (which is then, ironically, funneled back into US Treasuries).

But is the surplus really the best measure of the effects of ‘Made in China’ goods on the US economy? Perhaps not.

According to an ‘economic letter’ from the folks at the San Francisco Fed (H/T Business Insider), when a US consumer buys a Chinese-made product, the majority of the money spent stays right at home in the good ole’ US of A.

How so? The argument is that when you buy, say, a pair shoes for $70 – most of that $70 goes on rent, wages, storage, advertising, transport – not on the shoes themselves.

By the SF Fed’s calculations, 88.5 per cent of consumer spending goes on Made in USA stuff – that includes services, which make up the bulk of consumer spending as a whole. In fact, only 2.7 per cent of consumer spending in the US goes on Made in China goods. And even that figure is misleadingly high…

Whereas goods labeled “Made in China” make up 2.7% of U.S. consumer spending, only 1.2% actually reflects the cost of the imported goods. Thus, on average, of every dollar spent on an item labeled “Made in China,” 55 cents go for services produced in the United States. In other words, the U.S. content of “Made in China” is about 55%. The fact that the U.S. content of Chinese goods is much higher than for imports as a whole is mainly due to higher retail and wholesale margins on consumer electronics and clothing than on most other goods and services.

So, because Chinese made goods tend to be low-end products like t-shirts or shoes, or high mark-up goods like DVD players and TVs, they actually contribute more – in percentage terms – to the US economy than goods made, for example, in Germany or Japan.

Aside from making conscientious consumers feel better about that Chinese-made toaster in Target, it also has another important implication – inflation. If Chinese goods only make up 2.7 per cent of consumer spending, the shopper in Ohio is unlikely to feel the pain of rising labour costs at the factory in Guangdong.

So everyone’s a winner, right?

Related reading:
The U.S. Content of “Made in China”, San Francisco Fed
When you buy made in China, most of your money actually goes to America, Business Insider
Guest post: The end of Made in China?, beyondbrics