The Role China Plays C.P. Chandrasekhar

Growth in China, it is said, is slowing. GDP growth has reportedly fallen from 9.7 per cent in the first quarter of 2011, to 9.5 per cent in the second quarter, 9.1 per cent in the third and 8.9 per cent in the fourth. Much is being made of these numbers, though the 9.2 per cent average over 2011 is still high and the government has itself attempted to slow the system to rein in inflation.

One can sense an element of schadenfreude here. For too long now China has been showing up the rest of the world with its high rates of growth. This is especially true of the United States, which imports much from China, depends on inflows of capital from that country to finance its deficits, and is always looking for the next country to challenge its global supremacy.

However, if China’s growth is indeed slowing, this is no cause for even the US government to celebrate. A poorly performing China can drag the US down as well. Not just because China, with its large geographical size and population, is the growth pole that prevents the multi-speed global economy from sinking into another crisis. But because China is too important a market for the large multinational corporations that symbolise US economic power.

This last fact has been driven home by the recently released estimates yielded by the 2009 edition of the five-yearly benchmark surveys of the operations of US multinational corporations conducted by the Bureau of Economic Analysis of the US Department of Commerce. According to those figures, growth in the value added by US multinational firms slowed by almost half from 4 per cent to 2.2 per cent between 1999-2004 and 2004-09. However, that deceleration was accompanied by a shift in the relative importance of parents and majority owned foreign affiliates (MOFAs) in the aggregate performance of US MNCs. In 1999 and 2004, parent firms accounted for a little more than three-quarters of value added by US MNCs. But since then the share of parent firms in value added by US MNCs has fallen by close to 10 percentage points to 68.3 per cent in 2009. In sum, while operations of parent companies still dominate the activities of US MNCs, there appears to have been a significant shift in US multinational operations away from parent firms at home to affiliates abroad.

Of relevance here is the fact that, of the countries that were locations contributing to the increment in the operations of US multinationals over 1999-2009, China was one. The Asia-Pacific region, which accounted for 18 per cent of the value added by majority-owned affiliates of US multinationals in 1999, contributed 26 per cent of the increment in their value added during the decade ending 2009. And within the Asia-Pacific, China, which accounted for less than 4 per cent of the value added by MOFAs in 1999, contributed close to 19 per cent of the increment in MOFA-value added in that region during the relevant decade. Manufacturing accounted for a dominant 61 per cent of MOFA value added in the China, as compared with a much lower 42 per cent in all global locations.

These facts are particularly significant because of the nature of US multinational operations in China. There is a perception that China, with its large reservoir of relatively cheap labour, is a target for relocative investments by international firms. These firms, including multinationals from the US, are seen as using China as a low-cost production base for global markets, including markets in their parent countries. And the Chinese government is seen as exploiting this opportunity by maintaining an undervalued exchange rate so as to enhance the country’s export competitiveness.

But what the BEA’s benchmark survey has revealed is that the large increases in the value added of US multinational affiliates in manufacturing in China “reflected expanded production to serve the large and growing local market.” About two-thirds of the total output of US MNC affiliates was sold to local customers in both 1999 and 2009. On the other hand, the share of their output sold to U.S. customers declined from 16.3 per cent in 1999 to 10.2 per cent in 2009.

So China’s growth matters, since it is an important market for US firms located there. And what is important is not to look to their return, but to ensure that profits from China are used to invest in jobs at home.

(This article was originally published in the Triple Crisis Blog on January 24, 2012)