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The China Effect

Thursday, October 14, 2004; Page A30

THE POLITICAL debate on China has been mainly about the threat to American jobs. This threat is exaggerated: China specializes in low-wage, labor-intensive manufacturing; the United States is a high-wage, capital-intensive economy; Chinese competition is more likely to displace workers in Mexico than here. But the recent spike in oil prices points to a different mechanism through which China can affect U.S. interests. Surging economic growth in China is accompanied by surging demand for oil: China accounts for nearly two-fifths of the worldwide increase in oil consumption since 2000. Hence one reason for high oil prices.

High oil prices hurt the United States for the same reason that cheap manufacturing helps it. The question you have to ask in both cases is: Is this country a net importer or a net exporter of the goods whose price China is changing? In the case of basic manufactured goods such as clothes, the United States imports much more than it exports, so the arrival of a new player that forces global prices down benefits the country. The price of clothes and shoes in the United States has fallen by nearly a third over the past decade, as China has undercut rivals such as South Korea and Taiwan.

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When it comes to commodities, the United States also tends to import more than it exports, so higher prices make the United States poorer. Commodities such as copper or iron are too small a part of the economy for this effect to be significant, but that's not true for oil. The United States had a trade deficit in crude oil worth just over $100 billion last year. If oil prices rise 20 percent, the nation is $20 billion poorer.

It's hard to know whether this drag on U.S. growth is permanent. High energy prices will spur producers to increase supply, which may send prices down again. On the other hand, China's growth represents an enormous addition to global demand, perhaps enormous enough to overwhelm whatever extra supply is forthcoming. The Economist magazine recently gave one measure of the China shock: The increase in China's energy consumption over the next 20 years is likely to exceed total current U.S. consumption.

Expensive oil won't be enough to make Chinese growth a bad thing for the United States. The gains will be bigger: Chinese consumers will buy more from American firms; Chinese savers will keep American interest rates lower than they otherwise would be; Chinese workers will drive down American consumer prices. But China's effect on oil prices is something that Congress should keep in mind as it debates energy policy. It is an extra reason to address bottlenecks in the energy market that can exacerbate price spikes, such as the nation's underdeveloped electricity grid. And it is an extra reason to spur fuel efficiency in cars, a technologically feasible goal that awaits legislation to create the right incentives.

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