(Bloomberg) — The new normal for China’s economy looks to be shaping up as a new deal for U.S. workers — and ultimately good news for Federal Reserve Chair Janet Yellen.
The campaign to shift China to slower, consumption-driven growth and away from a dependence on exports and investment means the squeeze on U.S. workers from foreign competition will moderate at the same time that Chinese demand increases for U.S. products. The result: more and possibly better paying jobs for Americans and a major transformation in relations between the world’s No. 1 and No. 2 economies.
“China is changing from a producer model to a consumer model,” said Stephen Roach, a senior fellow at Yale University in New Haven, Connecticut, and former chairman of Morgan Stanley Asia. “That’s an enormous opportunity for the U.S.”
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Surging Chinese exports blew a big hole in the U.S. labor market over the last quarter-century, all but wiping out some industries. As many as 2.4 million American jobs were lost from 1999 to 2011 as a result, according to calculations by David Autor, a professor at the Massachusetts Institute of Technology in Cambridge, and his fellow authors in a paper last year.
Now “the bleeding has stopped,” said Mark Gatterdam, chief executive officer of Hardwood Artisans, a furniture manufacturer in Elkwood, Virginia.
“I don’t feel like they’re beating me over the head every day,” he added, referring to the Chinese competition, though he has some doubts about how long that will last.
Hardwood Artisans added four workers to its payroll last year, bringing its total workforce to 52. While business was soft toward the end of last year, “we’re very hopeful for 2015,” Gatterdam said.
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The Chinese competition isn’t going away, Autor said. It’s just that it’s no longer relentlessly ratcheting upward.
U.S. imports from China rose by an average 15.2 percent per year from 1999 through 2010. Since then, they’ve increased at a 6.4 percent annual clip, based on U.S. Census Bureau data.
While the lessening of pressure from Chinese shipments won’t raise U.S. wages on its own, “it will stop pushing them downward,” Autor said.
Yellen, who holds a meeting of the Federal Open Market Committee to consider interest-rate policy March 17-18, has repeatedly said she would like to see faster salary growth as the economy returns to normal and inflation rises to the Fed’s 2 percent goal. She alluded in congressional testimony Feb. 24 to the impact of globalization in depressing labor income.
Chinese Premier Li Keqiang last week set the country’s lowest growth target in more than 15 years as he laid out plans to change China’s economic model. The goal of about 7 percent was down from last year’s of around 7.5 percent and compares with average annual growth of about 10 percent for the past three decades.
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In a possible sign of the new strategy, China has kept its currency closely pegged to the dollar, resisting temptation to allow it to weaken to support export growth.
The U.S. would be hurt if China’s economy suffered a hard landing rather than a managed slowdown, though that’s not likely to happen, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
The transition to the new normal probably will be bumpy. Chinese exports jumped 15 percent in the first two months of the year from the same period in 2014, according to the customs administration in Beijing.
“While there have been lots of statements that they want to reduce their dependence on exports, I don’t see it,” said Scott Paul, president of the Washington-based Alliance for American Manufacturing.
China’s export boom was driven by the movement of tens of millions of workers from the countryside to take factory jobs. With its labor force now in decline, that demographic dividend is starting to disappear.
“From 2000 to 2010 you had an average increase of 10 million new workers per year coming in to the urban labor force,” said Peter Hooper, chief economist for Deutsche Bank Securities Inc. in New York and a former Fed official. “Going forward we’re expecting to see actual declines in the urban workforce in China.”
The country faces an “aging tsunami” that the Chinese leadership has yet to fully come to terms with, said Feng Wang, a professor at the University of California in Irvine.
The clearest sign of the potential benefits for U.S. workers has come in the growth of manufacturing jobs. They’ve risen 604,000 since the recession ended in June 2009 after plunging 5.6 million in the previous 10 years, when the competition from China was at its fiercest.
Some Chinese companies are even setting up operations in the U.S. Hangzhou, China-based Keer Group opened a plant in Indian Land, South Carolina, last month that already has shipped yarn to China, said Ke Wang, director of business and public affairs for its U.S. subsidiary.
Keer America Corp. is doubling its 65-employee workforce over the next two months and plans to increase its payroll to more than 500 by 2018, she said. Keer was attracted to South Carolina’s Lancaster County by financial incentives and a skilled workforce, Wang added.
The county was once a thriving textile center before the U.S. industry was slammed by foreign competition and the recession. Unemployment peaked at 18.6 percent in June 2009 and has since fallen to 6.5 percent as the region diversified away from textiles, said Keith Tunnell, president of Lancaster County Economic Development Corp. He said he’s talking with four other Chinese companies interested in moving there.
So far, wages of U.S. manufacturing workers haven’t shown the same uplift as jobs. Average hourly earnings for manufacturing industry employees climbed 1.9 percent last year after increasing 1.8 percent in 2013, according to Labor Department data.
The limited gains have an upside, according to Hal Sirkin, a senior partner for The Boston Consulting Group. They’re helping to increase the competitiveness of U.S. workers vis-à- vis their counterparts in China, where average urban wages rose 10.2 percent in the third quarter from a year earlier.
Unskilled American workers still face tough competition from overseas, including China, said Bob Funk, chief executive officer of staffing agency Express Employment Professionals in Oklahoma City. Though the gap has narrowed, compensation costs in many countries remain below the U.S.
Besides, the “first gainers” from China’s diminishing competitiveness will be Indonesia, Malaysia and Mexico, low- to middle-income countries with similar industries and cost structures, and not the U.S., said Andrew Polk, a senior economist in Beijing for the Conference Board.
Roach, though, said U.S. companies, particularly service providers, stand to benefit as China puts more emphasis on increased consumption to drive growth. He sees Chinese consumption of services growing by $12 trillion to $14 trillion between now and 2025, with foreign companies supplying $4 trillion to $6 trillion of that.
Apple Inc. is already profiting. The Cupertino, California-based company saw sales in China rise 70 percent in the past quarter, helped by the introduction of the iPhone 6 and 6 Plus.
The bottom line for the U.S. and global economies, according to Roach: China is shifting from a country propelled by demand from the rest of the world to one with a more balanced economy and greater appetite for imports.
“They’re going to be a source of growth for us,” Zandi said. “They’re not going to be an impediment.”
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