THE BLOG
08/26/2011 05:40 pm ET | Updated Oct 26, 2011

The Truth About "The U.S. Content of 'Made in China'"

Any tourist standing on Shanghai's waterfront and gazing across at the garish Pudong skyline sees the visible manifestation of American wealth moving to China and every businessperson on the streets of Shenzhen knows that the manufacturing export business built it.

Yet, a recent "economic letter" from the San Francisco Federal Reserve Board contends that America is spending only 1.9 percent of its dollars on Chinese goods. It has inspired headlines like: "'Made in China' Taking Over U.S.? Not By a Long Shot" from the Wall Street Journal. How can we reconcile what we see on Wal-Mart's shelves with what these experts and media pundits tell us?

As Benjamin Disraeli supposedly remarked, "There are lies, damned lies and statistics" and the arcane art of econometrics makes it easy for academics and pundits to tell the public that black is really white with a straight face. Let's peel back just the surface of the onion that the FRB has offered us:

Firstly, the paper, titled "The U.S. Content of 'Made in China'" is based on Personal Consumption Expenditures (PCE), which include everything from existing housing to used cars and nursing home stays. It just isn't germane to discussions of trade balances and creating national wealth.

Obviously, China doesn't play in these generally non-tradable categories, which comprise the largest portion of consumer spending. Leasing cars and renting houses do move a lot of PCE dollars around, but they create no new net wealth for America and provide relatively few jobs. Making the tools to build new homes and making the parts to build new cars are what create wealth and jobs; two things that are increasingly "Made in China."

Secondly, while the study carefully subtracts the value of American made inputs of Chinese production -- hence the title -- it neglects to add in the corresponding Chinese components in products we import from other nations. For instance, a large percentage of Indonesian clothing is cut entirely from Chinese cloth and China is the source of valuable rare earth metals in many high-tech products from Japan and Korea. Cars from these same nations are filled with Chinese tires, hoses, and transmissions. None of these indirect imports are included in the 1.9 percent figure simply because there is no available data source.

In truth, it simply isn't possible to accurately calculate total Chinese imports! Pretending to have done so, while ignoring visible evidence that contradicts the results, epitomizes the fashionable approach to economics. This eagerness to place our faith in highly abstract datasets over messy reality has encouraged an elite cadre of brilliant thinkers to drive our economy right into the ditch.

Finally, the study also asserts that China's spiraling inflation will not impact America, because we spend so much on domestic products and services. However, it fails to acknowledge that China's insatiable demand for commodities -- China just became the world's largest energy consumer and is just getting started -- increases the cost of nearly everything, regardless of the source of production. Further, when Chinese tire and drywall prices drive-up U.S. auto and construction costs, the price of domestic substitutes like used cars and existing homes will rise as well -- regardless of their "Made in China" content.

Sadly, what has actually preserved us from Chinese inflation is that the evisceration of our manufacturing sector has slashed real wages and left millions of Americans unemployed. The paper's most accurate statement is that China's share of PCE has doubled over the last decade.

An organization with a much closer connection to reality, the Consumer Products Safety Commission, reports that Chinese imports quadrupled from 1997 to 2008 and that a full 46 percent of imported consumer products are now produced there. Since China's hazardous goods also dominate product safety recalls, the CPSC has established offices in Beijing to help Chinese manufacturers improve their quality -- at the expense of American taxpayers.

We've got a better idea: let China keep their dangerous cribs and killer medications, and we'll keep our jobs and standard of living. If, as Beijing's apologists are so eager to believe, "Made in China" really constitutes only 1.9 percent of our spending, then the cost of returning to the safety of "Made in America" should be correspondingly minuscule.