The good and uncertain relationship between China and the Northwest

Yes, Boeing's a huge player in trade with the world's emerging giant, but it's not the only economic tie the region has – and it's not clear that China's growing trade and influence will be all good for this corner of the U.S.
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787 General Manager Mike Bair (left) and officials from the People's Republic of China. (Boeing)

Yes, Boeing's a huge player in trade with the world's emerging giant, but it's not the only economic tie the region has – and it's not clear that China's growing trade and influence will be all good for this corner of the U.S.

About China, it helps to be of two minds if you live in the Pacific Northwest. On the sunny side, thanks to a dynamic economy that has grown at double-digit rates for a generation, China has become one of our largest customers. Boeing has been doing business with China virtually from the day President Nixon flew to Beijing on a Boeing 707 in 1972. China ordered 10 707s that year. It has been a reliable and growing Boeing customer since and lately has become a significant supplier to Boeing, as well. Of about 1,055 commercial airplanes operating in China as of March, 60 percent were Boeing products vs. about 30 percent Airbus. In 2005 and 2006, eight Chinese airlines ordered more than 200 Boeing jets. China for the foreseeable future will be the largest market for commercial aircraft outside the U.S. Boeing forecasts China will require 2,880 aircraft over the next 20 years, worth $280 billion. It figures China's economy will grow at roughly twice the global rate (6.1 percent per year compounded vs. 3.1 percent). Air traffic will grow at about 8 percent annually vs. about 5 percent for the globe. No wonder, then, that Boeing CEO James McNerny told an investor conference May 23 that emergence of a third competitor in commercial aircraft is "inevitable" and that China is the likely candidate. That should surprise no one who has been paying attention. We told you as much on April 1. BusinessWeek reported earlier this year that China's top leadership had formally approved plans for China to produce large commercial aircraft. Chinese companies already are turning out parts for Boeing, including the rudder for the 787. And China already is building a relatively small single-aisle jet, the ARJ-21, that is scheduled to take to the air next year and enter commercial service in 2009. Boeing will have to stay on its toes to ensure it remains competitive, but there is no reason for panic. It will have to do that anyway to stay competitive with whatever Airbus will throw at it. Airbus looks like a disorganized mess now, but don't count it out. It is in the interest of customers, after all, to keep both players relatively healthy in this game, the better to play one against the other. And it will take the Chinese several years to develop the expertise to compete head to head with Boeing and Airbus. All of the Pacific Northwest, not just Boeing, benefits from China's growth. Its voracious appetite for raw materials, including copper, is a key reason Montana's economy is flat-out booming. Montana had the nation's lowest unemployment rates in both March (2.0 percent) and April (2.2 percent). In 2006, China was the leading destination for exports from Washington and Idaho and Oregon's No. 2 customer (behind Canada). In the first quarter of 2007, exports to China from Idaho – probably memory chips rather than potato chips – rose 48 percent from the same quarter in 2006. Washington's exports to China in the first quarter rose 15 percent from a year ago. To the extent the Pacific Northwest becomes a leader in energy-saving and green technologies, we should continue to benefit from China's development. China's helter-skelter growth has left it with grievous environmental and pollution problems. Not all is plus, of course. China's emergence as a low-cost manufacturing center has contributed to the decline of manufacturing employment in the U.S., including the Pacific Northwest. Washington's manufacturing sector shrank by more than 102,000 jobs (28 percent) from mid-1998 to early 2004. About half those jobs were in the aerospace industry, where a cyclical decline that had begun in 1998 was accelerated by the 9/11 attacks. U.S. manufacturing employment peaked at about 19.5 million in 1979. More than 3 million manufacturing jobs have been lost in the U.S. just since 1998. Not all of them have gone to China. Increased productivity and the substitution of capital for labor accounts for a part of the decline. Sidelight: The U.S. will remain the world's largest manufacturer for years to come, according to Global Insight of Boston, the economic-forecasting firm. In 1995, China accounted for just 4.6 percent by value of the world's manufactured goods vs. 24 percent for the U.S. China is up to about 12.1 percent (vs. 25.5 percent for the U.S.) but won't overtake the U.S. until 2020. As anyone who follows politics knows, China's huge trade surplus with the U.S. – $233 billion last year, $56 billion in this year's first quarter – has become a huge political issue. China has also accumulated more than $1 trillion of U.S. government bonds. Sky-is-falling types think this gives China the ability to pull the rug out from under the U.S. dollar. Others note that the bigger China's dollar hoard becomes, the less incentive it has to do anything that would reduce the value of the greenback. The long-term question about China is whether it will eventually become powerful enough to challenge American domination of world affairs. As the author and historian Niall Ferguson reminds us, no country today can challenge American power, soft or hard. Japan is not a candidate; its population is shrinking and aging. European powers – Germany, France, Italy, the U.K. – have relatively static populations and economies. "China is rising – some say it has already risen – to become the newest great power," reports The Economist. Its population, currently about 1.3 billion, will rise to 1.5 billion by 2025, according to the Population Reference Bureau. China's economy is still relatively small using nominal exchange rates. According to the International Monetary Fund, China's output of goods and services in 2006 was worth about $2.6 trillion, ranking it No. 4 behind, in order, the U.S. ($13.2 trillion), Japan ($4.9 trillion), and Germany ($2.9 trillion). But other estimates, based on the concept of purchasing-power parity (PPP), put China already at No. 2. PPP equalizes the purchasing power of different currencies in their home countries for a given basket of goods. The IMF, the World Bank, and the Central Intelligence Agency all list China's output at No.2 to the that of the U.S. based on purchasing power parity. And China is a growing military power, as a recent Pentagon report reminded us: "China's rapid rise as a regional political and economic power with global aspirations is an important element of today's strategic environment – one that has significant implications for the region and the world." All that said, China clearly has a long way to go before it will have the heft to balance or match the United States. "Do not yet think of [China] as a global [power]," advises The Economist. "Even if commercial and diplomatic tentacles stretch increasingly round the world, the main site of China's power, for decades to come, will be in its Asian backyard." We live in a uni-polar world now. For better or worse, and like it or not, we are likely to live in a uni-polar world for years to come.


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