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Charlie Pinto The U.S. Content of Made in China

1. Explain in your own words three key points that emerge from this case. The first key point that comes from this case is the illustration of the actual impact of Chinese imports on US spending. Most people tend to believe that imported Chinese goods have a large share of US spending, but the case demonstrates how this is actually not the case at all. As the Hale and Hobijn article states, only 2.5% of GDP is from Chinese imports. Furthermore, of total US spending, two-thirds comes from services, in which foreign nations have a miniscule share. Therefore, of the other one-third of US spending, China only holds, 2.7% of U.S. PCE.

The second key point that emerges from this case is the point that illustrates the exact US content from Made in China products. As the case article states, Whereas goods labeled Made in China make up 2.7% of U.S. consumer spending, only 1.2% actually reflects the cost of the imported goods. What this means is that of these Made in China products, the US content of these products is actually about 55%. Therefore, the US actually has a larger share than China of these Made in China products.

The final key point that emerges from this case is the question of whether or not Chinas inflationary pressures will have a significant impact on U.S. imports from China. This could be very important because these increases could be passed on to US consumers. As stated in the article, Since the share of PCE attributable to imports from China is less than 2% and some of this can be traced to production in other countries, it is unlikely that recent increases in labor costs and inflation in China will generate broad-based inflationary pressures in the United States.

2. If Chinese imports are such a small percentage of what consumers spend in the US, why do people have the opposite impression? One of the main reasons why I believe people have the impression that Chinese imports are a large portion of what consumers spend in the US is because we often forget that Services accounts for a huge portion of spending in the US. As the Hale and Hobijn article specifies, about two-thirds of all spending is for services, which are almost exclusively produced in the United States. Although Chinese imports hold about a quarter share of the overall foreign share of US spending, it is in the one-third of US spending that is not services, mainly durables and clothing/shoes of nondurables and therefore is actually only a small percentage of what consumers spend in the US.

3. Analyze figure 2, the Geography of US PCE, 2010, in terms of Dickens chapters 2 and 3. What does it suggest about the connectedness of the US when it comes to consumer goods? Figure 2 from the Hale and Hobijn article illustrates the geography of US PCE in 2010. The figure suggests that although globalization is a strong force in the world economy, the US is still largely spending money on consumer goods made in the US from US parts. Specifically, as Figure 2 illustrates, 81.9% of US PCE are goods made in the US from US parts. Many people believe that the US is beginning to rely on foreign products and goods as globalization spreads into further reaches of the world, however this figure illustrates that as of 2010, the connectedness of the US when it comes to consumer goods is not that far along and the US still largely spends on made in US from US parts goods.

4. Taking the i-phone as an example, in 2009 an i-phone cost about $179 to produce in China, which then sold in the US for about $500. The US and China have a large trade deficit, since the final value of the phone of $500 would be counted as an import from China. Using the logic of production networks, explain who is benefitting from this trade and why. I believe that both parties benefit from this trade. For the US, they are able to manufacture and build these products in a cheaper environment in which labor costs are significantly lower. While on the Chinese side, they are able to continue to build their economy and manufacturing industry and also have the benefit of having the $500 product count as an export to the United States. Both sides get advantages in areas they require and therefore both can benefit from this trade in the current situation.

Citations:
1. Galina Hale and Bart Hobijn, The U.S. Content of Made in China, Federal Reserve

Bank of San Francisco, FRBSF Economic Letter, 8 August 2011