What’s In That $45 Billion?

There has been much ado about the $45 billion of new exports to China — and the 235,000 American jobs they will support — that resulted from last week’s summit between President Barack Obama and President Hu Jintao of China. In fact, President Obama referred once again to the job impact of these orders in his State of the Union Speech on Tuesday evening.

Of course, it’s always good when the top leaders of the world’s leading superpowers provide concrete examples of the different ways in which China and the U.S. are working together. In my experience, though, pronouncements like these need to be taken with a huge grain of salt.

Under any president, preparations leading up to state visits between the United States and China tend to emphasize form over substance. The paramount objective of these visits is to cast a positive light on the relationship between the two countries by trumpeting the large amount of business being conducted. Previously announced deals, near deals, deals that have been in the works for a number of years, and deals that are still under discussion are all thrown into the same pot, the emphasis being on announcing the largest possible number.

On January 19, the White House provided a list of deals that went into the $45 billion package. Of the total, $19 billion, or 42 percent, represented the sale of 200 Boeing aircraft to China over the next three years that the White House said will support 100,000 American jobs. (More on that later.)

Of the larger of the remaining deals:

• General Electric (“GE”) announced that it had signed a Letter Of Intent (“LOI”) with the Chinese Ministry of Rail (“MOR”) to bring Chinese high-speed rail technology to the United States. GE and China South Locomotive & Rolling Stock Corporation Limited (“CSR”) plan to form a joint venture in the U.S. to manufacture high- and medium-speed electric multiple unit trains. GE estimates that new business generated by the HSR JV could support up to 3,500 American jobs. In addition, GE said it will agree to manufacture locomotives and provide components to China that will result in an estimated $360 million in U.S. export content, supporting up to 200 GE Transportation jobs.

• Caterpillar will ship $1.4 billion in U.S.-manufactured mining and construction equipment and diesel and gas turbine engines to China, supporting approximately 7,567 jobs in the United States.

• Alcoa announced that it had signed a Memorandum of Understanding (“MOU”) with the China Power Investment Corporation to collaborate on a broad range of aluminum and energy projects representing an estimated $7.5 billion in investment. The White House report notes that: “The total employment impact to the U.S. economy of this transaction is not known at this time; however, Alcoa estimates that this undertaking will improve the global competitiveness of the company and support jobs in the United States.”

Much of the rest of the package includes a variety of deals that involve investment in China and where the impact on American jobs, therefore, appears minimal.

• Navistar announced that it expects central Chinese government approval shortly for a $400 million joint venture to make trucks in China, which the company estimates will provide 200 jobs to the United States economy, mainly in the field of engineering and other services.

• Celanese said that it will conclude an MOU with Wison Group for the construction and operation of an industrial ethanol production facility in China. The transaction is valued at approximately $815 million, with $50 to $80 million in U.S. export content that will support an estimated 200 to 250 U.S. jobs.

While many of the deals in the package may be questionable as far as generating new jobs, surely the sale of 200 airplanes that are manufactured in Boeing’s factories in Seattle will provide a new boost to the regional and national economies? Dominic Gates, aerospace reporter for The Seattle Times, doesn’t think so. After conducting an investigation into the claim, here are some of the conclusions he reached and provided in his recent article on the subject:

• The big Boeing order from China trumpeted during Chinese President Hu Jintao’s state visit to the White House is actually a re-announcement of previous orders.

• The deal President Hu signed does not include any new jet orders…all of the airplanes in the sale were announced and booked by Boeing as firm orders over the past four years. Chinese airlines had already paid nonrefundable deposits and signed contracts for the jets, most of them as far back as 2007.

• “The only thing new is (Chinese) government approval,” said Boeing spokesman Miles Kotay.

• The White House announcement said the total value of the orders was $19 billion…But that’s the list price, which airline customers never pay.

• Based on market data from aircraft-valuation consultancy Avitas, the actual price for those 200 planes is about $11 billion.

Summits between the leaders of the United States and China are great for focusing everyone’s attention on the relationship between the two countries and for getting certain government approvals over the finish line. For example, a former General Motors executive told me that he used the occasion of a visit to China in the 1990s by then Vice President Al Gore to obtain final approval from the Chinese government for GM’s joint venture in Shanghai.

That deal was certainly important to GM, and Vice President Gore’s arrival in Beijing was a catalyst to getting the government off the dime. Apart from helping along large individual projects, there is no doubt that the focus provided by a successful state visit also promotes greater general economic cooperation over the longer term. No one, however, should take the government pronouncements at face value and believe that, somehow, $45 billion of new export orders can suddenly appear as a result of such meetings.

No comments yet... Be the first to leave a reply!