The American - Chinese (Catch 22) Trade Relationship
Current economic projections suggest that by 2050 the hierarchy of the largest economies would have China as the largest, followed by the USA, India, Japan, Brazil and Russia. Such historic shift of power is not likely to be smooth for a variety of reasons.
First, and foremost, is the complex, symbiotic relationship between the Chinese economy and American prosperity and indebtedness. A large fraction of the American trade deficit is with China. This is now becoming a political issue in the US, but since the Chinese purchase of American bonds is keeping the interest rates in America low, the recent American demand for a revaluation of the yuan is largely shadow boxing.
Nevertheless China and the United States remain economic competitors. The Chinese appetite for commodities is driving up world prices. In Mapping the Global Future, an assessment of the world's prospects in 2020, the US government's National Intelligence Council says China is expected to boost its energy consumption by 150 per cent.
The Chinese feel vulnerable since America controls the sea lanes from the Middle East. Consequently, the Chinese are building up their naval power to defend these sea lanes and also entering into exploration agreements with Central Asian and South American countries. In my own view, the mutual economic and business linkages will ensure that there would not be a military conflict between the US and China.
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China's real dangers are internal. The main challenge is the idea of Western individualism which goes against the Chinese tradition related to order and harmony in society. The failed Taiping rebellion of the mid-19th century, the communist revolution of Mao Tsetung, and the Tiananmen protests were attempts to find Chinese answers to this Western challenge.
Looking from outside, the centralisation of power by the Communist Party, and absence of institutions that provide outlet to vent frustrations of the public, appear future vulnerabilities. But Chinese leaders haven't yet found a new paradigm that would be in harmony with its own history as well as the needs of the times. Meanwhile, certain problems are festering, such as its hukou (household registration) system of two Chinas in which more than one-sixth of the population is denied the rights that others have.
Under the hukou system, people must live and work in the place where they are permanently registered, which is normally their place of birth. Households are designated as rural or urban. Urban workers are permitted to change jobs and they are provided with state housing and pensions.
Rural workers need government permission to seek work in designated urban areas. In their jobs, rural workers are required to enter into bonded contracts which they can break only if they pay the employer a large amount of money. Employers prefer to recruit young, single women, who are housed in cement-block dormitories; the fear of the registration laws ensures that the women spend most of their time in the factory complex.
In effect, the hukou system perpetuates two Chinas, where the rural sixth has become the underclass in relation to the urban population. The urban folks are like the silk-industry bourgeoisie, and the women of the peasant families are like the workforce for cocoon production.
Absent legal safeguards for the rural people, local governments have recruited gangsters, known in Chinese as 'the black society,' to collect extortionary taxes. According to a recent World Bank report, China's rural poor have suffered a six per cent decline in living standards since Beijing's accession to the World Trade Organisation in 2001.
The mix of foreign ideas, bureaucratic control, greed, and corruption has led to several social explosions from time to time. Given that the Communist Party in China allows no opposition to it, could there be periods of breakdown of order?
A historical breakdown of monumental proportions was the Taiping Rebellion (1851-1864). One of the bloodiest conflicts in history, it was a struggle between the forces of Imperial China and those inspired by the Christian convert Hong Xiuquan. It is estimated that this war cost more than 20 million civilian and military lives. Both the Chinese Nationalists and the Communists, two groups that later ruled the nation, claimed to have been inspired by it.
The British East India Company started to import opium to China in early 19th century. Warren Delano, maternal grandfather of Franklin Delano Roosevelt, was an important figure in this business. The Chinese resisted the importation of opium, but the Western powers insisted on carrying it out in the name of free trade and this led to the Opium Wars of 1839-1842 and 1856-1860. The treaties of Nanjing and Tianjin, which legalised the opium trade, also legitimised missionary activities throughout China.
This story had an American connection in the name of Issachar J Roberts, a Baptist minister, who was Hong's religious teacher. Believing that he was the Son of God and the younger brother of Jesus, Hong announced that his mission on earth was to rid China of evil influences of Manchus, Taoists, Buddhists, and Confucians. In the late 1840s, Hong reorganised his movement into a military organisation. In 1851, after repulsing an attack by the Imperial forces, he declared that a new Kingdom of Heavenly Peace had been established; he himself was the Heavenly King and the era of the Taiping (Great Peace) had begun.
The rebellion got off to an impressive start. Its soldiers raced northward through the central Yangtse valley to Nanjing. However, they were repulsed in Beijing. For the next ten years, the Taipings warred continuously to maintain their territory. But, slowly, the Kingdom began to unravel and in June, 1864, Hong poisoned himself.
The Tiananmen Square protests of 1989 were squelched before they became an unstoppable force. Although sparked by students mourning the death of a liberal Party leader, they were a consequence of the inability of the Communist party to resolve its differences in an orderly manner. It was the struggle between reformers and conservatives being played out in the streets in which the demonstrators called for greater democracy, and an end to official corruption.
As the protests spread nationwide, the hardliners got the upper hand and Beijing was placed under martial law. Tiananmen Square was not cleared, and on May 30 students erected the 'Goddess of Democracy' statue to the cheers of a large crowd. On June 4, on the orders of the party elders, troops and tanks cleared Tiananmen Square. Hundreds (some say, nearly 3,000) of unarmed protestors were killed. The Chinese government has refused to give out the number of dead and wounded.
The Taipings wanted to create an ideal theocratic state, whereas the Tiananmen protestors wanted an ideal liberal state. The liberal State model would solve the problems of hukou and hasten the creation of a civil State, but its goals are different from that of the Communist Party, which remains provincial in many respects.
It is the reluctance to face up to these tasks of bringing democracy within, that Chinese leaders have used hegemonic nationalism related especially to Taiwan for its internal political purposes.
The same reason leads to a selective use of history. Recently, there were state sponsored demonstrations against Japanese atrocities in the Second World War, yet China is purging its own textbooks of its own war in the late 1980s in Vietnam, and whitewashing the events of the Tiananmen Square protests.
The Chinese economy also has to carry the burden of an aging population that is proportionately greater than in other large countries. The demographic problem of China will get worse in the next decade.
The way China has catapulted itself onto the Monopoly board of global capitalism has caught most Western leaders on the hop. Like Butch Cassidy and the Sundance Kid looking back at their pursuers, top U.S. and European Union businesspeople are wondering, "Who are those guys?"
After all, how much do we know about the China National Petroleum Corp., which yesterday bid $4.18 billion for PetroKazakhstan, a Canadian oil company with big reserves in Central Asia? Or Haier, which earlier this year tried to nab U.S. white-goods company Maytag? Or Lenovo, which bought IBM's PC business?
How do you pronounce corporate acronyms like CNOOC (the China National Offshore Oil Corp., which recently tried to purchase Unocal), SAIC (the Shanghai Automotive Industry Corp., which fought Nanjing Automotive Corp. for Britain's Rover), or TCL (the TV company that bought France's Thomson Electronics)?
China has been a global trade presence since well before Marco Polo trekked there, but, as the recent flurry of successful and attempted acquisitions of major Western brands suggests, its influence has surged of late.
If you like the German spectator sport of schadenfreude, one delicious consequence of this is watching presidents, prime ministers, and CEOs from other nations scramble for position in the rapidly rearranging global business turf. Countless commentators have raised questions about the economic and global security implications of this rearrangement, but the murmur about the potential environmental and social consequences has been far more subdued.
Take CNOOC. Earlier this month, the company withdrew its $18.5 billion offer to buy Unocal in the wake of a political firestorm in the United States. That firestorm was triggered not by the company's corporate-responsibility record, which would have been a reasonable subject for discussion, but rather by the idea of selling off a U.S. oil company that some regard as a national strategic asset.
On that issue, it was Thomas Friedman, who wrote in The New York Times that, "if China wants to overpay for a second-tier U.S. energy company, that's China's business. Anyway, the more starved Americans are for oil, the sooner we will adopt alternatives and get off this drug once and for all."
But Friedman made a deeper point, one that's not going away with the CNOOC bid off the table. As he put it, China and America have become economic "Siamese twins." He writes, "We have slipped into a symbiotic relationship with another major power that is neither a free market nor a democracy." That, surely, is the real issue. How can we help bring China, and other emerging economies, up to speed on environmental, human-rights, and anticorruption protections?
One major obstacle to doing so is the hypocrisy of many Western approaches to globalization. After years of insisting they were 100 percent committed to free markets and no-holds-barred globalization, political and business leaders in the U.S. and E.U. are having their bluff called by China, Inc.
From the East looking West, it's increasingly clear that, in fact, Americans were 100 percent committed to Americanization, Europeans to Europeanization, and so on. It's hardly surprising, then, if some Chinese business leaders view Western concerns about corporate social responsibility and sustainable development as little more than protectionist trade barriers.
Still, that hardly makes legitimate concerns about the environment and worker rights disappear. Today's China is awash in contrasts. The newest factories, whether churning out cars or pharmaceuticals, are among the best in the world. At the same time, the country has some of the worst sweatshops and some of the most dangerous working conditions; think of the endless stream of coal-mine disasters that kill hundreds, if not thousands, of Chinese miners every year.
The civil society and nongovernmental-organization (NGO) sectors are gradually gaining their feet, but those feet are still tightly bound by government controls that massively constrain NGO evolution and censor what such organizations can say. Instead of expanding civil liberties and liberalizing economic policy simultaneously (as some other governments are doing), China's leaders are trying to increase economic health while maintaining tight political controls -- in the hope, apparently, that wealth will suppress the nascent appetite for democracy.
It's hard to say whether this high-stakes gamble will succeed. On the one hand, Public Security Minister Zhou Yongkang recently told a closed meeting that 3.76 million Chinese took part in 74,000 mass protests last year alone. On the other, such public activism can hardly be taken for granted; the London Times reported last week that China has created elite police squads in 36 cities to crush protests.
What is certain, though, is that anything that enables China to operate without civil-sector watchdogs should make the rest of us uneasy, not just about the nation's growing economic clout, but also about its environmental reach. (Air pollution from the country's great urban-industrial concentrations is now turning up as far afield as Canada. And that's to say nothing of the country's coal-powered carbon-dioxide emissions that will help accelerate global climate change.)
In a July 2005 survey by Toronto-based polling company GlobeScan, over 300 sustainability experts worldwide were asked whether they thought China would adopt the "best environmental and energy technologies and practices available." Forty-four percent thought it unlikely, against 28 percent who were confident that China would rise to the occasion.
One of the optimists is eco-designer Bill McDonough, whom we bumped into in Beijing, at the Fortune Global Forum this May. As chair of the China-U.S. Center for Sustainable Development, he believes China will be forced to become a leading incubator of environmental innovation simply because the in-country collision between people's needs and the ability of natural systems to support them is already so acute.
As he notes, "The Chinese have to build new housing for 400 million people in 12 years." General Electric Chair and CEO Jeff Immelt also sees China's impending crises as a huge opportunity for sustainability solutions, telling Fortune, "While Europe has been a driver for innovation in cleaner technologies, China promises to be its market."
Having met people from CNOOC, PetroChina, and Sinopec, it's clear to us that sustainable development will be a tough sell in China. That said, we share McDonough and Immelt's optimism, not least because of two meetings we had with Vice Minister Pan Yue, deputy director of the State Environment Protection Administration. He and SEPA have stalled dozens of major development projects that ignored environmental laws. The fact that anyone would even try to stop the juggernaut, let alone succeed, is encouraging.
We owe people like Pan all the support we can offer. We must use the oft-claimed leverage gained by engaging China as a trade partner to help its leaders and citizens fight for new rights and responsibilities. Otherwise, we risk having our own undermined.
China, which sends one-third of its exports to America, accounts for 26% of the U.S. trade gap. Most of its exports to the U.S. are manufactured products, made by workers earning only 4.5% of the average U.S. factory wage. ..." The article continues with: "But the fate of U.S. Workers depends primarily on domestic conditions, not the trade gap.
A Brookings Institution study ... found that trade accounts for only about 12% of the nation's manufacturing job losses since 2000. Most of the losses stem from weaker exports ... The main source of the deficit isn't China's ... low wages, or export subsidies, but imploding U.S. savings rate - ... The U.S. current account deficit - the gap between what America spends and what it produces - recently hit a high because of a sharp drop in personal savings and out-of-control federal spending. "
We also conveniently forget that our prolifgate spending has been financed by "... China, along with Japan and few others, ... financing the U.S. current account gap via huge purchases of dollar-demoninated securities at relatively low interest rates."
First: the USA buys the most bonds it issues. No one else comes even close. Second, if you add up all the bonds sold the last 30 years, it is over $8 trillion and rising fast.
Second: it helps to color things in. When I put the countries that are selling off US bonds in red and the ones buying in green, a pretty nasty picture emerges: our allies who we spend half a trillion protecting every year are SELLING and the countries that harbor some need to control our empire are BUYING. Rapidly. This is a STRATEGIC DISASATER. And we should be seeing hearings about this and there should be demands our allies support our red ink, not make it worse. Certainly, this is a stab in the back.
A year ago, Japan held $639.4 billion in US red ink. They sold off $21.6 billion this year. The UK sold off $47 billion. Taiwan sold off $11.4 billion. South Korea sold off $14 billion. Mexico sold off $7 billion. Singapore sold off $5 billion. And Canada sold off $6 billion.
These are the top holders of our public bonds who are our allies and who we protect with our super-massive, super-expensive military! And they collectively sold off $112 billion in bonds. This is a huge number since it comes from just ONE YEAR'S statistics!
Who bought this $112 billion in bonds? Heh. Hello, communists! After the US itself and Japan, the two top economies that are hosting the weakest currencies relative to all the other top 30 nations, China holds the third most US bonds. $416 billion. They bought another $95 billion in bonds just this year alone. This is the combined total sold by the top four allies of the US.
$11 billion of the bonds sold by our allies who are stabbing us in the back were bought by a consortium of OPEC countries seeking to gain influence over our military as well as our government. A consortium the Chinese are courting very strongly.
The diplomacy done by China this year aimed at stopping fighting in the Middle East of the Shi'ites versus the Sunni are significant and the fact that China and they nearly totally soaked up every penny of the bonds sold by the Asian 'allies' we are foolishly protecting for free shows clearly that there is something afoot here and I can see the outline of a very large boot coming down on our silly faces.
The only two European allies who bought bonds were Germany and Switzerland. Together, this was barely a billion dollars worth. Since NONE of our allies think our bonds are worth buying, nay, they aren't worth holding, is significant on many diplomatic, military and trade levels: they think we are going bankrupt and are ditching us as fast as they dare!
These economic relationships between U.S. and China - American's love of the inexpensive Chinese products - the U.S. is a huge market and one of the few strong economies - bind us in a symbiotic relationship.
What is the answer to the question on how to compete? One answer is to focus on "value added". What is the primary value your company adds to the product or service? The rest should be open to the most cost effective approach, such as out sourcing, OEM (original equipment manufacturer) relationship, etc.
Save what you can . Be prepared to compete on a global basis.
We are driving our economic and diplomatic car like we are madmen and it is on fire, the tires are gone and we are grinding grooves in the pavement while we scream and wave guns, shooting anyone who tries to stop us.
*Joined at the Hip
*China creates crack unit to crush poverty protests
*Chinese oil firm withdraws takeover bid for Unocal