China Surges Economically While America Falters

My last column (What Not To Learn From Baghdad) argued that while media and popular attention will always focus on dramatic events like wars, it is the day-in, day-out grind of business which over time shifts the balance of power. Commerce can redistribute industrial capacity, capital and technology between rival states, which in turn convert growing national wealth into expanding international power.

In the last few days, more data has been released by U.S. and Chinese sources that further highlight how Beijing continues to surge forward while Washington falters at home despite its recent demonstration of military power in Iraq. Military power is a lagging indicator. Nations need to create an industrial base upon which to build modern combat capabilities. That capability can then persist for years even if its underlying economic foundation starts to crumble. However, once a state starts to lose its economic edge, it becomes ever more difficult and costly to maintain its military advantages.

Last week´s column looked at China´s steel industry. The pattern seen there of meeting growing demand from domestic production is seen in other areas of heavy industry as well. China has become one of the biggest markets for excavators, with sales of more than 17,000 units during 2002. To meet this demand, the Swedish firm Volvo announced last year the establishment of a wholly-owned production facility in Shanghai's Pudong area. For an investment of around $15 million, Volvo will have a capacity of several thousand units per year with initial production focusing on its newest 20 ton class crawler excavators.

American heavy equipment manufacturer Caterpillar has lobbied hard for detente between Washington and Beijing to create a favorable business climate. Its goals are proclaimed on its corporate website “to be a major supplier of earthmoving and mining equipment, diesel and natural gas engines and electric power generator sets in China. Its strategy for achieving that goal includes establishing a manufacturing base in China. China's goal of quadrupling the gross national output and establishing a ‘Socialist market economy´ present great opportunity for companies such as Caterpillar that can invest in and sell to the massive infrastructure development driving much of that growth.” To that end, Caterpillar Xuzhou Ltd., a joint venture between Caterpillar and Xuzhou Construction Machinery Group, was established “committed to being the leading manufacturer of world-class hydraulic excavators and road building machinery in China.” Caterpillar already produces a variety of engines and chassis components in China within other joint ventures.

In an interview with Barron´s published April 9, General Motors retiring chairman John F. Smith, Jr. said Western automotive-technology companies will be looking for Chinese partners to expand operations in the Chinese vehicle market, as well as to meet demand from U.S., European, and Japanese auto makers for lower-cost vehicle parts. GM, Ford and other large auto makers have outlined ambitious goals to purchase billions of dollars worth of vehicle components from China.

One of the main drivers of Chinese growth is the demand for cars, just as was the case in the United States a half century ago. Almost 440,000 cars rolled off Chinese production lines in the first quarter of this year, as manufacturers raced to keep up with sales that expanded by 56 per cent to 1.13 million units last year. Part of Beijing´s desire to increase domestic steel production has been to provide inputs to the auto industry.

Adherents of the “big emerging market” thesis popular among some American “free trade” economists and Clinton administration officials in the 1990s, had argued that the decline in vehicle import tariffs required of Beijing under its World Trade Organization accession agreement would mean a flow of imported cars to China. Instead, Ford, Mercedes Benz and other major foreign automakers are expanding production in China to meet the demand.

This pattern confirms the view of Professor Robert S. Ross of Boston College that, “China, unlike Japan, has the natural resources to sustain economic development and strategic autonomy .... Chinese enterprises, following market forces, will be able to move further into China´s interior to exploit an inexhaustible, inexpensive and relatively reliable labor force.” At the seventh investment and trade fair held in early April at Xi´an, capital of the western Shaanxi Province, 40 of the world's top 500 companies from the United States, France, Germany and Japan attended. Contracts for over $400 million were signed.

While economic stagnation afflicts much of the world, Chinese industrial output has maintained strong growth for 14 months in a row, and in the first two months of this year, the industrial added value increased 17.5 per cent over the same period last year, a record high since 1996.

In contrast, the Federal Reserve reported April 15 that total output from U.S. manufacturers fell again in February and March, continuing three years of decline. The current downturn - despite increased demand growth - is similar to the disastrous period from 1979-1982 that was the worst since the 1930s. American demand is being met increasingly by imported manufactures.

China's foreign trade displayed strong growth in the first quarter, as the export of machinery and electronics products, which account for half of China's total exports, increased 42.1 per cent in the first two months, 20 percentage points higher than the same period last year. The export of new and high-tech products increased 51.8 per cent.

For the United States, the Commerce Department reported on April 16 that for 2002, the U.S. current-account deficit increased by $110.0 billion, to $503.4 billion total, mostly due to adverse trends in trade. Exports of goods were down $36.3 billion in 2002 compared to 2001, while total imports were up $51 billion. There is no way to spin such bad news on both sides of the trade ledger.

Washington´s obsession with trade in the 1990s has failed to advance the nation´s position in the world system, and there is not a single set of trade negotiations now in progress that can reasonably offer any change in current trends. Policy must now shift to the domestic economy by redirecting the efforts of America firms from developing rival industries overseas to reviving capabilities at home. It will take direct presidential leadership on a par with what has been shown in other areas foreign policy to accomplish this goal, but it must be done if the United States is to hold its lead as the world´s most powerful nation.

William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

U.S. Trade with China
(billion dollars)

Year	1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002

U.S. Imports	19.0	25.7	31.5	38.8	45.5	51.5	62.6	71.2	81.8	100.1	102.3	125.1

U.S. Exports	6.3	7.4	8.8	9.3	11.7	12.0	12.9	14.2	13.1	16.3	19.2	22.0

Trade Deficit	12.7	18.3	22.7	29.5	33.8	39.5	49.7	56.9	68.7	83.8	83.1	103.1

Fundamentally, we believe that the U.S. government needs to devote more resources and put in place new programs to build wider expertise about China and to protect our industrial base from eroding as a result of our economic relations with China.
-- C. Richard D’Amato, chairman
U.S.-China Security Review Commission
(How to improve U.S.-China relations )

I live in Asia around 11 months of the year and have spent almost half of the past 40 years here. In that time I have never been in a country in which and about which more lies are told [Particularly by CNN-like American "business consultants"] than China -- and/or in which lying and looting and stealing and counterfeiting and corruption is so much an everyday to day part of living.

And nor have I ever come across a more accurate synopsis of the real "china prospects" than those so plainly stated by John Derbyshire in his reviews here and elsewhere of the works of other "old 'china' hands," Joe Studwell and Gordon Chang -- who also know the real "china."

To believe the much-vaunted Peking-based pack of invading, colonizing, enslaving, mass-murdering, [More than one hundred million -- and counting!] lying, looting, thieving gangster bastards that so grandiosely self-styles itself, "china" -- snatchers of power from other despotic dictatorships that, in "5000 years of history" haven't yet managed to invent so much as a form of government worthy of the name -- is to amount to anything more than, say, the Soviet Union, is to believe in fairies.

Dictatorships exist only to keep themselves in power and will eat their own young to hang on to it -- and Peking's gangster/tyrant "politicians" are no exception to that rule.

Book Review by John Derbyshire

The Washington Times - April 14 2002

Dream On

The China Dream - By Joe Studwell

Atlantic Monthly Press - 360 pp. $27.00

The dream of Joe Studwell's title is the dream of the China market: of 1.3 billion consumers just waiting to be sold clothes, medicine, cars, toothpaste, or whatever else the dreamer has to offer. As an English writer of the 1840s put it: "If we could only persuade every person in China to lengthen his shirttail by a foot, we could keep the mills of Lancashire working round the clock." The dream has been dreamed by many westerners across many centuries. For a very few - the opium merchants of the 19th century, the fast-food franchisers of our own time - it has actually come true. Much, much more often, it has proved to be only a dream, the waking from which has sometimes been abrupt and unpleasant.

In recent years there have been three cycles of dreaming and waking for foreign businessmen eager to tap into the China market. The first cycle began in the early 1980s, after a 50-year period when dreaming about China was out of fashion altogether. With the ascendancy of Deng Xiaoping's faction following Mao's death, it became clear that the fantasy economics of the Mao period had definitely been abandoned. So far as industry was concerned, they had mostly been abandoned in favor of the kind of incentivized state socialism attempted in Eastern Europe twenty years before. This was not much noticed, however. What was noticed was Deng's maxim "to get rich is glorious," and the revitalization of Chinese agriculture that followed the retreat from collective farming, and the surge in disposable incomes among urban Chinese from a Mao-era base very close to zero. Western businessmen, dreaming the dream, poured in to set up "joint ventures" with Chinese partners.

The massacres of June 1989 are a convenient punctuation mark for the end of this first dream cycle. Many businessmen had already woken even before that, though; the book Beijing Jeep, published earlier that same year, told the dismal story of a typical "joint venture" fiasco.

The atmosphere of widespread state terror that followed the massacres offered a splendid opportunity for the Chinese government to administer some unpleasant medicine to an overheated economy. When this had been done to the leadership's satisfaction, Deng started the second cycle of dreaming with his famous "southern tour" of early 1992, in which he urged his countrymen to go for maximum economic growth. Following the massacres it was clear that the Communist Party had no intention of going away; but it seemed, from Deng's 1992 speeches, that it might be willing to leave the economy alone. This all happened just as the rising fad for "globalization" was seizing the attention of western business people. Once again, the dream took flight.

The actual experience of western business in China during the 1990s was closely watched by Joe Studwell, a writer on business and economics - he is founder and editor-in-chief of the excellent China Economic Quarterly - who lived in China for the entire decade. He saw the 1990s flood of dreamers arrive, bright-eyed and eager to engage this new, busy China. He watched the bright eyes glaze over as the reality of China gradually revealed itself to them. Signed agreements and "memoranda of understanding" turned out to be worthless; court rulings were not enforced; state-owned enterprises were exempt from costly environmental regulations; expensive licenses, processed by lackadaisical bureaucrats, were required at every turn; counterfeiting and abuse of intellectual property rights were rampant; the early-1990s purchasing-power models for the disposable income of the Chinese turned out to be too optimistic; ad hoc technical standards were used to impede trade; local management personnel were scarce, and of poor quality. As difficulties multiplied, the dream faded.

Then, in December last year, China's accession to the World Trade Organization became official. As this author points out: The government committed to the WTO from a position of weakness, not strength, because of quiet desperation, not unified political resolve. It reached for an outside force to do a job it was failing to do itself - the deregulation and de-bureaucratization of China's economy.

WTO accession arrived just as serious disillusion was setting in among foreign investors in China. There are signs that it has initiated a third cycle of dreaming. Certainly the Chinese government hopes this is so. Knowing that they cannot solve their country's economic problems without making political reforms they are unwilling to contemplate, China's communists hope that the standards implicit in WTO membership, and the compulsory procedures for resolving disputes between members, will, all by themselves, force China's domestic economy to shape up.

Joe Studwell shows convincingly why this is unlikely to happen.

The China Dream will inevitably be compared with last fall's book on the same topic, Gordon Chang's The Coming Collapse of China. [Which I reviewed in these pages 8/12/01]

Studwell's book is lighter on cultural insights than Chang's, but better organized and richer in hard economic facts. He notes, and abundantly documents, such large and intractable truths as the following:

For all the talk of reform, of retreat from socialism, of the unleashing of the energies of the Chinese people, and so on, government payrolls increased all through the 1980s and 1990s.

From being debt-free in 1979, China is now saddled with liabilities that will soon make it the world's most indebted nation.

"Given the state's determination to micromanage economic activity, there [is] almost no strictly legal way for foreign investors to make money."

Studwell offers two possibilities for China's near future: a long period of stagnation and low growth like the one Japan has been enduring, or a major fiscal crisis, with runs on the banks followed by Latin-American levels of instability and social disorder. He notes that neither scenario offers a very exact analogy to China: a stagnant debt-crushed economy with a per capita GNP of $25K per annum is not the same thing as one with $300.00 per annum, and Argentina has never had either Chinese levels of social and political control or modern China's imperial responsibilities and hegemonic ambitions.

The author's advice to foreign investors is to use the country as a manufacturing base for exports [If you can squeeze in among all the overseas-Chinese doing exactly that] -- but to engage in the domestic market only with utmost caution. It sounds right to me, though given the violence of regime change in China, and the xenophobic outbursts that traditionally accompany such change, I would add one more thing:

Keep a suitcase packed and ready under your bed at all times.

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