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China and the Shifting Balance of Economic Power
The Jamestown Foundation ^ | 20 May, 2003 | William R. Hawkins

Posted on 05/21/2003 11:47:35 AM PDT by batter

In March of 1917 the British Empire captured Baghdad from the Ottoman Empire. That military campaign was part of the larger conflict of World War I, from which Great Britain emerged victorious. Indeed, London has not lost a major war in over two centuries, though as the Duke of Wellington said of Waterloo, some have been near-run things. Yet, during this same period, Great Britain dropped from the position of a global superpower--one boasting an empire that governed a quarter of mankind--to that of Europe's third-ranked state and barely among the top ten nations worldwide.

Great Britain did not lose its position to rivals in war, but to rivals in peace. This is something that Americans savoring their current victory over Iraq should contemplate.

The twentieth century saw the tumultuous rise of several new powers within the international system as the industrial revolution, which had been pioneered by England in the eighteenth century, spread across Europe and around the world. By the eve of World War I, both Germany and the United States had surpassed Great Britain in manufacturing output. Russia was beginning to industrialize in earnest and Japan was becoming the first Asian state to follow suit. The origin of World War I lay in the East; Germany feared Russia's potential strength once its vast resources and population were mobilized by modern science and industry.

The day-to-day exercise of world power depends on the material wealth of the major contending states. National leaders may at times lack the desire or will to play on the world stage, or they may do so incompetently. But those who lack the means to act have limited options. They cannot expect to be successful when facing those who do have the means and the skill to control events.

The twenty-first century will see the further spread of science and industry, which is the real meaning of the buzz word "globalization." The result will be the rise of a new crop of major nations vying for their place in the international system. They will seek the power to control their destiny and to grab the largest possible share of the world's wealth.

Foremost among these new rivals is China. At the March National People's Congress in Beijing, retiring Premier Zhu Rongji declared that China's goal was to build "large internationally competitive companies or enterprise groups that have distinctive main lines of business and possess their own intellectual property rights and name brands." Beijing is investing strongly in education and is now graduating more electrical engineers than the United States. It is offering incentives to bring back home the hundreds of thousands of Chinese students who have gone to the best universities in the West to learn about leading edge technologies. And it continues to demand technology transfers from the many foreign firms that have been investing in China.

China's embrace of capitalism is not that of the laissez-faire variety. Take the case of the steel industry. Despite the fact that there is substantial overcapacity worldwide, which has led to such massive dumping into the American market as to imperil the survival of most U.S. steel mills, the Chinese have been investing heavily in new, efficient steel-making capacity. Domestically produced steel is expected to replace imports, which have been rising to meet the demands of a growing country. But China's leaders do not want to import anything of strategic value that they can make themselves. The ability to produce high quality hot-rolled products within China at low costs will also make the steel-using segments of Chinese industry more competitive, both at home and overseas. And, of course, Chinese steel mills are expected to flood the already saturated global marketplace with exports.

This pattern of meeting growing market demand from domestic production, rather than from the imports that adherents of the "big emerging market" thesis had predicted in the 1990s, has been seen in other areas of heavy industry as well. The large number of construction projects in China has boosted the demand for excavators. China has become one of the biggest markets for excavators, with sales of more than 17,000 units in 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 US$15 million, Volvo will have a capacity of several thousand units per year with initial production focusing on its newest twenty-ton class B series crawler excavator.

American heavy equipment manufacturer Caterpillar has lobbied hard for detente between Washington and Beijing while exporting equipment to China for over twenty years. However, it now proclaims on its corporate website that the company's long-term goal is:

"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. The website says that Caterpillar is "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 on 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 automakers for lower-cost vehicle parts. GM, Ford and other large automakers have outlined ambitious goals to purchase billions of dollars worth of vehicle components from China.

These developments confirm the work of Professor Robert S. Ross of Boston College, who has argued that "China, unlike Japan, has the natural resources to sustain economic development and strategic autonomy....Rather than move abroad as labor costs increase--as U.S. and Japanese enterprises have had to do--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." Indeed, at the seventh investment and trade fair held in early April at Xi'an, capital of the western Shaanxi Province, forty of the world's top 500 companies from the United States, France, Germany and Japan attended. Contracts for over US$400 million were signed. This pattern not only strengthens China, but weakens Beijing's economic rivals in both Asia and the United States.

While economic stagnation afflicts much of the world, Chinese industrial output has maintained strong growth for fourteenth months in a row. And in the first two months of this year, the industrial added value increased 17.5 percent 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 three year downturn--despite increased demand growth--is similar to the disastrous period from 1979-1982, which was the worst since the 1930s. American demand is being met increasingly by imported manufactures.

Official Chinese statistics show that in the first quarter, China's foreign trade displayed strong growth. The export of machinery and electronics products, which account for half of China's total exports, increased 42.1 percent 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 percent.

China's trade surplus with the United States has passed that of Japan's, and is even more one-sided as a trading relationship. That the United States buys US$2.50 worth of Japanese goods for every US$1 worth of American goods it sells is bad enough, but in the Chinese case Americans buy US$5 worth of Chinese goods for every US$1 of U.S. exports. Much of this imbalance is due to nominally American firms becoming partners with Chinese firms to build factories in China that replace factories in the United States.

Great Britain lost its place in the world by its own volition. By adopting "free trade" and a laissez-faire attitude towards the process of economic advancement, its leaders acted as if the outcome of commercial competition did not matter. American officials seem to have adopted this same attitude today. Little concern is expressed in official circles about the rise of Chinese economic capabilities even as the process is aided by the transfer of capital, technology and production capacity from the United States.

When Baghdad fell to the Mongols in the 13th century, Marco Polo wrote that a rich treasure vault was discovered in the palace. Before executing the captured Arab caliph, the warlord Hulagu, grandson of Ghengis Khan, mocked him for not having used the city's wealth to strengthen its defenses during the years before the Mongols appeared. Will American leaders someday be mocked for having failed to defend the industrial base upon which their nation's prosperity and security depends?

William R. Hawkins is Senior Fellow at the U.S. Business and Industry Council in Washington, DC.


TOPICS: Business/Economy; Foreign Affairs
KEYWORDS: china; economy; industry
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I linked some other Jamestown stories off the post. Enjoy
1 posted on 05/21/2003 11:47:35 AM PDT by batter
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To: soccer8
Nice post.

The author underestimates the extent to which all the European powers, including especially Great Britain, were weakened by the two World Wars.

The Chinese advantage in relatively high-quality, low-cost labor is worrisome. Remember that this was a factor in the labor wars of the 19th century. This time we won't be able to resort to lynchings and theft to counter that advantage.

At some point the trade imbalance is going to result in some sort of major dislocation. It can't continue indefinitely. That and world-wide over-capacity will probably result in a major deflationary spiral - a depression - followed by ?

2 posted on 05/21/2003 12:05:17 PM PDT by liberallarry
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To: soccer8
English culture dominates the world more than ever. HQ is no longer London, that's all.
3 posted on 05/21/2003 12:26:39 PM PDT by liberallarry
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To: soccer8
Didn't Lenin predict that the capitalists were going to sell the communist the very weappons the communists were going to use to defeat them?

I guess... Lenin was into something. Meanwhile, enjoy those lovely toys you get when you buy a kiddie combo meal.
4 posted on 05/21/2003 12:28:32 PM PDT by A Vast RightWing Conspirator
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To: liberallarry
A super-power has to have a super-power economy to support its super-power military. When the super-power gives its manufacturing power away to its enemies to build up their military, the super-power is on the verge of engineering their own demise.
5 posted on 05/21/2003 12:31:17 PM PDT by meenie
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To: liberallarry; A Vast RightWing Conspirator; meenie
IMHO, the dislocation you speak of liberallarry will either be accompanied by, or followed by, some form of ...

Dragon's Fury

We are exporting our manufacturing, engineering and development base almost as quickly as we can off shore, much of it to China. As an engineer and consultant, for years I was right in the middle of it. China is not capitalist, the same type of people, many of the same people, are still in charge. They have just found a better way to fund their rise to power after the failed Maoist principles. And that way is us.

They are hoping to reach a critical mass where they have enough infrastructure, factories, development, etc. to become completely self-sufficient into the future with Asian and European markets ... not to mention our own for the time being. But when the enivitable dislocation occurs, with current policies, we will be left sucking wind.

Ventures like Catepillar's are producing industries and factories in China that are quickly and easily convertable to other lines of production ... no factories are not easily or quickly so converted.

IMHO we are staring in the face of Gore's much trumpeted service economy. Trouble is, if allowed to run its entire course, a pure service econmoy is an economy of servants.

Hopefully we will change our attitudes and practices before they catch up to us in spades.

6 posted on 05/21/2003 1:14:36 PM PDT by Jeff Head
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To: Jeff Head
This post and your reply have pretty accurately nailed down the situation. The only goods and services that China seems willing to import are those which build its capital base for a future military base. the damage done to american and the American economy in the interim is unbelievably severe already. As we move to a full service economy there will be none able to afford the services. Thus we will see the continuing erosion of our industrial, engineering and software base and the vitory such as was seen in Iraq will no longer be possible. How can we lead in computer hardware and software when the base of those industries have been farmed out to China and factually that is what our military equipment advantage was/is based upon.

If young engineers fresh out of college can not get a job where do we think our Senior engineers will come from in 5, 10, or 20 years? If young software developers can not find employemnt now who do we think will be writing the cutting edge software in five years down the road?

If China demands free access to sell its goods and services in the USA at cut throat prices well we as a nation should be allowed to sell consumable products there without having to manufacture them in China.

7 posted on 05/21/2003 1:36:43 PM PDT by harpseal (Stay well - Stay safe - Stay armed - Yorktown)
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To: harpseal
We need to have the will and strength, accompanied by a leader who exhibits the same, to treat China as part of the same Evil Empire Reagan spoke of, and truly a part of the same Axis of Evil Bush speaks of.

We need to cut of the spicket and have the strength to live through the associated hardship such a cut off would already produce. If we wait, or if we allow China to reach the point where it does it on its own terms ... it will be worse by orders of magnitude ... not just in inconvienence, but in blood.

We should treat them as Reagan treated Russia ... call a spade a spade and then challenge them to keep up with us if they can using their own means without our abject funding, while we turn our free market economy on to the challenge. I am confidant that even at this late date we can still do it without a World War ... but I am afraid that will not hold long ... unless it goes on too long we end up in a position of not being able to wage it ourselves in our own self interest and are left with a fait accomplai.

Jeff

8 posted on 05/21/2003 1:50:35 PM PDT by Jeff Head
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To: harpseal
If China demands free access to sell its goods and services in the USA at cut throat prices well we as a nation should be allowed to sell consumable products there without having to manufacture them in China.

Too true, they need access to our markets to survive much less advance. Once again the communists exists only because we allow them to, and fund them. American manufactures need to understand the eventual "payday" access to Chinese markets will never happen under CCP rule, so there is NO advantage to whoring themselves for that access.

9 posted on 05/21/2003 2:20:42 PM PDT by Dead Dog (There are no minority rights in a democracy. 51% get's 49%'s stuff.)
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To: Dead Dog; harpseal; soccer8; A Vast RightWing Conspirator; liberallarry; Jeff Head
You have that straight. Even the RATS are beginning to notice a slippery-slope downside to this unfree trade-even to their precious Welfare State now that they aren't getting a bonanza of campaign contributions from China...(at least I assume they aren't any longer...)
10 posted on 05/21/2003 3:26:33 PM PDT by Paul Ross (From the State Looking Forward to Global Warming! Let's Drown France!)
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To: maui_hawaii; tallhappy; Enemy Of The State; Hopalong; Sawdring; color_tear; HighRoadToChina
Ping! There are some pretty good comments on this tread as well.
11 posted on 05/21/2003 3:47:26 PM PDT by batter ( Boycott "Made in China")
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To: soccer8
Bump.

Bookmarked.

12 posted on 05/21/2003 8:22:56 PM PDT by maui_hawaii
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To: liberallarry
"Remember that this was a factor in the labor wars of the 19th century...."

We seem to be slipping inexorably toward another Depression and then a World War. China's mercantilist trade strategy is a carbon copy of Japan's but it is even more self-serving than the Japanese. China is artificially valuing its currency and this is having the effect of exporting deflation globally.

China's economic statistics are unreliable and many observers believe that China is teetering precipitously above an economic abyss. The best strategy for the US would be to force the Chinese to correctly value the Yuan and then step out of the way as they have a civil war.

The current situation can't go on too much longer with the US being the only buyer. The Chinese strategy of bringing productive capacity online without reference to market demand looks smart now but eventaully it will look stupid after global demand collapses.

What I really worry about is our leaders. A situation like this has not existed since the 1930s and it doesn't seem that we have anyone on the foreign policy bench who understands deflation.

The Chinese are vulnerable and it would be very easy for foreign corporations to re-source their production to other countries in Asia. This card should be played to force the Chinese from stopping their exporting of Deflation.
13 posted on 05/21/2003 9:16:02 PM PDT by ggekko
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To: soccer8
But China's leaders do not want to import anything of strategic value that they can make themselves.

The idea that China is going to import a whole lot of anything from the US is a fairy tale.

14 posted on 05/21/2003 9:37:33 PM PDT by maui_hawaii
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To: ggekko
What I really worry about is our leaders...it doesn't seem that we have anyone on the foreign policy bench who understands deflation

Here I am a little more cautious than you...and a little more optimistic.

Our leaders understand deflation very well. Greenspan certainly does.

Nor are they fooled by unreliable Chinese statistics. We have armies of investigators and analysts trying to figure out reality, to look past not just Chinese propaganda but that of Bear, Sterns and Salomon as well. So do the Chinese.

The problem is that, at this level, everyone is playing real hardball. Someone could easily push when he should have blinked (SARS is an example), causing the whole structure to collapse.

15 posted on 05/22/2003 3:11:22 AM PDT by liberallarry
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To: liberallarry
Other than shoes, does China export anything of real significance, or economic value?

It seems 99% of what they sell is crap, whatever value is added to the product, or wealth within the product turns to dust within 5 years. The Quality control is bogus, and the products show this. Over a 10 year product life, it is better to buy American (or Taiwanees) goods then it is to buy from the PRCs.

In short, their products are wealth pumps, poggy bait, there is no gain in wealth or Utility by purchasing most of it. And if the product does have utitlity, it degrades rapidly. In short, we gain more wealth by buying durables from domestic sources at twice the price or greater.

That makes the importance of China (cheap goods) to our economy a pipe dream.
16 posted on 05/22/2003 7:15:59 AM PDT by Dead Dog (There are no minority rights in a democracy. 51% get's 49%'s stuff.)
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To: Dead Dog
We've been down this path before - first with Japan, then with the 4 tigers. It's very dangerous to underestimate the ability of the Chinese.
17 posted on 05/22/2003 8:21:03 AM PDT by liberallarry
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To: liberallarry
I don't know about the quality of Japanese stuff in the 1960's, but by 1976 they were very good. By the 80's they were providing great value to their customers.

The Chinese are using slave labour, not exactly the most efficient way to motivate a workforce.
18 posted on 05/22/2003 8:27:45 AM PDT by Dead Dog (There are no minority rights in a democracy. 51% get's 49%'s stuff.)
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To: Dead Dog
labour=labor...
19 posted on 05/22/2003 8:28:30 AM PDT by Dead Dog (There are no minority rights in a democracy. 51% get's 49%'s stuff.)
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To: soccer8
I see, the Chinese are going to take over the world - just like the Japanese were going to.
20 posted on 05/22/2003 8:47:39 AM PDT by edsheppa
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