Never Again Speech
Boycott Made in China
The Laogai Research Foundation
Posted on 02/12/2003 7:50:32 PM PST by maui_hawaii
It was a heavy piece of commentary to wade through on our Insight page yesterday but the combination of an Andy Xie Guozhong byline and the headline - "Why China will dominate the world economy for a decade" - compelled me to do that wading.
It was not because I expected to find something new. Mr Xie, a Morgan Stanley pontificator, is a disciple of a discredited school of economic theory known as factor price equalisation (everyone is equal and therefore all wages across the world should also be equal). From this defiance of economic reality he invariably infers a gospel of China boom, Hong Kong bust.
It was the thrust of his argument once again with the difference only of more emphasis on the China boom than on the Hong Kong bust. Essentially what he said was that China's huge workforce is growing ever more productive but its wages remain low and this would continue to give China an edge in clobbering competitors.
I cannot dispute the reasoning. The normal counter-argument that if you pay peanuts you get monkeys clearly does not apply across the border. These people are putting their backs into their jobs and that combination of low production costs and quality goods has clearly been an outstanding success in world export markets.
But just whose success has it been?
As one pointer I refer you to the chart. Foreign invested enterprises now account for 52.2 per cent of China's exports, up from 20.4 per cent 10 years ago. This represents a tenfold increase in their export shipments from US$17.4 billion in 1992 to US$169.9 billion last year. The rest of China's exports showed little more than a twofold increase over the same period.
It should not really be surprising. The key to a successful industrial boom is not primarily low wages and the application of new technology. It is first of all money - the raising of it, the right application of it, the judicious control of how it is spent and the return on investment of it. For this you need a financial system that operates on market principles.
But the mainland has no such thing. Most of the money its banks raise from the public is invested into a growing fiscal deficit, construction of public works of questionable usefulness and the propping up of loss-making state enterprises that should have long been shut down. A good proportion of it is also simply "misplaced". There is not much left over for financing of private sector industrial enterprise.
Thus most of the required money comes from elsewhere, largely Hong Kong, Taiwan and other overseas Chinese sources who naturally invoke the golden law for the use of it - him what has the gold makes the rules. It means they take ownership and control, pay little tax in the mainland and dodge what taxes they still may owe by booking their profits elsewhere.
That was how golfer Tiger Woods became Shenzhen's biggest taxpayer two years ago from just one day's proceeds of touring the links with local status seekers. The status seekers made their money by keeping quiet about where they made it.
It is not just overseas Chinese who have made themselves the beneficiaries of this great willingness by the mainland's workforce to work hard for little pay. If Beijing welcomes foreign corporations such as Wal-Mart to source low-cost quality goods in the mainland at low operating costs then the United States retail giant is only too happy to extract all the profits for itself and book them elsewhere.
Take note that this is not how the Industrial Revolution worked in Britain or America in the last half of the 19th century. Both of these had as sophisticated a financial system as was possible at the time and could apply it to new technologies on their own. They grew wealthy by being the investors in their industries as well as having the workshops of those industries located in their territories.
So when our headline on Mr Xie's piece says that China will dominate the world economy for a decade we need to refine things a little. If China's capital account remains closed and Beijing continues to dictate where money raised domestically will go, then it is more likely that foreign invested enterprises will come to dominate the Chinese economy. In fact they do so already.
What difference would it then make that the workshops are located in China? How does that constitute domination of the world economy?
Things would actually be the other way round. The word you are looking for here is "exploit" in its full unhappy sense of take advantage of hardworking people whose wages are suppressed and of a government willing to make big tax concessions and then laugh all the way to the bank, a foreign bank.
It will make a big difference when we try to defend ourselves and the only place boots for our army are made is in China. Now, the technology is leaving the U.S. to China so some CEO can buy a third home in the Bahamas. Greed is killing the blue collar American and compromising your National security.
Go to the mentioned Walmart and try to but something made in the U.S...A few coat hangers, a Maglite flashlight, an American flag {but read the label, some flags are now made in China) and a Skil saw that has Made in U.S.A. written on the box. This must piss the Walmart crowd off. I really like when the label says: Made exclusivly for Walmart, Bentonville, AK... Made in China
First, note that China has gone from being an oil exporter in 1993 to being a major importer, single-handedly accounting for a large share of cross-border growth in world oil consumption. It needs to keep growing those imports to grow its economy, which uses about 5 times the energy per unit of GNP that the US uses.
The US, of course, is still a bigger absolute user and importer of oil. So the runup in world oil prices above $35/bbl, or nearly triple their low in late 1998, would hurt us more than the Chinese. Not so. Because we are also the predominant SELLERS of oil. By "we" I mean the western oil majors, the Saudis, Kuwaitis, Mexicans, PdVSA (if not Chavez) and now the Russians, who more or less are now politically alligned. We take the money out of one pocket and put it in another of "our" pockets. The Chinese just pay and pay...US or our allies.
I think it is no coincidence that the oil strike in Venezuela, which took a couple of million bbl/d off the market, has come just as China has been desperately trying to build up a strategic petroleum reserve. Indeed, the real reason behind the Iraq war threats is not so much for us to get ahold of cheap oil for ourselves: It is to keep it out of the hands of Chinese, who have a little known concession to develop a major oil field there.
Notice who the "terrorist states" are: Sudan, Yemen, Iran, Iraq. It is no mere coincidence that they also happen to be the bigggest oil exporters to the PRC, according to the EIA. And that French tanker blown up offshore Yemen? Dollars to donuts that was Sudan crude destined for China. Make no mistake about it, the US and Russia, Japan, Europe and all of South Asia are worried silly about China: its massive population, its ruthless trade practices, its brutal totalitarian proclivities. Especially the Russians, who are out-numbered across the Siberian border by something like 100 or more to one. The numbers are relentless and pose an inevitable strategic threat to anyone who gets in China's way. Which is why, after the Clinton Administration's "nice doggie" approach to this doberman, we have undertaken a defacto encirclement and isolation campaign against China. And they're pissed.
Ask yourself why oil prices are so high? It's not because the world is running out of oil, or that demand is all that robust (despite a cold winter). OPEC is showing unprecendented production restraint. All the US majors have cut capex and are actually lowering production when common sense would say "make hay while the sun shines." Washington, however, says nothing and even encourages such cartel behavior. Not to merely make Bush family friends rich. It is a geopolitical squeeze play aimed squarely at our one and only real world strategic threat: China.
It is equivalent to the oil embargo we placed on Japan before WWII, but more subtly applied. A sort of rubber-hose treatment that leaves no visible body marks, or fingerprints. But I assure you the Chinese feel the pain and see what's going on. And they are making a continual calculation of relative strength: are they growing stronger or weaker against the West day by day, year by year. On the surface, they seem to be stronger. But their long-range thinkers have to see the squeeze play going on and wondering when they will have maximum relative strength to undertake the inevitable confrontation they KNOW is just a matter of time.
A senior foreign diplomat friend of mine, who knows the Chinese well, said a couple of years ago the Chinese have come to assume there will be a major confrontation with the US within the next 10 years or so. My fear is that they may move up the timetable. Not because of their strength, as argued in the article, but because of their increasing vulnerability.
That is a worrisome thought, and one against which the North Korean situation must be viewed. We are witnessing the playing out of very high stakes poker. And Iraq is just a side-bet.
If N. Korean crisis blows, bye-bye to Chinese boom. E. Asian economy could tank. China has to deal with angry Japan.
In addition, the rest of Asia eventually got rich off of cheap exports to the West too. So now China is following this proven strategy. China may have low wages today but eventually they'll rise like they did in Japan or S. Korea. The 100 mil. people living along China's coast already enjoy a standard of living on par with S. Korea or Taiwan. 20 years ago, that wasn't the case. Over the next 20 years, you can expect another 100-200 mil. people to join this middle class. Then China will have a middle-class population almost as big as America's entire population. And then China has the rest of the century to pull ahead.
The author of this article worries about foreigners owning too large a portion of China's economy. But this is a bogus argument. Even in the US, only 5% of the US GDP eventually ends up in the hands of shareholders. The vast bulk of the rest of the 95% goes to employee wages ultimately. Same with China. And these days, lots of people claim foreign investors aren't making any profit at all in China, which only means that average Chinese are getting even more than 95%.
They can always go someplace else if China is unavailable. By the way, welcome back formorsaplastics!
They can go back to S.E. Asia. There is also a political cost to consider. What caught up with Latin America can affect China, too. They were not exactly democratic for a long time. China can play fast and loose during the boom time. We will see how well China deal with her people when the bust comes.
Indonesia isn't the first country to experience capital flight after going democratic. All of Latin America today is experiencing capital flight after abandoning authoritarian rule. A recent Washington Post op-ed noted that Latin America's GDP growth rate today after adopting democracy is only 1/10th of what it was in the preceding 20 years when Latin America was ruled by authoritarian governments like Pinochet's.
Ironic, isn't it? It just seems that whenever a country goes democratic, capital flight follows. It happened in Russia, even Taiwan after Pres. Chen got elected 2 years ago. Taiwan's lost more money in the past 2 years than in all of the previous 8 years combined! Foreign investors don't like the inherently weak, chaotic governments that result when Third World countries adopt democracy and tend to flee. Every Taiwanese thinks Taiwan's grid-lock plagued pariliament is a chaotic joke. The Western liberal intelligentsia preach democracy all day but their foreign investor counterparts all flee whenever a Third World country adopts democracy and put their money into authoritarian China instead.
If you love authoritarian rule so much, at least China should do it like Singapore. If things continue as they are, China will be like a corrupt authoritarian country with failing economy. I won't worry too much if China is doing 1/10 of Singapore. Don't forget that.
You are really silent on Singapore angle. China has incompetent corrupt authoritarians who are more interested in wallowing in coming glory, and whipping up people's expectation too high. Singapore did none of that.
Besides, neither S. Korea nor Japan had sick banking system like China does now when they develop.
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