Clyde Prestowitz in American Prospect (03/01/05)
China as No. 1 by Clyde Prestowitz
Copyright 2005 American Prospect
March 1, 2005, Volume 16; Issue 3
Bush wants freedom everywhere. But the world's biggest dictatorship is
now one of America's biggest creditors. Guess who has the leverage on
IN THE 15TH CENTURY, VENICE WAS ONE OF THE WORLD'S richest cities and
ranked among the great powers because its navy controlled the
Mediterranean and its merchants controlled the trade in goods,
especially spices. Then Portuguese Captain Vasco da Gama arrived in
India in 1498. By 1515, the Portuguese controlled the Straits of
Hormuz, the Indian Ocean, the Moluccas (or Spice Islands), and the
trade with China. The spices, gems, and silks that for centuries had
passed from Asia through the Middle East to Venice and then to the rest
of Europe were now carried around Africa on Portuguese caravels. The
Egyptian sultans had been able to keep the price of pepper for Europe
very high by limiting shipments to 210 tons annually. With the
Portuguese in the game, the price of pepper in Lisbon dropped swiftly
to one-fifth the price in Venice. The Egyptian-Venetian trade was
destroyed overnight, and Portugal knocked Venice out of the ranks of
the gr! eat powers without firing a shot.
That history came to mind during President Bush's recent inaugural
address. His assumptions of indefinite American hegemony were quite at
odds with what I have been seeing on recent trips to Asia, and
especially to China.
In Singapore, high officials describe the recent rise of China as akin
to the arrival of a new sun in the solar system. All over Asia, one
hears talk of a shift, not in the balance of power but in the "balance
of influence." In a poll asking Thais which nation they considered
their country's closest ally, the response was 75 percent for China
against 9 percent for the United States. In the Philippines, pop stars
from China have risen to the top of the ratings. Filipino businessman
John Gokongwei says, "China isn't interested in military expansion. It
will seek tribute through trade, like it did before the Western powers
came to Asia."
During a recent trip to Australia to meet with business, government,
academic, and media leaders, I was told repeatedly that America must
not ask Australians to choose between the United States and China. Two
years before, President Bush traveled Down Under only to be followed
within a week by Chinese President Hu Jintao. Whereas Bush stayed only
a couple of days, held no press conferences, and got a distinctly cool
reception, Hu kissed babies, toured the country, and was treated like a
Go to Newman in Australia's big-sky country. There you can watch as the
front-end loaders take big bites out of the 60-foot walls of iron ore
in the open strip mines and load the trains that will take the ore on
the first leg of its trip to China. Or just drive north of the U.S.
border to Alberta, Canada, where provincial officials are deep in
negotiations to strike large deals giving China access to Canadian oil
reserves previously destined exclusively for the U.S. market. Brazil,
South Korea, and even Japan all now export more to China than to the
United States. After more than 20 years of rapid growth, the Chinese
economy has become the world's second-largest behind the United States
in terms of purchasing power parity.
No one wants to alienate a good customer. And China is quite simply becoming everyone's best customer. Well, almost everyone's.
IN CONTRAST TO MANY OTHER COUNTRIES, THE UNITED States has seen its
exports to China increase only modestly in recent years while its
imports have gone off the chart. Last year China passed Mexico and
Japan to become the second-largest exporter to the U.S. market after
Canada. Because Canada also buys a lot from U.S. suppliers, however,
China now has by far the largest trade surplus ($150 billion) with the
United States that any country has ever had. Behind this statistic lie
several powerful new forces.
First, China has become the location of choice for global
manufacturing. This is usually attributed to its low wages. Chinese
factory workers today earn 50 cents to $2 an hour and often work long
shifts, getting minimal time off for weekends and holidays. But low
wages are not the only factor; after all, wages in places like Vietnam,
Myanmar, and Africa are even lower. China's workers are not just
inexpensive but literate, hard working, already reasonably skilled, and
eager-nay, desperate-to be trained. There is also a sizable and growing
cadre of university-educated technologists and professionals. For
example, China is now graduating 330,000 engineers and scientists
annually, as compared with 398,622 for the United States. China has
also invested extensively in infrastructure and now has a very workable
system of airports, harbors, communications, and roads. Indeed, your
mobile phone will work a lot better in China than in the United!
States, and you'll get from the airport to downtown in Shanghai a lot
faster than in any major U.S. city.
Today, China is already the largest market in the world for steel,
mobile phones, cement, aluminum, and electronic components. Within 20
years, it will likely be the largest market in the world for just about
everything. If you are a manufacturer, you will pretty much have to
succeed in the China market to have a chance of surviving anywhere
else. In theory, you can serve the China market by exporting, but there
are some good reasons why you might not. Because Chinese labor is
inexpensive, production processes that are capital-intensive in the
advanced countries can be "dumbed down" and made much less
capital-intensive in China. As a manufacturer, you cut both your wage
and your investment costs. On top of that, the Chinese government at
local, provincial, and national levels will offer substantial
investment incentives-such as long tax holidays, capital grants, free
land, low utility rates, worker training, and other benefit! s-to
companies willing to put plants and researchand-development facilities
These investment incentives confound free-trade theory. They are, in
fact, distortions of the market, and therefore of questionable
legitimacy under the rules of the World Trade Organization. This has
never been challenged because other countries have investment
subsidies, too. (American states offer tax deals to induce companies to
invest.) China, however, subsidizes investment strategically to capture
new industries at higher levels than anyone else.
BUT WHY IS THE UNITED STATES the outlier when it comes to China trade?
Why isn't every nation running a large trade deficit with the Chinese?
Commodity suppliers like Australia, Brazil, and Chile, of course, have
trade surpluses with China because China needs their materials. But
what of Japan, Korea, Taiwan, and the European nations? Their
industries are also locating plants in China. But there are mitigating
circumstances. A big one is that these countries have maintained a
broader, more robust manufacturing base than the United States. One of
America's biggest exports to China and the rest of Asia is waste paper.
Germany exports high-speed trains, specialty steels, and machine tools.
In addition to these, Japan exports loads of electronic components and
ships. America long ago gave up making any of this stuff.
A second factor is differing business and government attitudes.
Japanese executives, for example, make a point of saying that they
"keep the brain work in Japan." Indeed, Canon has publicly stated that
it is bringing formerly outsourced work back to Japan in order to keep
key technologies proprietary in Japan. Some European companies take a
similar attitude. But given the shareholder-as-king basis of U.S.
business, this is a very difficult position for U.S. executives to
take. Nor are there government policies to maintain U.S. advantage; it
is assumed that American genius and free markets will automatically
result in U.S. leadership. If the Chinese are foolish enough to
exchange low-priced consumer goods for cheap U.S. paper, let the party
That brings us to the 800-pound gorilla of the story-the dollar. It is,
of course, the world's money. As such, it allows Americans to buy
things in international markets simply by printing green pictures of
presidents and exchanging them for real goods and services. Unlike
others who have to make and sell something to earn dollars with which
to buy oil or soybeans or whatever, the Americans only have to run the
n the short run, the U.S. budget and trade deficits can be financed at
unprecedented levels by the foreigners who lend us money. The U.S.
trade deficit is exacerbated by the fact that China keeps its currency
artificially low to promote exports. But because the United States
needs a net inflow from abroad of about $2 billion every day to keep
itself afloat, it doesn't seriously complain. Worse, the U.S.
government actually likes a strong dollar, to keep the price of
imported goods and the cost of borrowing low. Of course, such a dollar
absolutely kills the export and manufacturing industries, but it makes
consumers and the government feel very good, so the government doesn't
want to do anything that might interrupt the flow of that foreign
capital. Besides, to do so could throw the U.S. economy into a nasty
recession, if not a depression. Obviously, this cannot continue
The second-biggest lender to the United States after Japan is China.
Those who think this dependence has no diplomatic consequences are
naive. For more than 50 years, American policy was to keep China out of
the Korean Peninsula. Today, the U.S. government has outsourced the
handling of North Korea to Beijing. When Chinese Prime Minister Wen
Jiabao came recently to Washington, American supporters of Taiwan were
shocked and disappointed by his warning to the Taiwanese against any
deviation from the long-standing "one China" formulation. American
trade officials who ask Beijing to offer more protection for U.S.
intellectual property, or to revalue its currency, are politely
The United States has lost substantial leverage with China, along with
our loss of manufacturing industry and dependence on Chinese loans.
China is both symptom and cause of America's dwindling economic
leadership. This loss has geopolitical consequences far beyond our
relations with Beijing, and it mocks Bush's hegemonic grand design. At
this rate, we risk becoming the Venice of the 21st century.
China is a symptom and a cause of America's vulnerability. Our
retailers depend on China, our high-tech companies cede important
knowhow, and our debt depends on Chinese financing.
Clyde Prestowitz is president of the Economic Strategy Institute and author of the forthcoming 3 Billion New Capitalists.