Dear Larry: China threatens American preeminence and President Trump is right to worry about it. But you’re going about it the wrong way, and your approach will produce results very different from what you expect or want.
When you say: “I do not think President Xi has any intention of following through on any of the discussions we’ve made and I think the President is so satisfied with China on these so-called talks that he is keeping the pressure on and I support that,” Beijing hears: “We can hurt China’s economy so badly by reducing exports to the US that internal political pressure will force President Xi to capitulate.”
This is a very big mistake, for two reasons. The first is that you do not negotiate with China by trying to make its leader lose face.
China’s export dependence on the United States is shrinking, not growing. Most of China’s exports are directed towards Asia.
Asia, moreover, provided the biggest growth margin in China’s exports.
Where are you going to impose tariffs on US imports from China? Americans don’t want to pay higher prices for smartphones, or computers, or display screens, or the other cheap consumer electronics that make the tech boom in American equities possible in the first place.
The vast majority of China’s exports to the US are consumer goods, especially electronics. Most of these goods are assembled in China from imported components. China adds only a third or so the value added to these goods. China has a chronic labor shortage and is shifting low-paid assembly to lower-wage countries in Asia. If you tax consumer goods from China, American consumers will pay more, and the Chinese will accelerate the shift of low-wage employment to the new economic zone they are building in Asia through the $1 trillion One Belt, One Road program.
This transition has been underway for years. Here’s a 2013 chart that I published in a presentation for Reorient Group (now Yunfeng Financial), a Hong Kong investment bank where I was a managing director.
In short, tariffs on consumer goods only will throw Br’er Xi into the briar patch. You’re ten years late and $1 trillion short.
China cheats, China plays dirty, China steals technology, China muscles American companies in joint venture, China does every manner of bad thing. But that’s not the big problem. Don’t worry about the “crown jewels” of American technology, as you said today on CNBC. Those are the old crown jewels. The new crown jewels are coming out of Chinese laboratories.
In 2002, China’s biggest telecom equipment company, Huawei, was caught red-handed with Cisco code, bugs and all. Now Huawei spends more on R&D than Microsoft. It employs thousands of European engineers as well as tens of thousands of Chinese. American graduate programs in math and physics are in trouble because Chinese (and other foreign students) have stopped applying (foreign students now comprise about four-fifths of the graduate students in key STEM faculties). The Chinese aren’t coming to the US anymore because they don’t have to: They can get as good an education in cutting-edge technology at home. If we have lost our edge at the university level, how long will our edge last at the corporate level? There’s virtually no venture capital money going into anything to do with physics. It’s all software.
There’s a bigger issue here, and that’s the failure of American observers to anticipate China’s emergence as the world’s most powerful economy. We couldn’t believe that a state-run economy directed by a Communist Party could succeed. Back in 2001 Gordon Chang published the first edition of his book The Coming Collapse of China. Since then per capital GDP in China has quintupled. In 2015 the whole economics profession thought that China was entering a financial crisis as its reserves fell by $1 trillion—except for the Bank for International Settlements, which explained that Chinese companies repaid $1 trillion of foreign debt with those reserves. China is still growing at 6%-7% a year, which means that its economy doubles in size every decade.
Unlike all the so-called emerging markets of the world—Brazil, Mexico, Turkey, India and so forth—China moved its people from subsistence agriculture to urban employment. 600 million people—the equivalent of two Americas—moved from country to city in the last 35 years. And over that period per capita GDP in China has risen by 45 times – that’s 4,500%.
It’s misleading to speak of a “Chinese model.” This is the Asian model, invented by the Japanese after the restoration of the Emperor Meiji in 1868. By 1905, Japan was able to beat Russia on land and sea; by 1936, it designed and built the world’s best fighter plane, the Mitsubishi Zero. Japan gave us a run for our money in 1941. Of course, Japan’s population was half that of the United States, not to mention our British and other allies. China has four times our population.
The United States is absolutely right to restrict Chinese access to US technology. I have proposed even more stringent measures, for example, 100% US content for any high-tech goods bought by the military. That just buys a little more time. We need to worry less about what technology China may have stolen in the past, and more about what kind of technology it may invent in the future. If China leaps ahead of us in quantum computing—which it is trying hard to do—they will secure an advantage as big as America’s advantage in semiconductors during the 1970s and 1980s. That will be game over.
Don’t hope for a coalition of the willing against China. Europe has already taken the opportunity to cut deals with China behind our backs. Last week, Germany’s top manufacturing companies — Volkswagen, BMW, Daimler, BASF and Siemens — announced tens of billions of dollars of new investments in China as Chinese Premier Li Keqiang posed for a photo op with German Chancellor Merkel in Berlin. BMW will expand its joint venture with Brilliance Auto to produce 519,000 vehicles a year. It also set up a joint venture to produce an electric version of the Mini together with Great Wall Auto. And it agreed to buy $4.7 billion worth of batteries from Chinese producer CATL, which just announced a new plant in southern Germany. Volkswagen earlier this year announced that it would invest $18 billion in China by 2022 and construct six plants to build electric vehicles.
America now has 91 cars for every 100 people. China has 15 cars for every 100 people, and it has four times as many people. Do the math: If China rises to the car ownership level of South Korea (46 cars per 100 people), it will have to produce or import roughly 400 million cars to reach that level. China already is the world’s biggest auto market (GM sells more cars there in the US), and the Germans just got the inside track.
Meanwhile, Europe and Japan have signed the Japan-European Free Trade Agreement, in what Germany’s Der Spiegel calls a “warning” to the US.
The world isn’t lining up with us. It’s lining up against US. China and its One Belt, One Road economic sphere—stretching from Turkey to the Philippines—represents the world’s fastest-growing consumer market. China will open its market selectively, bribing our erstwhile friends and allies. It might take a minor hit to growth (between 0.5% and 1% of GDP growth per year, according to most estimates), but it will survive a trade war with the US with an expanded Asian market.
The Chinese dragon does have a point of vulnerability, and that is innovation. During the 1960s and 1970s, the United States invented CMOS chip manufacturing, LED screens, the semiconductor laser, and the whole array of technologies that created the digital age. We have made marginal improvements on these technologies but haven’t invented anything really new for half a century.
I’ll repeat what Dr. Henry Kressel and I proposed in the Wall Street Journal right after Trump was elected:
First, encourage innovation, which is the precondition for economic growth. The U.S. can’t bring back most of the jobs it has lost, but Americans can create new and better ones. It goes without saying that Washington should aggressively defend intellectual property rights and enforce anti-dumping laws. But that isn’t enough.
Although private investors should take all the risks in commercializing new technology, federal R&D support is key. The civilian spinoffs of defense research gave us many of the new products of the past 30 years. Yet federal R&D spending as a share of the economy has fallen almost in half, to 0.73% of GDP in 2013 from 1.2% in 1987, at the peak of Reagan’s Strategic Defense Initiative. The next administration should raise R&D spending back to 1.2% of GDP by 2018.
Second, ensure that the resulting innovation turns into American jobs. High-tech is capital intensive, and modern manufacturing is expensive. But CEOs have learned that the market rewards companies that are light on capital investment and big on share buybacks. To change this behavior, lawmakers could give companies tax incentives to invest in capital assets in the U.S.
Washington should also enforce strict U.S. content rules for sensitive defense technology. Many of the Pentagon’s military systems depend on imported components. That’s a concern on security grounds alone. Procurement rules should be changed to require that critical components be manufactured in the U.S….
When Russia took a lead in the space race with the 1957 launch of Sputnik, the U.S. responded with aggressive support for science and engineering education. That helped make America the world’s leader in innovation. This should be a Sputnik moment. High schools could offer intensive training in science, technology and math. The U.S. should develop—with local, state and federal support—technical institutes on the German model to channel students into corporate internships and, ultimately, well-paid industrial jobs. Americans are at a turning point. They can either resign themselves to decline or revive their country’s industrial pre-eminence.
Your friend,
Dave
Jo Kang No the CCP only goes round lecturing it’s own citizens, murdering 70m of them during the cultural revolution. The problam with the CCP is once it has more power, it will kill and main people to protect it’s interests.
Luckily you Chinese have much smaller weapons.
David Goldman,
Fantastic down to Earth article.
Yes, bullying does not work in trade wars when both parties are of equal boxing weight. And it is useless when China is involved as it has an ingrained culture about ‘death before shame and dishonour’.
But to be honest both protagonists will survive the ‘rumble’ but China would come up better for three simple reasons (a) it is not as if it has no other markets for its ‘cheaper’ manufactured goods – it only has to cover variable costs for the duration of the conflict. (b) out of patriotism the more affluent Chinese will stop buying higher value American goods but the poorer American working class will now find their staple cheap consumer goods from China relatively unaffordable. (c) the Chinese migrant workers might lose their jobs but they always have a farm home village to go home to and survive on a subsistence basis – it will be like a sabbatical. There is no safety net for the U.S. working class.
But surely the most valid point is that bilateral trade wars can never work in a multilateral multipolar global trade world. Did not the Great Depression and WW2 result from ‘Protectionism’?
And surely the salient ideological issue is why a mixed socialist cum capitalist market economy like China is creating a huge affluent middle income class and in sharp contrast the flag flyer of Western liberal democracy cum free enterprise cum capitalist market economy of the U.S. is floundering with a 70%poor20%middleincome10%veryrich profile?
Perhaps democracy is not necessarily synonymous with capitalism and/or capitalism cannot survive if 10% of the people owns 70% of the total wealth! Is freedom to vote of any meaningful value if the lottery of a ballot box always comes out as stipulating no guarantee of food, shelter and work, and most of all equal sense of self esteem and dignity and sense of equal entitlement and opportunity to all? Can humanity strive and aspire for democracy if humanity is a jungle where the fittest survives like gladiators in a Roman coliseum?
Vincent Cheok
Joe Wong hahaha, and Chinese are some of the tallest people in the world, right ?
Ahson Aftab There’s a couple of new stories in atimes on pakistain…. awaiting your insightful comments !
Joe Wong Now, now, two wongs dont make a white. Just as Tibet, Taiwan, E Turkmenistan do not belong to China !
Death before shame and dishonor ? You mean like Mao when he ran away from the Japs, allowing the ladies of Nanking to be dishonored ?
the us. or american empire is fading away,and you are watching it be finished off by the old grainy bunch currently in power""THE TRUMP ADM."".they are the greedy small minded criminals who have engineered the collapse of american; inginuety; engineering; ‘manufacturing; etc. through their greed.wall street has captured the u.s economy and with their partners in washington have robbed the american public of their wealth and future. look no further than the depleation of pension funds and soc sec. they have stollen it all. within the next 5yrs the u s will have a major economic collase ,sending the world into a financial disaster.
Joe Wong Ignore Igor. He is just a troll.
Ivor Large, Kobe Steel, Olympia, Nissan, etc. have been caught faking data for decades, producing chemical to fake milk quality is a street vendor trick in the eyes of Japanese businesses, but by comparing with American’s WMD scandal, Japanese shameless lies are indeed child play.
Ivor Large, no, UK and Canada did not give Scotland and Quebec the permission to vote for independence, those places held illegal voting themselves. Both UK and Canada warned the Scots and Quebecers they would suffer consequence if the vote gone through like what happened in Spain, the separatist leaders will be prosecuted for treason. If both UK and Canada did like China, there will be no such hypocritical message to mislead the people like Bexit and causing unnecessary acrimony and tension between the people and families.
The politicians in the West are irresponsible, they cause harm to the nation and people but never take responsibility for their deed by claiming it is democracy, and the people in the West is stupid and they let their politicians get away crimes with obfuscation.
One of the criteria English exile convicts to Australia was they have pea sized brain and underdeveloped body features.
Ivor Large 70 million? The figure keeps going up. LOL You must be a lobotomized citizen to actually believe these fairy tales. But of course, your free press always tells the truth. LOL How many times have you been told this foreign leader is a dictator and killed his own people prior to regime change by western powers? Here comes the freedom bombs….
Ivor Large did your wife or mom get raped by a Chinese,I see you have as so much hatred for the Chinese people, cos you make it so personal ,relax chill anger will just send you to the hospital with severe stroke or high blood pressure, go drink a can of coke it will make you feel much better,breathe in breathe out kapish.
Ivor Large no they go there cos you’ll all pussies, European ladies are getting raped in Germany ,Sweden, London, Paris you name
Ivor Large have you heard about the tainted milk from a big French dairy company ,so what’s the big deal this shit happens everywhere
Are you a faggot, I guess you are cos you’re going around checking peoples dong,otherwise how do you know who has a big one and who has a small one.
Igor small soon you’ll have east Turkmenistan on the streets they’ll rape your sister, your mom, your wife, your daughter just like they doing in Sweden, Germany ,London, paris,they won’t be any white trash kids all will become muslims
Jo Kang
American democracy? Anyone ever heard of the" Electoral College." They appointed Trump and G W Bush to the presidency against the express wish of the voters.
Alan Wang Statistics, the numbers don’t lie…. check out the Kinsey Rpt or also how many asian females marry foreigners.
So keep beating your wang !
Thomas Daniel Kuhn Does the CCP have an electoral college, do Chinese actually have a vote (unless they are taiwanese or singaporeans)
Next thing you’ll be defending the DDR and CSR, both of which I have experience of (and am proud to say I played my part in their extinction).
Sad old loser.
Jo Kang You are also a lobotomised citizen to believe the CCP. I dont believe the entire lot – elites. As Trotsky said, find the truth by comparing the lies.
Joe Wong Bonkers… both places were given the vote by London and Ottawa. You really need to get out of the Peking firewall.
Alan Wang Nope, I am a rather ‘large’ westerner, whose favorite country is Singapore and has the upmost respect for the overseas Chinese, who compared to the Bhumis and Indons, are the only guys who are worth working with on rigs.
What I despise is the nationalism the CCP encourages, because it will end in the end of the CCP (good) but more rape and massacres of the hard working overseas Chinese.
Sure maybe you feel small and dont have a gf in Canada, but the CCP are to Chinese as the Nazis were to Germans, pandering to insecurity.
Well Joe, there’s a few Ukrainians who would like to have a word with you over the Holodomor.
But I guess 3m is only a footnote on the 70m murdered by the CCP or the 12m murdered in Russland, 2m in Cambodia.
All by Communists
And the Chinese will also learn the CCP are abusing them.
Thomas Daniel Kuhn You know what, comrade slaphead, folks like me can laugh at the tiddly-winks, insecure and falling for the BS of the CCP. It’s sad really. Small people, small mentality.
But what gets my goat up is old Yanks like you, growing up in a free land since 1940 and wishing failure on your land (what my relies, East of the Iron Curtain, would have given for your opportunities).
So you must be a total loser, you criticise the US but haven’t changed a thing, while my mob destroyed Communism. And, soudruh, I was with them in Vaclavske Namesti in 1989.
Kurt Schoedel Troll or contrarian, I don’t beleive in conspiracies
Ivor Large Neither do I. I have never made any comment about conspiracies in this thread. Perhaps you have this thread mixed up with something else.
Ivor Large
Dream on ….
though the young river gives a lot in the offing
beware for it changes its course very often
& may destroy a lot of banks before it starts to soften
Ivor Large I don’t go checking statistics on penis sizes in not gay,what’s the big deal if Asian females marry caucasian its love, even caucasian females marry Asian males ,that’s love,maybe you’re not getting some so that’s why all the rage or maybe you’re gay cos you’re all the time checking penises or statistics on penises, but that’s fine coming out of the closet is good faggot
Ivor Large I don’t look at things like big and small, I can tell you’re a big guy hiding behind a picture of a hen.and you’re the big guy who always brings up topics about helpless nanking women during the war, it shows how much respect you have for women,only faggots and low life scumbags do that,,its like talking about the suffering the jews faced