China Challenges

Silencing the Masses

When Chinese President Hu Jintao and Premier Wen Jiabao assumed leadership of Communist Party a few years ago, many people both at home and abroad were speculating if, and when, they would make it easier for average citizens to express their views and opinions on a number of sensitive topics ranging from the Tiananmen Square Massacre in 1989 to the widespread persecution of religious activists from around the world.

Given the spectacular rise of Internet, the promotion of greater overseas travel and study, and the reformist reputation of Mr. Wen, there were many good reasons for hope.

Who is the Real Wen? In fact, just days before the Tiananmen Square crackdown, Mr. Wen was photographed by Western journalists standing next to former premier Zhao Ziyang, a figure beloved by many Chinese giving an emotional appeal to the thousands of innocent university students to leave the Square before the military tanks arrived. While Mr. Zhao spent next 16 years under house arrest until his recent passing, Mr. Wen was able to regain the confidence of the Party’s hard-line faction and continue maneuvering up the Party’s hierarchy.

Surrounded by students demanding their right for greater freedom, Mr. Wen was thought to be a quiet advocate of less stringent regulations over Beijing’s many large state-run media outlets. But with the recent crackdown on Internet blogging and university-based chat rooms, this optimistic outlook appears to have been wishful thinking.

The Chinese Minefield. This suppression of thought is also creating a challenging political environment for Western Internet giants, such as Yahoo, Microsoft, and Google racing to tap millions of young and eager Chinese web surfers.

How they respond to Beijing’s tightening grip over Internet will help determine their rise or fall in market where the number of new netizens is increasing by the millions with each passing month.

Before they expand their reach into the Middle Kingdom, Microsoft and rest of the Silicon Valley titans need to carefully navigate the cultural and political minefield that is today’s mainland China.

While they were created and prospered in a free society that historically values the freedom of thought and expression, Bill Gates and other industry heavyweights are trying to conquer a Chinese society that is a mixture of old-style Mao thought police and new Shanghai WTO-approved skyscrapers.

To gain market access and win the all-important game of guanxi (personal relationships) with key government officials, these Western multinationals often bend to satisfy Beijing’s demands. According to a report in the Hong Kong-based South China Morning Post, for example, users of Microsoft's new China-based Internet portal were recently blocked from using the words "democracy", "freedom" and "human rights" in a policy shift widely seen as an attempt to appease Beijing.

So concerned about Taiwan’s quest for freedom and the possible move away from the “motherland,” Beijing was also pleased to discover that the expressions "Taiwan independence" and "demonstration" have been banned from Microsoft's free online blog service, MSN Spaces.

Maintaining Stability. While it enjoys the benefits of high economic growth rates and over $50 billion in direct foreign investment per year from enterprises from around the globe, Beijing is most concerned about maintaining social stability and providing adequate job opportunities to the estimated 100 million mostly lowly-educated migrant workers who have moved into urban areas in the past decade.

In a society where labor unrest is growing and the gap between rich and poor is widening, Chinese people on the street seem increasing aware that social problems are mounting. Thousands of Chinese laborers have joined strikes and walkouts to express their anger against unfair treatment and corruption at state-owned enterprises.

In its effort to silence unwanted voices, Beijing implemented a series of new measures. In the past few years, the state has introduced sophisticated software that can track and block dissent about sensitive topics. For instance, in the weeks after China's former premier, Mr. Zhao Ziyang, died this past January, almost all references to him in cyberspace were eliminated.

In April, the government took another controversial step and shut down some popular university Internet message boards, even at the country’s top educational institutions. By denying the country’s best and brightest students the opportunity freely debate some of the critical issues shaping their future, Beijing is trying to close another door to the outside world.

Similar to the politically-correct police that have invaded many Western institutions of higher learning in the past decade, message boards were brought to an end at both Shanghai’s Fudan University and Beijing’s Tsinghua University, where President Bush and other world leaders have been invited to speak in the past.

In a culture that values personal relationships, students and alumni often used these boards to debate controversial topics and to communicate with Chinese living abroad. In an informal survey, many of my university students here in Shanghai admitted reading such boards and often tried to post their own thoughts.

In early June, a new declaration was issued requiring a new Internet registration system for Chinese bloggers also give officials another tool for control. In a report in the Christian Science Monitor, the journalists' watch group Reporters Without Borders stated:

"Those who continue to publish under their real names on sites hosted in China will either have to avoid political subjects or just relay the Communist Party's propaganda. This decision will enable those in power to control online news more effectively." 

Afraid to offend the government sensors, Western firms and local counterparts have the added duty of closely monitoring all the content that is posted in its chat rooms and message boards.

Human Rights. Western people have harshly complained about a lack of human rights in China. But from the perspective of most Chinese I have met during my many years living and working here, the concept of human rights is often interpreted only in terms of economic opportunity. Compared to the bad old days of the 1970s and 1980s, job opportunities for most talented and motivated people have never been better.

For the 19 million Chinese textiles workers earning a few dollars a day, it is often better than struggling to earn a living on the farm.

In the Chinese countryside, where a vast majority of the 1.3 billion citizens still live, people are often allowed to have some choice regarding who there village leaders are. So from the view of most farmers, they already enjoy limited democratic rights and for many there is no urgent need to demand more.

Two Steps Forward, One Step Back. When it comes promoting greater freedom of expression and more political influence, President Bush and other Western leaders should take a long-term view. Yes, the recent crackdown on Internet speech shows the steep mountain advocates must climb, but one must maintain a hope that someday a new generation of Tiananmen students will rise up and take on Party.

Using a harsh tone in front of President Hu on the global stage will only alienate the more moderate voices like Premier Wen in Beijing in their internal battles with the hardliners. When Bush meets President Hu this fall in the next summit, he should continue to advocate greater cooperation on trade and cultural exchange. With patience, the next Communist Fall will come.

A Textbook Twist

In a new twist, Beijing is now pressuring Japanese schools on the mainland to modify the history textbooks they use.  The Japan Times reports:

Chinese authorities have confiscated 128 Japanese social studies textbooks ordered by a Japanese school in Dalian because they contain "inappropriate descriptions" of Taiwan and mainland China, government officials said Tuesday.

The Dalian customs office in Liaoning Province seized the supplementary history and geography textbooks because they use maps that illustrate Taiwan and China in different colors, according to an official at the Education, Culture, Sports, Science and Technology Ministry.

George Bush: Are You Listening?

In the Hong Kong-based South China Morning Post, Mr. Daniel Griswold from the conservative Cato Institute makes some important points about the possibility of a coming trade war with China.  He writes:

The Bush administration has joined a rising chorus of voices in the US Congress to demand that the mainland government raise the value of its currency - or else.

Beijing should and probably will allow its currency to readjust in the not-too-distant future. But heavy-handed threats from the United States are based on populist nonsense that, if enacted into law, would inflict real damage on American families.

If the purpose of Beijing's fixed currency has been to discourage imports into China, it has been a spectacular failure.

The mainland's growing economy has whetted a voracious appetite for imports. The value of goods imported into China grew 40 per cent in 2003 and another 36 per cent last year, faster than the growth of its exports. China is now the world's third-leading importer, behind only the US and Germany.

The mainland's growing demand for imports includes a broad range of US products, from wheat, soya beans and raw cotton to plastics, semiconductors and industrial machinery. In fact, since 2000, US exports of goods to China have more than doubled to US$35 billion, while US exports to the rest of the world have grown a paltry 2 per cent. Last year, China was the fifth-largest market in the world for US exports.

China's fixed currency cannot be blamed for recent troubles in American manufacturing, where output is actually 45 per cent higher than when China first fixed its currency to the US dollar, in 1994. Employment in manufacturing has fallen in the US because workers are more productive. The textile and apparel industries, which compete most directly with Chinese imports, have been shedding jobs for decades.

The obsession with the bilateral trade deficit with China misses the whole point of trade. Americans benefit from imports from China as well as exports to China. The US imports so much from China because its workers excel at producing lower-end consumer goods, and America is the world's biggest consumer market.

Slapping steep tariffs on Chinese goods would disrupt our mutually beneficial relationship with the world's most dynamic economy. It would jeopardise one of America's few growing export markets. It would hit tens of millions of families with a regressive tax on such basic items as shoes, clothing and consumer electronics from China. And it would alienate an important regional power in East Asia as the US tries to contain North Korea.

Krugman and Fight for Oil

In Tuesday's New York Times, liberal columnist Mr. Paul Krugman claims a string of Chinese takeover bids by Haier and and China National Offshore Oil Company (CNOOC) are more threatening to America's interests than similar attempts made by Japanese investors in the late 1980s. 

In his attempt to scare America, he offers little supporting evidence.  He writes that the Chinese will not squander their money on "prestige investments" like Sony's purchase on Hollywood moviemaker Columbia Pictures and Rockefeller Center.

On the contrary, many other analysts are claiming that China's Lenovo paid too steep of  price for IBM's famous, but stuggling, PC unit last year. 

The Chinese are just as prone to poor investment decisions as the Japanese.  Only time will tell.

Mr. Krugman goes on to claim that CNOOC's try for Unocal should be blocked by Washington because it gives Beijing too much power in the "great game" of gaining acess over key "far-flung oil and natural gas reserves" in Burma and Afghanistan.

On this issue, Mr. Joesph Kahn, also in the Times, explains some of the implications of this move:

If its bid is successful, Beijing will have a greater stake in the global oil markets, in the same way that Japanese and European oil companies work closely with major American companies around the world.

If the bid were rejected by the United States on national security grounds, as some members of Congress have publicly advocated, China could be motivated to build more ties to rogue states and step up its courtship of major oil producers in Africa and Latin America that in the past have looked mainly to the United States market.

The energy issue touches all of the hot buttons in China's realm, from its need to modernize its economy to its tensions with Japan, Taiwan and the West.

Since becoming China's top leader in late 2002, President Hu Jintao has traveled to Latin America, Southeast Asia and Africa on missions focused largely on securing energy supplies that will not pass through American or European companies before reaching China.

As was the case with Japan in the 1930's, China's relations with the outside world are being transformed by energy needs, generating fears that it will compete with the United States for resources. Chinese analysts say the United States should approve the Unocal deal and work with China to make energy a common cause, before it becomes a source of tension.

Just a decade ago China exported more oil than it imported, but last year it passed Japan to become the world's second-largest importer, after the United States.

Unlike Japan and European nations, which are also big oil importers, China does not have a strategic alliance with the United States. Beijing has grown increasingly wary of depending heavily on imports when its companies do not control major reserves abroad and its navy does not patrol the sea lanes through which those supplies must pass to reach Chinese ports.

Shortages of imported oil could threaten China in the event of a conflict with Taiwan. The United States, which has said it would defend Taiwan if the Chinese were to attack it, could potentially block shipping in the East China Sea, crippling Chinese trade.

In public, Chinese officials portray their country as a relatively minor player in global energy markets that seeks cooperative ventures with any country or major company on commercial terms.

Beijing this year began construction of a American-style strategic oil reserve on the coast of Zhejiang province.

Ultimately, officials aim to create a reserve large enough to allow China's economy and military to function for at least three months without imported oil.

Chinese leaders were well aware that they are paying inflated prices for foreign assets. CNOOC's bid for Unocal, which would be financed primarily by loans from state-run banks and the company's state-owned parent, offers a substantial premium for the company's assets.

But the extra cost is worth it for the sake of political security, many Chinese argue.

Shark Fin Soup Update

According to South China Morning Post on Saturday, shark fin soup is off the menu at Disney's new park in scheduled to open later this year in Hong Kong. Simon Parry writes:

Disney has scrapped plans to serve shark's fin soup at its Hong Kong theme park, citing its failure to locate sustainably harvested supplies of the delicacy. The U-turn follows an international outcry by conservationists - who last night hailed the decision.

Taking Some Time Off

As I spend more time with my family and friends in the next few days, new posts will be limited.  Enjoy the summertime!   

China's Income Gap

It has been my impression that many ways China is very capitialist society with intense competition between individuals for the limited number of opportunities availabile.

A recent survey reported in the Shanghai Star showed a widening gap between rich and poor. It found that 10% of citizens in the cities possess 45% of urban wealth while the poorest 10% have only 1.4%.

In the same article, it says there has been a decrease in salaries and wages as a proportion of the country's gross domestic product (GDP).

Are We Losing the Globalization Game?

In Saturday's South China Morning Post, Peggy Yuan reports:

Foreign direct investment (FDI) into China hit a record high last year, helped along by strong investment from neighboring countries showing greater interest in the mainland's property sector.

In an annual report released in Paris on Thursday, the Organisation for Economic Co-operation and Development (OECD) said external investment in China last year was US$54.9 billion, an increase of almost US$8 billion.

Later in the article, she makes two interesting points:

The income tax rate levied on domestic enterprises in China is 33 percent, while foreign-funded businesses pay just 15 percent.

The United States continued to be the most attractive destination for direct investment from other countries last year. The OECD report said the US attracted US$107 billion in inward investment, well up on the previous year's US$67 billion.

This is a very important point.

In the past few years, many liberal Democrats in Washington and their allies in the mainstream media have convinced a majority of Americans that we are losing the economic battle with China and India and the globalization is something to be feared. 

Sure, America has a number of weaknesses that need to be addressed, but the overall trend toward deeper international economic integration has benefited us greatly in the past few decades. 

Consider the fact that America attracted $107 billion in foreign investment with an increase of $40 billion. And at the same time, China attracted $55 billion with an increase of only $8 billion. 

If we are losing the battle, why do foreigners want to invest so much money in our country and create millions of new jobs each year?

Maybe Outsourcing is Not Such a Big Threat after All?

During the 2004 election, John Kerry and his labor union allies repeatedly warned voters about the dangers that outsourcing creates for American workers. How many times did we hear about jobs moving to China or India and suffering that this caused?

Now, consider this recent article titled, True or False: Outsourcing Is a Crisis, in one of America's most liberal newspapers, the New York Times, one of John Kerry's biggest cheerleaders. The strory begins:

If you read only the headlines, the future of globalization may seem scary, indeed.

American jobs have already been heading abroad.

And as telecommunications and more powerful computers enable companies to take even more jobs overseas, the service sector, which accounts for about 85 percent of the United States work force, will be increasingly vulnerable to competition from the cheap labor pools of the developing world.

So the question looms: Is America on the verge of losing oodles of white-collar jobs?

Probably not. The threat of global outsourcing is easily overstated.

The article later goes on to cite this important point:

But even if millions of tasks can be done by cheaper labor on the other side of the planet, businesses won't rush to move every job they can to wherever the cost is lowest. The labor market isn't quite that global, and it's unlikely to be anytime soon.

In conclusion, the article admits that the threat of outsourcing is not so big:

A report by the McKinsey consulting group estimates that by 2008, multinational companies in the entire developed world will have located only 4.1 million service jobs in low-wage countries, up from about 1.5 million in 2003. The figure is equivalent to only 1 percent of the total number of service jobs in developed countries.

Education and retraining is a major part of the answer for helping skilled workers adjust and find new jobs to replace those lost to global competition. I.B.M. often cited in this debate, says it spends more than $700 million on training its employees for new jobs within the company, and for those laid off it offers severance packages that include career counseling and reimbursement for retraining.

By one calculation, the cost of softening the blow might not be all that high. For every dollar invested offshore, American companies save 58 cents, McKinsey estimates.

Be Ready for a Backlash

In recent days, some major Chinese firms, like the conglomorate Haier (pronounced Higher) and oil-giant CNOOC have announced plans to takeover their struggling American rivals Maytag and Unocal, respectively.

Before Washington gets nervous and starts thinking silly things, like "we must stop the Communists from invading corporate America" we should take a deep breath and remember some key points:

At present, most Chinese companies have little experience building a global brand and managing American workers.

Research shows that about 70% of major aquisitions fail to succeed. The main reasons for this include internal conflicts over corporate cultures and human resource policies, differences over future strategy, and high rates of employee turnover at the aquired firm.

Similar to the Japanese in the 1980's, many Chinese firms have built up strong financial statements in dollars after years of retaining their export earnings. So it normal they search for ways to invest their excess cash.

Sometime soon, the Chinese firms will also probably benefit from a stronger currency, which makes dollars cheaper.

Hopefully, they will learn from the mistakes of others. One of the biggest failures in merger and aquisition history was Sony's purchase of Columbia Pictures in the late 1980s.

According to today's New York Times, it seems the blacklash has already begun.

Two Republican congressmen, Richard W. Pombo, chairman of the House Committee on Resources, and Duncan Hunter, chairman of the House Armed Services Committee, wrote to President Bush last week, saying that "such an acquisition raises many concerns about U.S. jobs, energy production and energy security."

"We fear that American companies will find it increasingly difficult to compete against China's state-owned and/or controlled energy companies, given their mandates to supply China's ever-growing demand for energy, which will increasingly need to come from foreign sources," the letter said.

Are Americans Hypocrites about China's Piracy?

Regular readers of this blog know I am very concerned about the implications of China’s widespread theft of intellectual property. In an April column at Slate.com Mr. Henry Blodget says:

But it's not just DVDs that are being ripped off, of course. It's everything. According to some estimates, as much as a third of China's GDP comes from piracy and counterfeiting, including more than 90 percent of the country's software and 95 percent of its video games.

In the book The Chinese Century, Mr. Oded Shenkar says that five of six of the "Yamaha" motorcycles in China are fake—in part, perhaps, because Yamaha's parts suppliers sell real Yamaha parts to fake-Yamaha assemblers.

The same goes for more than half of China's razor blades, cell phones, drugs, chewing gum, and shampoo.

The new frontier, meanwhile, is export. Some estimate that 7 percent of global trade is now bogus stuff.

Piracy apologists, who occasionally include the Chinese government, often point out that developing countries have a long tradition of such behavior, starting with the U.S.

In this view, the U.S. companies are hypocrites: Now that we've stolen IP, polluted the environment, and exploited workers to move up the value chain, we want to ban the practices in other countries.

A Warning from Greenspan

In my view, if Western politicians can overcome the temptation of laws restricting imports from China, and follow free trade principles, they will win more cooperation and respect in Beijing, and it would be a win-win situation for most people in both countries.

While testifying in front of Congress, US Federal Reserve chairman Alan Greenspan last night cautioned against taking a backward step into protectionism when it deals with China. According to various news reports:

"It is in our interest and that of the global economy that China continues to progress toward becoming a more market-based, productive and dynamic economy ... For our part, it is essential that we not put that outcome, or our future, at risk with a step back into protectionism," he said.

Coming to a Showroom Near You

While American carmakers GM and Ford continue to struggle with their labor unions over massive layoffs and soaring healthcare costs, many smaller Chinese automakers are preparing export more cars into foreign markets.

In Thursday’s edition of the South China Morning Post, Mr. Eric Ng writes about Geely Automobile’s plans to accelerate its export sales. According to the firm’s chairman Mr. Li Shufu, Geely hopes to export more than 10,000 units this year.

Geely hopes to export about 67 per cent of its output by 2015. But Mr. Li conceded that exporting mainland cars was "a tough business" due to weak brand awareness, quality problems, a lack of proprietary designs and virtually non-existent sales and servicing networks overseas.

What other hurdles must Geely overcome? Their biggest challenge is improving their quality standards and developing a reliable network of suppliers of key components and materials. While China's labor costs are low, the overall cost of putting a car together is still quite high at present.

Just remember: Toyota faced similar challenges back in the early 1970's.

The Possible Effects of a Yuan Revaluation

In recent months, Washington has threatened Beijing with more tariffs if it fails to end the currency peg and allow the yuan to appreciate in value versus the dollar.

Who are the potential winners and losers from a yuan appreciation? Rememer that a nation's exporters prefer a weak currency, while importers prefer a strong currency. With yuan the becoming stronger, the dollar would automatically be cheaper.

The winners would be major American exporters to China like Boeing, Cisco Systems, and Motorola. The yuan they earn could be exchanged for more dollars.

The losers would be major American importers like Walmart that depend on components or materials from their Chinese suppliers. This in turn may result in higher prices for a wide variety of goods found in American stores.

Other losers would be the Chinese government which holds billions of dollars of American debt issued by the Federal Reserve. The Chinese banking system could lose some deposits as the wealthy buy cheaper dollars and invest overseas.

Will such a move help reduce America's large trade imbalance with the Middle Kingdom? The answer is probably very little. To understand why, consider the following points:

Because much of China's export industry relies on using low-cost labor to proccess imported materials and components, raising the value of the yuan by 10 percent would only increase the dollar of exports by about half as much.

According to research from the Swiss bank UBS, that would only knock about $6 billion a year off US imports from China. This would be a negligible reduction compared with the economy's $645 billion current account deficit, essentially its overdraft with the rest of the world.

Economics versus History

With the sixtieth anniversary of the end of World War II in the Pacific, tensions between Japan and its neighbors are bound to flare up again.

For decades, optimists in international relations like myself have argued that closer economic integration and growing trade ties between Japan and China could help these two Asian rivals overcome their historical mistrust of each other. But with the anti-Japan protests in many Chinese cities earlier this spring, this hope seems like wishful thinking.

As an American who has taught young people in both countries, I have experienced firsthand the growing divide between these two economic powers.

The disputes range from Japanese history textbooks that gloss over its wartime atrocities to Tokyo’s desire to gain a permanent seat on the United Nations Security Council. The school history textbook most often mentioned is, in fact, read by very few Japanese children.

According to the South China Morning Post on April 19, just 18 of the country’s 11,102 junior high schools actually use it, meaning 0.1 percent of the 1.2 million seventh grade children have a copy. The authors of the textbook have released a Chinese translation – in a bid to prove it is factual.

To help resolve the issue and improve international understanding, a group of historians from Japan, China, and South Korea have written new history textbook of the 1930s and 1940s that gives a variety of viewpoints on each major event.

While many of my university students in Shanghai are fascinated by Japanese animation and Japanese pop music, they will not forgive Japan for their wartime aggression and inability to sincerely apologize for unspeakable crimes against innocent Chinese citizens. When told about Prime Minister Junichiro Koizumi’s apology in Indonesia in May, many Chinese students just reply that it is too little and too late.

According to recent trade data released by the Japanese Finance Ministry, its trade with China exceeded its trade with the United States for the first time ever. Exports to China rose 16.1% to a record 8.09 trillion yen, while Japan’s imports from China jumped 17.9% to a record 10.63 trillion yen, giving China a substantial trade surplus.

Today there are more than 20,000 Japanese companies in China employing an estimated 9.2 million people. These firms indirectly create millions of more jobs by purchasing components and materials from local firms. Sony, for instance, says that by the year 2008, its sales in China will exceed those in Japan.

Since diplomatic relations resumed in 1973, Japanese firms have poured an estimated $45 billion of foreign investment into China and created good jobs for talented and hardworking Chinese. Investment totaled $5.45 billion in the past year alone.

With comparatively high labor costs in Japan, leading firms such as Sony have shifted many labor-intensive jobs to China, while keeping the most advanced research and development jobs in Japan. In many ways, the two economies compliment, and even need each other.

But Japanese firms finding it increasing difficult to recruit and keep talented young Chinese. Many believe they pay less and give fewer promotions to locals when compared to their American or European counterparts.

Many of my Chinese students fail to realize how much the Chinese economy has benefited from Japanese support over the years. Under pressure from voters, Prime Minister Koizumi will terminate Tokyo’s official development assistance to Beijing in 2008 that has amounted to 3 trillion yen [$105 billion at current exchange rates] in 25 years.

Many experts say that Sino-Japan relations are at an all-time low since diplomatic ties were forged in 1972. What are the long-term consequences of all the distrust and anger shown in the protests by thousands of Chinese? No one really knows for sure. And can stronger economic ties help repair relations and help restore trust? Only time will tell.

A Chinese Aquisition Spree?

Similar to the Japanese in the late 1980's, Chinese firms are becoming increasingly agressive in trying to aquire their American rivals. Following Lenovo's purchase of IBM's struggling PC unit earlier this year. Qingdao-based Haier has made its move. In its quest to become a global super brand, the Haier Group, the mainland's biggest white goods producer, has made a bid to acquire the third-biggest home appliance maker, Maytag.

Maytag Corp said that it has received a US$1.28 billion preliminary bid from a consortium comprising Haier America Trading, Bain Capital and the Blackstone Group, an offer 14 per cent higher than a rival bid by US buyout firm Ripplewood Holdings.

According to the South China Morning Post, Haier has 30 factories and eight design centres abroad. The firm has a plant in South Carolina making small refrigerators and a office building in Manhattan. Haier now ranks sixth in the US refrigerator market and is perhaps the best-known Chinese consumer brand in the country.

As Micheal Gross at Slate.com points out, Haier is most interested in Maytag's intangible assets:

Haier is a strategic buyer. Strategic buyers look beyond cash flow and hard assets. Rather, they consider how all the target's assets—everything from its cash on hand to its brand name—can further its core strategy. Maytag's intangible assets—its brand, its management, its century of washing-machine-making experience, and distribution relationships—are what Haier finds most appealing.

Friend or Foe - Part II

On Sunday, June 12 the Hong Kong-based South China Morning Post published the following article:

North Americans fear Beijing's rising political, economic clout
ASSOCIATED PRESS in Washington

The mainland's growing political power and influence on the world economy has many people in North America concerned, polls suggest. Substantial numbers of people in Canada and the United States worry that China's emergence is a threat to world peace and are concerned about its impact on the economy in their own countries.

Two-thirds of the Americans and half the Canadians polled said they fear "China is a serious threat" to jobs in their own countries. Just over half the Americans and nearly half the Canadians said they are concerned about the level of Chinese investment in their countries.

Friend or Foe?

How should Washington view China's growing miltary power?

Consider the following comments by Mr. Tom Plate in the Japan Times a few days ago. Every word is true.

Here are a few relevant facts. China's military expenditures are far less than that of the U.S., not only in gross amount but also in proportion to its national economic product. It is not the Communist Chinese government in Beijing, after all, that ever invaded Taiwan: In a sense, it was the rightwing nationalistic losers of the Chinese civil war who did so in 1949.

It was not the Chinese that invaded Hong Kong: In a sense, it was colonial Britain that did so in the 1840s, plucking the fruit of its Opium War. And it was not China that asked the U.N. Security Council for permission to invade a far-off country two years ago. That was the U.S., and when it didn't get its way from the United Nations, the U.S. invaded anyhow.

Battling Beijing over Fakes

During a recent trip to Beijing, US Commerce Secretary Carlos Gutierrez and Trade Representative Robert Portman spent most of their time crusading for a currency revaluation of the Chinese yuan and debating the implications surging textile exports to the American market.

While fighting to protect a dying textile industry that has suffered job losses for many years, Gutierrez and Portman said only a few words about the key strategic challenge that continues to plague most foreign multinationals in Asia: intellectual property piracy and counterfeiting.

Beijing’s failure to protect our copyrights and patents takes away thousands of high-skilled American jobs, tens of billions of dollars in potential revenue, and saps our ability to compete in the future. The Business Software Alliance estimates the annual loss in sales to the global software industry is $3.82 billion, with China ranking third behind Vietnam and Ukraine with the highest piracy rates.

In the world’s most advanced economy, what is more important: high-tech or textiles?

Reality Bites. While shirts and skirts get most of the attention, convincing Beijing to make a greater effort enforcing its own laws requires us to accept some hard truths.

First, the more Chinese firms use pirated technology the cheaper their products become, and the more we want to buy them. When a Chinese exporter buys pirated Microsoft software, the firm’s total cost of production is lower, and the American consumer enjoys greater savings at Walmart.

Second, many of the greatest beneficiaries of knockoff goods are foreign enterprises themselves. For instance, consider the private school I teach at here in Shanghai. Founded in 1997, it is a joint venture between a local university and a group of Canadian investors. Easily purchased in numerous small shops for less than one dollar a copy, fake Microsoft software is installed on all the school’s computers.

Third, some Chinese have realized that fakes can also have a dangerous side. A recent inspection conducted by the China Health Care Association showed that more than 25% of the health care products were fakes. With more medicine being sold over the Internet, some potential harmful pills with inevitably end up in American hands.

Finding a Solution. In a developing country undergoing a major transformation, Chinese businesspeople often do not take what Beijing says so seriously, where the desire to earn extra money is often more important than the rule of law. So what can be done to improve this complex problem?

A leading Chinese expert, Ted C. Fishman suggests two controversial remedies, neither of them very appealing. Realizing that negotiation and diplomacy have failed, he calls for a new “technology tax” on a wide variety of Chinese goods coming across the Pacific, under the assumption that nearly all goods benefit in some way from stolen technology.

While admitting in USA Today that this remedy would be “a hard sell”, Mr. Fishman would only be hurting many American multinationals that have built hundreds of factories in the Middle Kingdom that produce goods destined for American stores. Similar to a new tariff, this tax would only damage America’s reputation more, and increase prices for American consumers.

And why impose such a technology tax on only on Chinese-made goods, when the exact some logic could be used against products which come from Vietnam, Eastern Europe, and Russia?

Self-Monitoring. Fishman also suggests the United States could insist that corporate purchasing departments certify that no Chinese-made components and materials come from factories where pirated technology is widely used. This kind of monitoring system has already been used to inspect suppliers that allegedly use child labor or have abusive management policies.

While it is not cure-all, a new industry-wide monitoring system could be a major step forward. It could be used to target all foreign suppliers, not just those in China. As Walmart and Nike have discovered in recent years, a firm’s reputation can be damaged overnight after allegations of abuse and unfair treatment against low-skilled workers.

The risk is that the system could be abused by a firm’s opponents to make trumped-up allegations that have little or no factual evidence.

Conclusion. The simple truth is that global economy will never start winning the war against fakes until more people realize the harm the pose to our individual health and happiness. Last year, 13 Chinese infants died after drinking milk made from fake baby formula.

While American consumers enjoy cheap prices, they must also deal with the annoyances that a few fakes are often mixed in with each shipment of goods that come from abroad. Imagine your reaction after realizing that the Kodak film in your old camera has destroyed all of your holiday memories.

With the Communists need to appear strong and stand up to the West, Washington must admit that pressuring Beijing will only lead to disappointment. The case must made that its Beijing’s own interest to enforce their intellectual property laws and protect their own people. New approaches must be tried to make incremental improvement to a problem that will never be completely solved.

Animal Rights at Disney's Park in Hong Kong

Claiming that the company is failing in its corporate responsibilities, animal protection groups are pressuring Disney not to serve shark's fin soup at its new Hong Kong theme park when it opens in September.

Very popular among wealthy Chinese, the consumption of shark's fin, usually in a soup, has been blamed for falling shark numbers and activists have called on the American entertainment giant to set an example and pull it from its menus.

For most of my Chinese university students, studying business management here in Shanghai, this is a very confusing and humorous story. In a country where animal rights are non-issue for most people, and all kinds of exotic dishes, including pig’s brains and dog meat, are regularly served at many local restaurants, this controversy serves as a good example of the cultural divide between many Asians and animal-loving Westerners.

If Disney fails to bow their demands, activist groups such as the Worldwide Fund for Nature (WWF) have threatened to a global boycott of all Disney products if it insists on serving the dish -- something the company rightly claims is common practice among Chinese restaurants and five-star hotels along the eastern coast of the country.

The Fight to Protect our Brainwork

In USA Today, Ted C. Fishman has some interesting insights into the issue of intellectual property rights and its influence on the American economy:

Nearly every product turned out of a Chinese factory for export benefits from the country's loose intellectual property regime. That includes the goods that made up the United State's $160 billion-plus trade deficit with China last year. Trade deficit numbers are scary, but they also are a good, albeit indirect, measure of how well American companies - the ones that bring in Chinese goods - profit by taking advantage of China's low-cost manufacturing.

Convincing the Chinese to enforce intellectual property protections means convincing them to give up one of the primary practices that has nourished their economic miracle. It is a hard sell. Current hopes for remedies rest on negotiation and the threat of adjudication through the World Trade Organization. These allow the Chinese to buy time - possibly years - that the United States cannot afford to give.

While I agree with his analysis of the situation, Mr. Fishman suggests more taxes to put more external pressure on Beijing.

One better approach would be to levy a kind of technology tax on a wide variety of Chinese goods coming into the United States, based on the assumption that nearly all Chinese goods benefit in some way from stolen technology. That show of strength might quickly convince China to change its rules and enforcement.

In my mind, more taxes will only harm the American consumer and make a bad situation worse.

Another approach begins at home. The United States could insist that corporate buyers of Chinese-made goods certify that their goods were not made in factories where pirated technology runs the show. This kind of monitoring is already used by U.S. companies who inspect suppliers in low-wage countries to make sure they are not using child labor or abusive management techniques. The system isn't perfect, but it has made a difference in how U.S. companies and their suppliers do business.

This is a much more practical idea, that I would support.

A Reality Check for the Sino-American Relationship

Sometime this summer, Congressional leaders are expected call for a final vote on potentially disastrous piece of trade legislation that would impose a 27.5 percent tariff on all Chinese-made products that enter this country. Such protectionist policies will only hurt American consumers, create more mistrust in Beijing, and make life more difficult for the increasing number of American firms trying to sell their goods to an ever expanding market.

As President Bush rightfully said, the US and China have “a complex relationship” that involves a full range of social, economic, and political issues. While Beijing continues to disregard many international norms in international commerce, do our members of Congress fully grasp the potential implications of such a provocative new policy?

Trying to send a clear warning to Beijing that Congress is serious about addressing a bilateral trade imbalance that was $56 billion in 2004, this bill sends all the wrong messages to our trading partners and could potentially push Sino-US relations to their lowest level in years.

Memories are Short. Sponsored by New York Democrat Charles Schumer and South Carolina Republican Lindsey Graham, this massive tax increase will only be withdrawn if Beijing succumbs to international pressure and stops “manipulating” the value of the Chinese currency, which has been artificially pegged for about the last decade at 8.27 yuan to dollar, and allows it to appreciate.

Many Americans seem to have forgotten how Beijing’s pegged currency bought some much-needed stability to the global economic system just a few years ago. During the Asian Financial Crisis in 1997, when currencies in South Korea and Thailand were collapsing, Beijing held firm and effectively fought off currency speculators and allowed much Asia to rapidly recover.

Principles or Politics. While free trade principles have proven time and again the best way to promote economic growth and economic development, elected officials often overcome the temptation of protectionist measures. For free trade supporters, the outlook is not so encouraging. Earlier this spring, 67 Senators caved to strong special interest pressure and backed the Schumer/Graham bill during an initial vote.

In a recent piece in the New York Times, Senators Schumer and Graham claim China’s “mercantilist approach” and “manipulation” has undermined the support for free trade. Some Senators probably voted for the bill hoping that the Administration could be relied upon to veto it, just in case, it ever reached the President’s desk.

To make matters worse, the American people often cannot count on the mainstream media to provide a clear picture of the challenges that American businesspeople face in the growing Chinese market.

Consider the following inaccurate picture created by Sebastian Mallaby, a member of the Washington Post editorial board, in a recent commentary published in the Christian Science Monitor:

Think China doesn't abide by international rules? To meet the terms of its accession to the World Trade Organization (WTO), China abolished or amended 2,600 legal statutes and regulations, Neil Hughes notes in the latest Foreign Affairs. The compliance continues: China is pressing ahead with its WTO commitment to open its capital markets to foreign competition by 2007.

For Western businesses trying to sell their goods and services here in Shanghai, the number of laws abolished or amended is almost irrelevant. They are much more concerned about having their legal rights protected in a judicial system littered with corrupt judges that are often under political pressure to rule in favor of their local rival.

Chevy versus Chery. In addition to all the difficulties it having back in its home market, General Motors recently accused a rapidly expanding Chinese rival Chery Automobile (notice the similar spelling to Chevy) of copying its four-door Daweoo Martiz (owned by GM) and Chevrolet Spark passenger car to produce the QQ, which has become Chery’s most popular model.

While many of his points seem reasonable, Mr. Mallaby continues to overlook some other key problems:

Congress is also beating up China for its currency policy and its piracy of US intellectual property. Yes, China pegs the yuan to the dollar, a policy that keeps its value artificially low and its exports artificially competitive. Yes, Chinese pirates rip off American music and software. But Congress should keep this misbehavior in perspective.

Mr. Mallaby seems to be saying that Congress should layoff Beijing and allow it to continue its half-hearted enforcement of intellectual property rights. Patents and copyrights are at the heart of many high-tech products that give American firms their competitive advantage.

Washington seems ready to enact the wrong medicine for the wrong problem. According to reports from Reuters and Bloomberg on Friday, Senator Schumer is claiming the Bush Administration was quietly backing his efforts to pressure Beijing on the yuan.

Lets assume in the days ahead Beijing gives in allows the yuan to appreciate by 10 or 15 percent. Many experts argue that this shift will have little, if any, long-term impact on the trade imbalance.

While President Bush often talks about the importance of free trade, his actions don’t always match his words. During his fight for reelection in 2004, thousands of American jobs were lost in key battleground states after tariffs on some types of imported steel were imposed.

Following the same flawed approach, the Administration recently imposed quotas on imports of Chinese clothing after dramatic surges were recorded in recent months. This jump only occurred after an international system of quotas was lifted at the start of this year that had previously been suppressed China’s ability to serve the American market. China is just replacing other imports that use to come from other developing countries like Vietnam and Bangladesh.

Before the Congress imposes more restrictions on Chinese goods, America needs to stop and identify its own the true strategic interests in the bilateral relationship. While restricting Chinese imports may win more votes from labor union members, it does long-term harm to our reputation around the globe.

Putting more pressure on Beijing to reform its foreign exchange system only promotes more mistrust on both sides of the Pacific and creates greater economic risks in a region that is driving global growth.