China Comment

Energy, Environment, and Economy

Isn’t that Odd?: Plastic Bag Entrepreneurs

China has long been a country of entrepreneurs, from its urine merchants, to the indigents who walk around recycling plastic bottles and aluminum (they are ubiquitous, despite some efforts to remove them, both high and low tech [The former is an electronic recycling machine; the latter, a poignant transcript of a UK special on a "clean up" of homeless who make a living collecting plastic bottles]), to the proprietors of hundreds of mom and pop shops.

What follows is an amusing prediction for this week’s Isn’t That Odd.  If you’re in China and you see this happening, please post here- I’m asking my contacts to look out for this.

I predict that China’s new plastic bag policy is going to create a new wave of self-employment for their urban poor. Why? Well, first, let’s examine the policy:

1.) A National Policy Designed to Reduce Plastic Bag Waste
The policy of charging for plastic bags (at .2-.6 yuan), and phasing out the ultra-thin bags will hopefully decrease waste as people begin toting canvass and bamboo bags to the stores. However, some problems have been realized due to this policy, as a recent Xinhua article examined; ranging from vendors who are still utilizing the ultra-thin bags, to others who are not charging for bag usage.  “At a small grocery near the Carrefour, the shopkeeper still offered customers free plastic bags. As he said: “I sold vegetables worth 0.7 yuan. How can I charge 0.5 yuan for a bag?”

Other problems include:

It is more difficult to tote canvass bags everywhere when one goes outside. Penny-pinching people have to plan before going shopping, instead of previously being able to use free store-supplied plastic bags or to purchase new canvas bags at the grocery.

Also, at markets, fish-sellers now wrap fish in newspapers instead of inside plastic bags. This causes newsprint to leak onto the fish, which makes the food untasty and unsanitary. And places where the plastic bags are still used have suffered problems of people grabbing extra bags to use for private purposes- creating a shortage at some stores, as the Xinhua article goes on to explain.

Consequences: Depending on how much of a price these plastic bags might be oversold at, I wouldn’t be surprised to see some Chinese entrepreneurs standing outside stores, selling and undercutting the stores’ prices for plastic bags. They might grab a few extra bags when they are in the stores, they might repurpose previously-used bags, or they might (if they have some capital) go to a manufacturer and purchase bags in bulk.

If you’ve ever read Carl Crow’s venerable 400 Million Customers, you know how hardscrabble the Chinese can be in seeking out entrepreneurial opportunities.

My favorite tale of Mr. Crow’s (he wrote in the 1930s but his words are still relevant and amusing today- and inspired another informative book- James McGregor’s One Billion Customers.) is how Crow organized an ad promotion with a US manufacturer who wanted to introduce a better brand of soap (I think-I read the book a few years ago so my memory is slightly hazy) in Chinese stores. The manufacturer gave stores free soap samples to hand to their customers.

A month later, the manufacturer was quite upset, because brand awareness hadn’t increased. So Crow went to investigate. He found the stores and discovered several problems.

1.) Many stores were selling the “free” samples; because they figured it didn’t matter if one brand of soap was more popular than another; because they weren’t in the business of selling soap, consumers could buy their soap anywhere so giving soap for free would do nothing for their store! (They didn’t believe they could build store-brand loyalty with customers by giving something away for free- see point 2). And by selling the soap (cheaper than other brands), they could gain extra money that their neighbor stores wouldn’t get and could still win a little customer loyalty since customers would be glad that store A offered better prices!

2.) If something was free, many customers figured, it must be lower quality, or spoiled. So they didn’t want to take free samples. Only the poorest of the poor took the free samples, and they couldn’t afford to purchase this expensive soap anyway, so the marketing tactic fell flat!

 Oh, China- such an Odd and wonderful Capitalistic place.

4 July, 2008 Posted by | Book Review, China Business, China Environment/Health, Isn't That Odd? | , , , , , , , , , , , | 1 Comment

The Visible Hand of China in Latin America

Off the Shelf:

The Visible Hand of China in Latin America (2007), edited by Javier Santiso of the OECD, is a great pamphlet with a lot of hard data about China’s role in that part of the world.

While much is often stated of China’s trade surplus with the rest of the world, China actually ran a trade deficit with Latin America for much of the 2000s. China is the continent’s third largest trading partner, after the United States.

Eduardo Lora opens the book with a discussion on whether Latin America should fear China. From the data he presents, the answer appears to be “not yet.” He points out several economic weaknesses faced by China.

1.) Allegedly, China still has poor corporate governance and inefficient state-owned companies. Lora notes that the amount of state-run underperforming assets has massively declined over the years, but he makes much of the nonperforming loans and debt that burdened Chinese banks until restructuring and bank sheet balancing resulted in NPLs at only 9.5% as of late 2006. Considering how flush with reserves, investment and other cash China currently is, and how their companies are modernizing business practices, I do not think corporate governance questions is necessarily a crippling problem for China to overcome with investments in Latin America… especially when compared to indigenous Latin American companies’ problems with inefficiency and corruption.

To back up his assertion, Lora goes on to argue (27) that the three largest firms in main economic sectors are state owned and that China is propping up 30-50% of those firms as “national champions” by giving them loads of state support so they will become globally competitive multinationals by 2010 (27). He argues this will lead to inefficiencies.

For comparison for how strong China’s companies are. As of 2007, China managed to get eight companies into Fortune 500’s World’s Most Admired Companies (The US had 135; Japan, 61; Britain, France, and Germany, 26 apiece) . A good amount of the top companies, however, are state owned. [I find it odd though that Huawei, Lenovo, Haier, Baidu, and Galanz were not listed as admired companies-- a lot can be said for them as Donald Sull (2005) discussed in Made In China.] And indeed, being listed on Interbrand’s listing of Top Global Brands still escapes Chinese companies. As of 2007, China still had no companies on the list (Here’s the report). The Best China brands are examined here. An easy chart of them is here.

2.) Lora gets a bit technical by discussing how China’s financial system is still undeveloped (28-30). Keep in mind though that a lot he discusses as being undeveloped has evolved since his article was written (in late 2006). He complains how until 2006, foreigners could only buy nonvoting B-shares in several sectors (infrastructure, utilities, and finiancials). Now, he says foreigners can purchase A shares, but to ensure stability they are required to buy over 10% of shares and hold for longer than 3 years. Lora argues this lack of easy-foreign investment will eventually damage Chinese companies’ ability to efficiently expand. (Then again, China has a lot of money even within its country, so maybe it will escape these problems.)

3.) Allegedly 50% of GDP (31) is locked up in savings and investments. Lora states this could be good, but it prevents capital and labor from moving to the most efficient sectors.

4.) Lora points out that 40% of private entrepreneurs with companies that have incomes over $120,000 USD are CCP members (31). This could be a neutral comment, or it could imply possibility that corruption rather than efficiency might govern China’s future capital markets.

Lora then discusses weaknesses that are shared between the countries:

5.) Weak higher education. (More on that in a later article)

6.) Corruption/Weak Rule of Law

As of 2007 there were 122,000 Chinese lawyers at one per 10,650 people [In the US the ratio is 1 per 270]  (“Chinese Seek a Day in Court”, WSJ, July 1, A12) but most judges are retired from the PLA and lack legal expertise.

I don’t particularly believe Lora’s view that China’s companies are doomed to not meet expectations of world-dominance, since China is confronting many troubles he identifies. However, the points he raises have at times been overlooked by people willing to too-quickly crown China the next world hegemon.

Chapter 2, by Jorge Blázquez-Lidoy, Javier Rodríguez and Javier Santiso discuss whether China’s markets complement or threaten Latin America’s.

China’s export-mix competes the most with Thailand, Hungary, and Mexican goods (53). Costa Rica also, to a lesser degree, faces competition (54).

Brazil and China are highly complementary in trade (55).

In a chart on (54), Santiso excellently documents, through use of his own data tables, how Venezuela, Peru, Chile, Columbia and Argentina have very little competitive overlap with China.

Mexico and China share interest in IT, consumer electronics, clothes, and manufacturing. Transportation equipment is Mexico’s only advantage.

Latin America allegedly has too inefficient ports, so they cannot gain in transport cheapness vis-a-vis China in trade with other countries and regions. Customs are too slow, taking up to seven days on average to clear across the region. However, Latin America will still not be overly burdened by China competition since the two regions specialize in different products.

Latin America, for example, gains in trade to China by sending copper, oil, soybeans, and coffee.

According to the article, “in 2004, 1/2 of Chinese FDI went to Latin America, exceeding the 30 per cent that went to Asia (70).” I’m not sure that’s completely true and will have to consult my other sources, but it bears examining, because it’s quite interesting, given all the media attention lavished on China-Africa relations.

In essence, Santiso concludes that “China will benefit other emerging economies in [Latin America in] the long term.” “Latin America faces few if any short-term trade costs” (55), except in Mexico and Costa Rica, of course.

Chapters 3-5 were okay, but didn’t reveal too much of immediate interest. The pamphlet-book is a good read, and I’ll recommend it even though it is fast getting out of date. There simply aren’t that many good articles/books written on China-Latin America relations, but of the ones that do exist, Santiso’s is certainly a gem.

OTHER RESOURCES

* Mohan Malik, writing for PINR has a digestable version of Sino-Latin American Relations.

* There is a 2005 CRS Congressional report on China’s influence in Latin America.

* PBS had a radio program on China-Latin America ties. One Brazilian disagreed with Santiso’s statement that China benefitted the Brazilian economy. He called attention to textile competition.

2 July, 2008 Posted by | Book Review, China Business, China Economy, China Future | , , , , , | Leave a comment

Futurecast (Part II): Russia and India

In this continuation of my review of Robert Shapiro’s Futurecast, I analyze his discussion on why Russia, India, and other countries will fail to achieve China and United States’ levels of growth in the coming ten to twenty years.

SHOULD THE WORLD BE CONCERNED ABOUT RUSSIA AND INDIA?

Shapiro discusses why Russia and India will not be able to match the United States or China in relative successfulness. He points out India is ranked 118th in the world for literacy.

Additionally, the Indian economy is still greatly underdeveloped. 60% of Indian labor is based in agriculture, and 20% is centered in extremely small, often one-person-businesses due to a regulatory culture with restrictive land policies and subsidies to miniature businesses that impedes business consolidation (101).

In comparison, a little less than 1% of the US’s economy is based in highly productive agriculture, and 43% of China’s workers serve in agricultural fields, all according to the CIA’s World Factbook. 

In 2004, partially due to restrictive government policies, India received only $5.3 billion (2.3%) of the world’s FDI that was sent to developing countries; China received $60.6 billion (over 20%) (162). While this indicates India has potential to grow; the changes in regulatory environment need to come much quicker to encourage such growth.

India’s Democratic society is far less likely to sanction the painful changes than China’s semi-autocratic government permitted to increase efficiency and development. China ended many state pensions, reduced health benefits, and evicted thousands from their homes. Shapiro does not believe India has the political will to carry through similar needed reforms.

Shapiro does not discuss, but it bears mentioning that India also faces a military challenge. With unrest and instability increasing in Pakistan, the chances for an armed confrontation over Jammu-Kashmir and other disputed regions may increase.

Muslim-led terrorist attacks, such as a 2006 train bombing by extremists that killed over 170, have been significant in recent years (See the Jamestown Foundation’s Terrorism Monitor and the CFR report on Indian terrorism for more information; an Indian think tank discusses terrorist violence in India  and points out that the number of yearly deaths have declined from 2002 to 2006, but still over “2,765 people died in terrorism-related violence in India during year 2006.” [Important to note: some violence involved other groups such as the Naxalites])

Shapiro also avoids in-depth discussion of possible China/India and China/United States confrontation in the near future. China and India have been working hard to resolve border disputes, but all disputed land is not yet resolved. Additionally, both have interests in Southeast Asia, and their expanding navies could come into a conflict over operational spaces. A naval confrontation over bottlenecks such as the Strait of Malacca, however, will not be likely until both countries develop their militaries to become true regional powers- something that will elude China until the mid to late 2010s, and which India may not achieve until the 2020s.

RUSSIA

Shapiro argues Russia’s demographic decline (its aging and population decrease) will contribute to a drop in productivity that will be exacerbated by a murky legal environment that could discourage foreign investment and development. Considering how Russia is currently benefitting from $135 a barrel oil, it is becoming much more flush with cash.

But extra cash does not necessarily equate to extra power. Mexico, Saudi Arabia, Nigeria, and other Middle Eastern states have squandered huge oil windfalls in the past without managing to pull their countries out of poverty and into fully sustainable modern economies.

Shapiro’s analysis of Russia could have benefitted from an indepth discussion of the effect that increasing linkages between China and Russia might have in spurring Moscow to faster development.

China/Russia trade was $50 billion in 2007, and Russia is China’s 8th largest trade partner. Chinese FDI in Russia is estimated at only $3 billion in 2006, “less than 5% of total FDI stock in Russia,” according to a report in the China and Eurasia Forum Quarterly. However, that amount of Chinese FDI sent abroad still accounts for the 6th highest Chinese foreign FDI received by any country in 2006 (excluding tax havens).

Russia may have the largest FDI ODI (Outward Directed Investments) of the BRIC (Brazil, Russia, India, and China) countries– valued at $50 billion+ in 2007, but its FDI has yet to have a large positive effect on foreign countries. Russia’s largest investment targets are located in Cyprus (receiving 37.5%), Luxembourg (26.7%), and the United States (6.7%). Of Russia’s allies in the CIS (Commonwealth of Independent States), Armenia and Belarus receive the most investment according to Deutsche Bank, but it would be difficult to argue that either of those countries has become an economic success due to Russian development.

A later analysis will examine the Russian/China energy trade, but the data for Russia/China business and resource trade, according to Deutsche Bank and a China-Eurasia Forum Quarterly report by Libor Krkoska and Yevgenia Korniyenko, indicates Russia’s culture of bureaucratic inertia will disrupt development. Also, Russia’s corrupt business practices have gotten worse, according to Freedom House, which might stunt further development. 

Russia has a long way to go before it can become a viable partner for China, and historical tensions between the countries might yet preclude strong agreement and alliances in the next five to ten years.

RECIPE FOR SUCCESS?

Shapiro lauds slashing corporate tax rates [as was done to good effect in Sweden and Ireland] (33) and convincing workers that “their interest lies in accepting fewer benefits and less economic security from their governments” (32), since “the American and Chinese approaches can sustain themselves over the next generation, while Japan and Europe’s systems cannot” (34).

Shapiro points out that from 1990 to 2006 “the global market share of European manufacturers shrank from 18.5% to just over 14%, while the global market held by American companies rose from 21 to 23%” (183). He cites that the key to growth– he gives Ireland as an example [especially due to its IT and Pharmaceutical industry successes] (201)– is to “open its economy to foreign competition and investment.”

“In 2006, Europe’s major countries accounted for just 10% of world GDP, less than 1/2 of what America produced that year” (176).

Shapiro spends the rest of the book discussing challenges in health care, energy, and the environment, lamenting a possible doomsday-scenario of economic collapse in China coming on $150 a barrel oil. We’ll see how that plays out. China’s Oil Price Freeze discussed some of the tensions threatening to emerge in response to China’s insistence on keeping energy prices stuck at November 2007 levels, and Consequences of China’s Oil Price Hike discussed tensions that might emerge now that China has raised some energy prices.

CONCLUSION

Futurecast offers little new specific for China-watchers and makes a few slightly dubious surface-assertions in regards to Chinese strengths and weaknesses, but that has to be expected from a broad overview. The book is easy to read, and doesn’t make any glaring errors.

If one is reading for a broad and ambitious look at future geopolitics two to ten years down the line, this book is a good read. I would recommend it to a person who is generally interested in China, or anyone who wants to feel happy about the United States’ place in the world community since this book does an excellent job of Pro-America cheerleading.

24 June, 2008 Posted by | Book Review, China Diplomacy, China Future | , , , , , , , , , , , | 1 Comment

Off The Shelf: Futurecast 2020 (Part I)

Futurecast: 2020 argues that only the United States and China will be considered great economic and political powers in 10 to 20 years. Its author, Robert Shapiro (a former Clinton Administration advisor) reaches this conclusion primarily by arguments based on demographics (aging in countries), obligations (European social safety nets will drain their coffers and ability to produce), innovation (Shapiro argues America can uniquely benefit), and business development (Shapiro argues both China and the United States possess good capabilities and regulatory environments).

I will discuss Shapiro’s most provocative statements in an analysis of what the future holds for China and the United States in relation to the rest of the world.

MILITARY

* Shapiro gives a possible warning of future confrontation between China and the US. “Even deep economic relationships do not preclude wars between the parties, once they’re each other’s near peers in military power.” (20) For example, in the “calm” before WWI, world trade was at an all-time high. and yet that trade led to war, and an arms race rather than peace.

China’s military spending budget has increased by double [percentage] digits for 20 consecutive years, this year rising nearly 18% to at least $59.6 billion (There are many estimates of the precise amount of spending since China does not calculate its military spending the same way that other countries tend to calculate theirs; but the important thing is that China is spending AT LEAST this much.)

However, it is unlikely, even given current levels of assumed spending, that China will be able to challenge the US even on a regional scale until around the year 2020 (Zalmay Khalizad discusses it HERE; but Mulvenon, Cordesman of the CSIS, and others have discussed China’s military force at length in full-length books).

But being directly able to match the US tank for tank may not matter since the Chinese are investing a lot in asymmetrical warfare. The most famous book on China’s asymmetrical and military policy is China Debates the Future Security Environment, by Michael Pillsbury. It’s a little out of date (from 2000), but it’s free on the Internet so it is easy to check out. (A slightly alarmist report on Chinese cyberterror from The Guardian is also available.)

ECONOMIC SUCCESS

Shapiro argues that “demographics and globalization will intensify economic inequality almost everywhere” (22); but that the societies with the greatest inequalities will likely be the richest, like China and the United States, since globalization allows returns on investment to rise (22).

Shapiro discusses how China and the United States are best positioned to take advantage of globalization due to their “freewheeling market capitalism” (16) which allows for innovation and can help the countries escape the burdens of aging and social-welfare systems Shapiro argues will plague Europe and lead to a “geopolitical marginalization” (21)… since “Europe has steadily cut its defense capacities and commitments…[it is] likely to be preoccupied politically with the fierce domestic conflicts certain to erupt when that slow growth collides with the tax hikes and spending cuts requried to keep their pension and health-care systems going (21).

Due to these declines, Shapiro argues, Europe will by necessity grow closer to United States whose military can protect Europe and help ensure its steady flow of raw material resources.

OTHER DEMOGRAPHICS

Shapiro touches on China’s aging; but notes that its large population, if properly educated, can mitigate most of the troublesome effects of a declining workforce. Even if China grays, its population is not expected to begin aging until the late 2010s, and at least through the early 2020s, around 75% of the population will be working-age or younger.

Another factor explaining why China’s aging will not necessarily hobble the country, is that unlike most other aging countries; Japan, the US, and Europe, China has not yet reduced the size of its agricultural industy– it still represents around 43% of their labor force. China still has a long way to go on reducing agricultural employment and retooling that employment into more productive industries. Therefore, in terms of raw productive ability, China will be able to benefit from a continually expanding industrial-production pool as more agricultural workers shift into city employment.

However, Shapiro avoids a detailed discussion on China’s environmental or health problems. Considering how he allots much discussion arguing that China and America are strong countries with strong economies in part because they lack national health care, this is a bit confusing.

China’s environmental problems have gradually worsened; 16 of their cities are listed as the 20 most polluted in the world. The preponderance of pollution will lead to more chronic conditions, and more lost-days at work which can cut into productivity. When I lived in Beijing, every year we suffered a few “purple” level pollution days where the air quality index rated worse than 500 parts particulate matter pollution- the highest level measured.

INFRASTRUCTURE

Shapiro discusses the usual things about China developing massive amounts of infrastructure and still having a long way to grow. As a World Bank Report stated in regards to China’s massive infrastructure investments: “Annual capital expenditures for transport, electricity, piped gas, telecommunications, urban water supply and sanitation increased steadily from US$39 billion in 1994, to US$88 billion in 1998, and to US$123 billion (about 8.7% of GDP) in 2003.”

Infrastructure needs to be constructed rapidly to encourage continual expansion of China’s economy. According to the Economist “logistics costs… amount to 18% of GDP in China compared with 10% in America” and “between 2006 and 2010 $200 billion is expected to be invested in railways alone, four times more than in the previous five years. ” It will be interesting to see if China’s government can maintain those levels of investment, given the current global recession.

DIPLOMACY

Shapiro then explains how China’s growth and increasing relevance in international trade and resource transfers will encourage new diplomatic alignments. Shapiro argues that a China and Europe alliance or a China and Russia alliance could pressure America and cause it and its world financial institutions to alter policies (40).

PART II will discuss Russia and India, Recipies for Success, and Conclusions on the book.

Feel free to sound off in the Comments section of this post for your opinions on the book and my analysis.

Futurecast 2020

by: Robert J. Shapiro (Undersecretary of Commerce 1998-2001, Senior economic advisor to the Clinton, Gore, and Kerry Campaigns, cofounder of SONECON LLC.) 2007.

23 June, 2008 Posted by | Book Review, China Environment/Health, China Future | , , , , , , , , , , | 2 Comments

Off the Shelf: China’s Economic Influence

The April 2008 CRS American government report I mentioned before in “China’s Soft Power” dredged up some good statistical data regarding China’s economic reach. However, the CRS analysis fell flat by not including Hong Kong’s FDI in the full calculation of China’s FDI and influence on foreign countries.  

China’s 2007 stock of FDI abroad is either $93.7 billion (according to the CIA), or $73.3 billion (according to the report; CRS, 22) or $292 billion (according to UNCTAD); but if you add Hong Kong there is an additional $534 billion or $769 billion in FDI stocks to be accounted (according to the CIA and UNCTAD respectively), or $43 billion in same-year 2006 FDI flows, according to UNCTAD.

Because Hong Kong’s FDI is omitted, the CRS report understates much of China’s world-wide influence.

Of course, much of Hong Kong’s $534 billion in FDI is reinvested back in the mainland.

Many factors can be evaluated when considering China’s worldwide economic influence. Here, I highlight two main ideas touched on in the report; China’ Foreign Trade, and its FDI.

CHINA TRADE

China’s main trading strengths are with countries bordering it such as Japan, South Korea, Central Asia, ASEAN, and Pacific Island Countries. Its total trade with Pacific Island Countries was $754 million in 2006, compared to $404 million by the United States, $3.7 billion by Australia, $918 million by Japan, and $832 million by the EU-25 countries (CRS, 36).

“[I]n 2007, China’s total trade with ASEAN was 17% larger than total U.S. trade ($200.6 billion versus $171.7 billion). China’s exports to ASEAN in 2007 were 55.6%” greater than United States’ exports to the region, while U.S. imports from ASEAN were 2.6% greater than China’s imports (CRS, 91).

“Based on the fact that China’s imports from ASEAN in 2007 grew by 21.1% (over the previous year), versus 12.4% for the United States, it is likely that China’s imports from ASEAN will be larger than U.S. imports [from the region] in 2008. China ran a $14.1 billion trade deficit with ASEAN, while the U.S. trade deficit totaled $50.6 billion” (CRS, 91).

China’s trade with Japan was $210.7 billion in 2006; Japan’s amount of trade with the US was $213.5. The trend in trade indicates China is probably now Japan’s number one trading partner (CRS, 43). Japan receives 9.5% of China’s exports.

China’s trade was greater that US trade with South Korea in 2006. China-SK had $118.1 billion in bilateral commerce, compared to America’s $76.9 billion in bilateral commerce with the peninsular state (CRS, 44). China’s trade with the country is rapidly accelerating and currently accounts for 4.6% of China’s exports (CRS, 45).

China’s trade with Central Asia was $12 billion in 2006 (CRS, 71), accounting for 1.34% of Chinese export trade (CRS, 72). In 2003, US trade with Central Asia amounted to $1 billion. In 2006, the United States imported $1.3 billion from the 5 Central Asian states and exported around $927 million to them (Data from HERE, HERE, HERE), HERE, and HERE). for a total of around $2.3 billion; dwarfed by China’s trade with the region.

WHERE THE UNITED STATES’ TRADE INFLUENCE REMAINS STRONG

In contrast, the United States still trades more with Latin America and Africa, two regions often identified as places where China might eventually challenge the United States’ trade dominance.

“China’s overall trade with LAC [Latin American Countries] grew to about $70 billion in 2006, representing just 4% of its overall trade. In comparison, U.S. trade with Latin America and the Caribbean amounted to almost $555 billion in 2006″ (CRS, 26).

“From 2001–2006, the absolute value of U.S. goods trade with Africa, at $71 billion, was greater than that of Sino-African trade, but Chinese-African trade grew at a much faster rate than U.S.-African trade.” Then again, it had a longer way to rise. “China’s total trade with sub-Saharan Africa rose from $8.92 billion to $45.35 billion in that period, an increase of 409%, as compared to a 152% rise in total U.S.-African trade” (CRS, 119).

WHAT EFFECT DOES CHINA’S RISING TRADE HAVE?

China’s growing influence in trade with its Asian neighbors could lead to future trade embargoes and conflicts such as the 2001 mushroom/automobile trade war between China and Japan. This began when Japan placed a tariff on Chinese leeks and mushrooms. In return, the Chinese imposed oppressively high tariffs on Japanese cars, mobile phones, and air conditioners. The Japanese eventually backed off. It is important to note, however, that the mushroom trade war happened before full Chinese ascension to the WTO. Now that China is part of the WTO (since November 2001) and greater integrated into the world financial system, such trade wars might be less likely to occur.

US-CHINA TRADE & THE TRADE DEFICIT

The United States received, in 2006, 21% of China’s exports (CRS, 45). “In 2007 the United States incurred a merchandise trade deficit of $256 billion with China, $83 billion with Japan, and $13 billion with South Korea (43% of the total U.S. trade deficit of $816 billion) (CRS, 60).

CHINA FDI

As earlier noted; estimates of China’s FDI investments in foreign countries might be incorrect due to non-inclusion of Hong Kong FDI numbers into the CRS report.

From existing data, it appears China’s FDI sent abroad is relatively low.

“From 2002–2006, U.S. FDI flows to ASEAN were $13.7 billion (or 8.0% of total), making the United States ASEAN’s 4th largest source for FDI. Over this period, China’s FDI totaled $2.3 billion or 1.3% of total, making China the 10th overall source of ASEAN’s FDI” (CRS, 95). “The United States remains ASEAN’s 2nd largest trading partner (China ranks 5th) and its 4th largest source of foreign direct investment (China ranks 10th)” (CRS, 102).

“While China’s reported cumulative stock of FDI in [Latin America] amounted to $11.5 billion in 2005, the cumulative stock of U.S. FDI in the region amounted to $366 billion in 2005, and grew to $403 billion by 2006″ (CRS, 26).

Considering the difficulties of analysis; rather than getting into a deeper blow-by-blow analysis of China’s FDI around the world, I’ll point out an interesting point.

According to the UN; US and Japan’s year 2005 FDI into China accounted for $95 billion, which is $22 billion more than China’s total 2006 FDI invested everywhere in the world (CRS, 47). Using those numbers, it still appears that foreigners are developing and affecting China more than China is developing and affecting the world.

At least that’s how it is for now, anyway.

CONCLUSION

There’s a lot more to read in the US Government report, from a discussion on Sino-Japanese-Korean relations, to analyses of how the Taiwan issue affects international relations and of China’s energy diplomacy and the SCO (Shanghai Cooperation Organization), to in-depth discussion of international loans and trading and nuanced explanations of where China’s FDI is heading and why.

Despite its flaws, the report is still well worth checking out.

* Also of Interest: UNCTAD’s World Investment Report: 2006

17 June, 2008 Posted by | Book Review, China Diplomacy, China Economy, China Future | , , , , , , , , , , , | Leave a comment

Off the Shelf: China and Murphy’s “Are We Rome?”

Off the Shelf: An in-depth look at something I am reading.

Are We Rome? (2007)
-Cullen Murphy, managing editor of the Atlantic Monthly.

Murphy’s examination of how America’s experience of “empire” compares to Rome’s empire can lead some to question if America is in danger of crumbling? This led me to examine causes for worry that American hegemony might be at an end, and to see whether or not China possessed some of America’s strengths and weaknesses.

Murphy describes traits of successful empires. He notes the importance of technology and innovation, and the spread of culture. He complains about political patronage, American exceptionalism (Manifest Destiny), and argues that privatization induces corruption and helped lead to Rome’s decline.

TECHNOLOGY/INNOVATION
Technology and innovation in China still lags behind that of many developed countries, Nicholas Lardy of the Brookings Institution would argue. Although patent applications are up and the number of college graduates continues to rise, the quality of the graduates is hampered due to less-than expert teachers. When programs increase enrollment five or tenfold in size within a decade, either more students are packed into a class, or less knowledgeable teachers are paraded onto a stage.

As of 2005, America and Japan lead the world in patents by a large margin. with 186,000 granted to Japanese, 135,000 to Americans, 64,000 to Koreans, and 21,000 (6th on the list) granted to the Chinese. In terms of Engineering graduates, in 2004 the US graduated 137,000 students with Bachelor’s in Engineering degrees; India graduated 112,000; and China, 354,106. “In terms of degrees awarded per one million citizens, the United States awarded 758 degrees; China, 497 degrees; and India, 199″ (National Science Teachers Association). Additionally, some “Engineers” graduated by China may be the equivalent of motor mechanics and industrial technicians (ibid).

However, 20-30 years down the line, after constructing a more robust learning supply-chain, China’s educational investment might begin to pay off significantly. According to the Economist; “By 2015 its research scientists and engineers may outnumber those of any other country. By 2020 it aims to spend a bigger share of its GDP on research and development (R&D) than the European Union.”

CULTURE/ASSIMILATION AND WEALTH DISTRIBUTION
Murphy claims America, like Rome, draws power from immigrants, but he notes that some places with high levels of multicultural variegation, such as California can become anarchic amalgams unless care is taken to instill a sense of civic responsibility and lower the wealth distribution differential.

Currently, the United States confronts rates of CEO pay at 430 to 1 where back in the 1960s they averaged of 25 to 1 of an average workers’ salary. The Ancient Romans suffered rates of 1000+ to 1. However, China also confronts a significant wealth distribution differential with a Gini coefficient only .03 points lower than the US’ (More Detail Here).

Indeed, the 2008 unrest in T*b*t can be partially attribuited to “unfair” Han Chinese exploitation of the region. The report, “No One Has the Liberty to Refuse“, written in June 2007, demonstrates how the 2008 protests originated for reasons other than alleged “cultural repression” (An Audio Clip is available HERE; A shorter article is HERE). Thousands of T*b*tans have been relocated into the cities, where they cannot find work, and where they compete with Han Chinese for jobs. Life has improved in T*b*t in the past decade, with an economic growth rate over 12% for “six consecutive years,” government-subsidized schooling and social programs. However, new Chinese immigrants whose numbers were buoyed by the 2006 rail line, have begun to culturally and economically colonize the under-developed region.

Immigration and tourism- seeing millions more than before the rail was opened- create a culture clash potentially much more deadly than the one in California forecasted by Murphy.

PATRONAGE
Murphy then complains about patronage through a focus on Pliny the Younger. He laments the appointments (suffragium) in the government based on connections in both ancient Rome and modern America.

However, as any scholar of China will be quick to note– China is notorious for the practice guanxi and an almost religious attraction to “patronage-like” associations based on friendship rather than efficiency. 

Ultimately, most, if not all countries suffer from overriding patronage; from Britain’s old boy’s clubs, to the French ecole class of Administrators, to America’s old Ivy League elite.

There is always a danger if patronage appointments are completely unaccountable; but disasters have a way of dismissing incompetent leaders. For example, Hurricane Katrina led to the downfall of Michael Brown, and China’s SARS crisis allowed Hu Jintao and Wen Jiabao to demonstrate courage and leadership by staying in Beijing during the crisis; while other leaders, notably members of Jiang Zemin’s clique,  left Beijing on trips to SARS-unaffected provinces. Arguably, Hu and Wen’s actions helped strengthen their political capital to the detriment of Jiang’s “Shanghai Gang” which has since seen members such as former Shanghai Party Boss Chen Liangyu sacked for corruption.

AMERICAN AND CHINESE EXCEPTIONALISM
The Middle Kingdom long enjoyed a position as the center of the East Asian world. Diplomats from as far as Vietnam and T*b*t would kowtow to the Emperor. This position changed after the 1860s and the Opium Wars. But now, the Middle Kingdom is trying to get back at the world’s center. China’s naval developments and interest in ports at Gwadar, involvement in the ASEAN+3 grouping, establishment of the SCO (Shanghai Cooperation Organization), and greater involvement in the UN peacekeeping operations demonstrate an increasing willingness of China to act internationally. [A forthcoming article will examine these assertions.]

PRIVATIZATION OF MILITARY/CORRUPTION/HOLLOWING OUT
Murphy also discusses how contractors and privatization of American military are hollowing out America’s defensive spirit in much the same way mercenary barbarians contributed to Rome’s downfall. The contractors’ training and standards of justice are allegedly dissimilar from those upheld by the American military.

China seems to escape the problem faced by America; its cyberterrorism/cybersecurity is controlled tightly by the government. In contrast, even United States’ Government’s systems are outsourced to private companies- thus the spat over a proposed Huawei/3M merger.

China’s military problem appears to be not that it outsources its military development, but that it doesn’t have good enough internal development. C4I and equipment integration, as discussed in books on China’s military by James Mulvenon and David Shambaugh, are better in America and other developed countries. China also purchases many ships and airplanes from Russia instead of through internal construction. As China develops its home defense industry, this problem might dissipate.

CONCLUSION

Ultimately, Murphy presented an intriguing historical comparison of American “empire” and Roman. He identifies weak points in America’s government and military and raises calls for concern. But although China lacks several of America’s weaknesses, it still confronts remarkably similar obstacles and has many of its own challenges to overcome.

Murphy’s book is recommended for general readers, and for those interested in America’s position in the world. It never mentions China, but in an internationally anarchic system of diplomacy, the loss of power for America might well be a zero-sum game that gives China a leg up, so it is interesting to analyze the possibilities.

7 June, 2008 Posted by | Book Review, China Future, China Technology | , , , , , , , , , , , , | Leave a comment

   

Follow

Get every new post delivered to your Inbox.

Join 104 other followers