Below is text of address delivered at Pitzer College
Thank you for coming to hear what I have to say about China and about the U.S. China bilateral relations. As a business consultant, I have been going to China regularly for the last 30 years, essentially from the beginning of China’s economic reform. My first personal visit to China actually took place in 1974, during the height of the Great Cultural Revolution. I certainly have enjoyed a ringside seat watching China’s amazing transition and transformation during this period.
In my early trips into China, I would be interviewed by the CIA and the FBI upon my return. They would want to know whom I saw, what we talked about and so on. I was happy to tell them all I knew because from the start, I thought I had a mission, which was to explain China to Americans and America to the Chinese. I felt that I was in the position to act as a bridge between the two countries that meant the most to me.
Thirty years later, some things have not changed much. In particular, there remains a lot about China that America does not understand and I continue to feel that the role of a cultural intermediary is as relevant as ever. So it is today that I am here to describe and explain some things about China that America needs to know and understand--such understanding being crucial to the development of a healthy bilateral relationship. As the two arguably most powerful nations and economies in the world, a strong positive bilateral relationship is important not only to the peoples of the two countries but to a peaceful world.
I might also add that given the recent financial turmoil on Wall Street and the increasing importance of China, holding close to $1 trillion or our treasury notes and government debt, it becomes increasing relevant that we develop a measure of respect for someone that is likely to end up owning a bit of America in exchange for bailing us of out of our financial excesses.
My talk today is not about western media distortion of China or the biases of western politicians. If it is, I would be on the podium for hours. What I hope to do is to take you outside of your customary American frame of reference. I would like to present some data and thoughts that would automatically counter many of the preconceptions of China that you have grown up with. To paraphrase Secretary Paulson from his Foreign Affairs article about China, I want to help you see the country as it actually is, not as many Americans imagine it to be. If I can persuade you to rethink about China, I would feel that I have accomplished something worthwhile today.
Olympics Aftermath
Let’s start with the Olympics. By most accounts, the Beijing Olympics was an overwhelming success. Certainly, the people of China, and for that matter most of the overseas ethnic Chinese, are rightfully proud of the number of gold and medals the Chinese athletes won. But frankly, that was not the most significant achievement in my mind. Considering that Australia won 42 medals with a population of 21 million, that’s two medals for every million population. To attain parity on a per capita basis, the U.S. would have to win more than five times their actual tally. For China, they would have to sweep every event and then supplement with plenty of knock-offs to meet that standard. On the other hand, if one were to measure achievement against the level of economic development, Ethiopia, Jamaica and Georgia would come in first, second and third.
There are many ways to slice and dice the Olympic outcome, but more important in my mind, is that billions of people in the world have tuned in and caught a glimpse of today’s China for possibly their first time without the filter of the western media or political leaders or the bias of some religious cult. I thought NBC did a good job of introducing some of China’s culture to their viewing audience, particularly short vignettes such as Shaolin martial arts by Mary Carillo and hand pulled noodles by Martin Yan. I was also impressed with GE and their commercials specially done just for the Olympics—sort of like commercials geared just for the Super Bowls--using authentic Chinese backdrops and storylines to make their point.
Despite all the anti Olympic torch rallies and sentiments advocating another Olympic boycott, some even go so far as to call this the “genocide Olympics,” a record number of 100 heads of state representing 80 different countries attended the opening ceremony. They did not witness any slaughter of innocents but did see that the Chinese could really put on a show and raised the bar that likely will stand for many future Olympics. I am glad that Mr. Steven Spielberg was not involved so as not to confuse the minds of the viewers as to who contributed what. The visitors left after seeing a virtually flawless execution of a 16-day event. The 10,000 athletes from around world went home with, I am sure, memories to last a life time.
The 30,000 some journalists found different perspectives and events to write about and most, by and large, will further understanding between the East and West. The worst example of going out of his way to look for dirt under the carpet, that I happened to have read, was a near hysteric blog on ESPN accusing Beijing of a cover-up because a building under construction was draped by a beautifully decorated plastic sheet to hide the construction in progress underneath. Why an attempt to present a more pleasant public appearance became an excuse to blacken China is something I do not understand.
The Chinese Spy that Never Was
How many of you read Physics Today regularly? In the September issue, there is an article written by the former Secretary of Air Force talking about the period in the late ‘80s and early ‘90s when Chinese scientists were attending scientific conferences in the U.S. As the testimony at the Cox Committee hearing later revealed, the American authorities regarded these attendances as intelligence gathering on the part of the Chinese. Actually, just opposite was going on, the visitors, according to Thomas Reed, the author, was trying to find ways to let America know what China was doing in nuclear weapon development.
These visitors found Danny Stillman, a nuclear weapon scientist at Los Alamos who was charged with gathering intelligence on China’s weapon development—a polite way of saying that he was a spy. Stillman was eager to meet and talk to the Chinese visitors, who in turn invited Stillman to visit China. Through a series of visits over months to various secret facilities including the nuclear testing grounds, Stillman came away thoroughly impressed with what China had done. He put all his trip reports together into a cohesive tome and sought permission to publish his book. The U.S. government said no.
Stillman’s timing was bad. The Congressional Committee headed by then Representative Christopher Cox had just concluded that America was running wild with Chinese spies, that every Chinese company was a front to steal secrets from America. And then Dr. Wen Ho Lee was identified as the one who leaked W-88 multi-head missile technology to China. It would have contradicted all that anti-China rhetoric if Stillman’s book were to come out saying that China detonated their first atomic bomb in 1964 and in a mere 32 months their first H-bomb and launched their first unmanned satellite in 1970. The unacceptable conclusion would have been that China has independently developed their first class nuclear weaponry all along--all of it having taken place well before Nixon went to China in 1972 and before exchanges were taking place between the two countries. Stillman’s book had to be suppressed as it would have taken the hot air out of the hysterical China bashing balloon floating around Washington from 1998 to 2000.
Why, you might ask, did the Chinese want to expose their nuclear secrets to the U.S.? I think the answer is very simple. How can you have a nuclear deterrence if the other side doesn’t know that you have the capability to deter? China has consistently declined to join the arms race to see who can pile up the larger heap of ever more sophisticated arms. But once in a while, I think, China feels that Washington and Pentagon need to be updated and be informed that China has a credible 2nd strike capability to retaliate and enter that data into their calculations when they plot the course to world domination. Of course, this leads to the question of whether the DoD’s current expanding defense budget makes any sense, which we can discuss in the Q&A if you wish.
America’s Racism
Personally I am acutely aware of the historic racial bias of the American authorities towards the ethnic Chinese in America as exemplified by the Congressional hearings and by the case of Wen Ho Lee, where after 9 months of solitary confinement, all the charges against him were dropped except for one, and that was for not following lab procedure and downloading files from office computer to home computer. Just think, nine months of solitary confinement for downloading computer files against procedure. The special agent of the FBI involved in this case had to admit in court that he lied. The presiding judge apologized to Dr. Lee on behalf of the government for their misconduct. It had to be one of the more embarrassing chapters of American justice.
Lest you think the Wen Ho Lee case was an isolated aberration, it is not. I live in Silicon Valley and there are frequent cases of miscarriage of justice and official intimidation. Recently, there was a Bill Chen originally from China who was appointed sales manager to sell vibration tables to China. The government accused him of selling the tables to a missile building facility when his sales report indicated that they went to a locomotive factory. Originally his employer supported his defense but then the government quietly informed the company that if they plan to sell any more tables to the American Air Force, they better withdraw their support. The company had to fire him. He was in limbo for some time before the government dropped all charges. The last public statement he made to the local press last year was that his career was ruined and he was taking his family back to China.
Just earlier this year, there was a case involving another PhD whose expertise was in agriculture remote sensing, involving the use of satellite data to predict crop harvest, and had been in this country for 20 years. He came to the U.S. from China to study for his PhD. Most recently he worked for a contract research organization analyzing publicly available satellite data to quantify global climate changes for NASA at its facility in Mountain View. His work had no connection to national security. He even got clearance for his ID badge to enter NASA at will. Then the FBI came to interview him, followed by a lie detector test and then two more interviews, at the end of which he was escorted off the premises and fired. He never could figure out why the FBI came to see him and on what grounds he was dismissed. The only explanation I could offer him was that the special-agent-in-charge of Silicon Valley had told BBC in a public interview that the valley was crawling with spies from China and that every working Chinese was a potential security risk.
There are, of course, costs associated with the national practice of racial profiling. Let me ask you, which universities and colleges do you think, have sent the most number of graduates on to obtain a doctorate degree in America? If you guess UC Berkeley, you would be close but incorrect. According to National Science Foundation’s latest compilation, in 2006, the latest year of the survey, the two schools that contributed the most number of Bachelor degree holders that went on to earn a doctorate degree in the United States (in science or engineering) was Tsinghua and Beijing University. This is the first time in history where two Chinese institutions of higher learning out supplied the American universities. Berkeley was third. Over the period of 1999 to 2006, over 26 thousand doctorates earned their undergraduate degrees from China. For 2006, the latest year reported, for every 6 that got their undergraduate training from the U.S., one more came from China. So the question to ponder is this: Given the racist attitudes that prevail, how many of these PhD’s would remain in the U.S. after getting their degree, and of those that remain how many would risk their careers by working in a national laboratory?
Shipping Jobs Overseas
This bias against ethnic Chinese in this country has been around since the 19th century. This prejudice is tied to how we feel about China which is why I personally want to do what I can to counter the China bashing rhetoric by our political leaders. The first one I would like to tackle is the question of so-called “shipping jobs overseas.” According to the National Association of Manufacturers, manufacturing from the U.S. contributes 22% of the total global output with a workforce of about 14 million, by far the leader of the world. China, the rising manufacturing power that we love to demonize, contributes just 8% and with a workforce as large as 100 million if the migrant workers in rural industries are included--22% with 14 million versus 8% with 100 million, that is roughly 20 fold difference in productivity. It should immediately become obvious that there is no way that the American worker would be willing to take a humongous pay cut to do the low paying jobs being done in China. The Chinese might wish to move up the value chain and take over the American job but their productivity (and capability) has a long way to go. The next time you hear about shipping jobs overseas, you should challenge the speaker not to sprout nonsense.
China’s emergence in becoming the global factory really began in earnest when China entered WTO (World Trade Organization) in 2001. In order to conform to the stipulations of membership, China had to stop subsidizing inefficient, state-owned enterprises and let some of them go belly up. They knew that the price to be paid was to put around 30 million of their workers out on the streets. Led by Premier Zhu Rongji, China accepted the pain because they saw the long term benefits of competing in the global market. China made the right choice and hopefully America will also have the courage to make the hard decisions necessary to overcome their current economic dilemma. Blaming China is not going to cut it.
China, the Polluter
Now, China’s rapid economic development does come at a price and the most serious would be the environmental cost. In recent weeks, lambasting China for runaway pollution damage has become a fashionable diatribe for the politicians. They seem offended that China is soon going to overtake us as the biggest polluter in the world. Our political leaders say: “How dare the Chinese insist that we take the lead in pollution abatement before they, India and the rest of developing countries take corrective measures?”
I used to think well, the politicians have a point there. But then a July 31, 2008 press release from the The Climate Group caught my attention. The lead paragraph of this press release said. “China is already the world’s leading renewable energy producer and is over taking more developed economies in the exploiting valuable economic opportunities, creating green collar jobs and leading development of critical low carbon technologies.” The report goes on to say that China has the advantage of low cost, a clear policy framework, a dynamic and entrepreneurial business environment and plenty of abatement opportunities. I must admit until I read the report, I didn't know that China is already a leader in the Green revolution. That China is already a world leader in the manufacture of solar panels and wind turbines. That China is introducing fuel efficiency standards for cars which are 40% higher than those in the U.S. Forty percent! While Washington continues to talk about going green, China has been doing something about it. I have no expertise on China’s effort to go green and I was really surprised by the strong definitive statements from this non-profit organization, organized in 2004 in multiple countries to promote a green and clean earth. However, in recent separate visits to Beijing, my friends and I can testify to seeing blue skies, so there must be something to this report.
Human Rights & Democracy
Now let’s talk about human rights and democracy. First, I find it ironic that the country who perpetrated Abu Ghraib, Guantanamo and the fine art of waterboarding should be the leading critic of others facing their own set of human rights challenges. I believe that at the very least, the very visible and prompt manner that authorities came to the rescue of the unfortunate victims of the giant earthquake in Sichuan showed to the world that the Chinese government is not a callous body but cares as much about its people as any responsible government.
There are at least 56 ethnic groups living in peaceful co-existence inside China. Official policies go out of their way to favor the 55 ethnic minorities such as no single child restrictions and a Chinese version of affirmative action that makes it easier for minorities to get a higher education. During my travels inside China, I have met folks that are half Han and half another minority. Invariably when they fill out their residence registration (hukou), they claim to be the minority and not a Han majority in order to take advantage of the more favorable conditions. I cannot recall ever talking to a Chinese citizen that disparages another because of the other person’s ethnicity. Conversely, every minority person will openly admit that they belong to Bai, or Miao, or Korean, or Hui, or Mongolian, or Tibetan, or whatever minority in the course of normal conversation. They can be proud of who they are and do not feel that they need to hide their ethnic identity.
We do blanch at how quickly China carried out the executions of the condemned. It’s sort of “one strike and you’re out.” But it is not our place to condone or condemn China’s administration of justice. They have a huge population to deal with and how to maintain order and stability in such a society is beyond our American experience and expertise. Human rights abuses abound in China, such as children in sweat shops, slave labor camps, tainted blood transfusions, toxic baby formulas and so on. These are appalling situations, but it’s important to bear in mind that the Chinese government is combating the problems and not condoning them—no more than the U.S. government condoning many of the human right abuses in this country.
The city of Shenzhen bordering Hong Kong, which a quarter of a century ago was nothing more than rice paddies and fishing boats, has been the greatest experiment since China launched its reform. Up to now, the reform is most visible economically, but they have just announced that the mayor will be the first of China’s major cities to be elected and not appointed. This is a major step for China.
Chinese officials have been talking about democracy even back in Mao days but always within a single political party and not in a pluralistic framework. We Americans have trouble understanding the seeming contradiction of a democracy functioning within a single party rule. We are befuddled, I think, partly because we are accustomed to associating exercise of democracy with serious fundraising and that money is what makes democracy go around.
But there is something to be said about the Chinese system of governing. Leaders are judged and promoted based on the merits of their past performance. They are tested every step along the way. They rise to the top, not dependent on their lineage and on their cronies and public persona. In their selection process, the candidate who knows how to stay low key and keep a low profile (di diao in Chinese) is more likely to be promoted over the handsome, flamboyant and dynamic orator. These promotions came not because of unilateral decisions of a strong man but through consensus, compromise and horse trading between various factions.
China’s Foreign Policy
China’s foreign policy is also diametrically different from the U.S. China has insisted on non-interference of the internal affairs and non-infringement of the sovereignty of another country and to work within the confines of the United Nations. They have contributed troops and police in 13 of 17 on-going UN Peacekeeping operations. Since 1990, China has contributed 9000 peacekeepers in 22 UN operations, more than the combined total of the other four permanent members of the Security Council. As of the end of 2007, China has exercised its veto power on the Security Council a total of 6 times since they joined that body. During that same period, USSR/Russia cast 123 vetoes, the U.S. 80 times, UK 32 and France 18.
I would like to describe just one example of China’s foreign policy based on the exercise of soft power and on the principle of mutual benefit. About a year ago, China signed a deal with Congo to work on infrastructure projects in accordance with the Congo government’s priorities, which were water, electricity, education, health and transportation. The total cost will exceed $9 billion, far more than Congo’s annual budget of $1.3 billion. To pay for the infrastructure investment, China formed a JV with Congo to extract copper, nickel and cobalt, a $3 billion investment. Presumably, the Congo side will pay for their share of the investment with their share of the extracted minerals. Other parts of the deal include technology transfer and training of Congolese staff, work on social welfare and environment and subcontracting certain work to local Congolese companies.
The deal is neither colonial exploitation nor charity to a destitute developing nation. China is not telling the Congo government how to run their country and make no judgment on whether the government is to their liking. Instead, they just structured a win-win arrangement that will make a difference in Congo quickly. The World Bank considers Congo one of the worst countries to conduct business. So the success of this cooperation is not assured. Hopefully the Congolese people will soon see and reap the benefits of this outcome.
The West likes to hold China responsible for Darfur. The premise seems to be that China is doing business with the Sudan government and Sudan government is using the revenue to commit genocide in Darfur. But China is not the only country doing a lot of business in Sudan. India, Japan and Russia are also major players. Furthermore, many years before China was involved in Sudan, the U.S. was there. The CIA backed the other faction and when that faction did not win control of the government, conflict resulted which gradually moved to the Darfur region. Needless to say, conflict takes two opposing parties, in this case the Sudanese government and the rebel faction. Since we Americans are backing the rebels, the government must be the bad guys. Just ask Mia Farrow.
At least last year, China was able persuade the Sudan government to allow a 20,000 strong UN-AU peace-keeping force into the Darfur region, and China took the lead in contributing peace keepers to the force. Unfortunately the force has not been effective, in part because other UN member and African nations have been slow to contribute their share of personnel. Everybody bears some responsibility for the tragedy that is Darfur, it is too easy just to fault China.
I would like to make a brief comment about Taiwan and Tibet so that we can move on to the Q&A, which is my favorite part of the program.
Taiwan & China
Taiwan has been economically integrated with the mainland for well over a decade. Taiwan is either the largest or second largest source of foreign direct investment in China. Entrepreneurs from Taiwan have made millions, and at least one billionaire, from China. Today, over one million Taiwanese live and work in China. Taiwan’s productizing expertise and understanding of the world market coupled with China’s manufacturing prowess has been a powerful amalgamation of complementary strengths. Taiwan’s early factories in China served as the foundation of China’s manufacturing strength. In turn, the components and sub-assemblies shipped from Taiwan across the straits for final assembly every year has earned Taiwan a trade surplus that has always exceeded the total trade deficit incurred with the rest of the world. The common culture, language and ethnicity across the straits have made the synergy a natural outcome.
Unfortunately for Taiwan, the last eight year under President Chen Shui-bian has been an absolute disaster. He did not care about how to manage Taiwan’s comparative advantages. He was much too busy figuring out ways to line his and his family’s pockets. He and his immediate family are currently under investigation for various money laundering schemes, hidden Swiss accounts and bogus accounts in Singapore, the U.S. and who knows where. Having stepped down, Chen lost his presidential immunity and the investigators are hot after many leads. The Taiwan stock market seems unable to get out of the free fall as nervous investors wonder how many of the listed companies are waiting to be implicated by the radiating circle of wrongdoing. It didn’t help that the incoming president Ma Ying-jeou campaigned on the promise of a quick turn-around in Taiwan’s economy. The voters took him literally and expected miracles in his first 100 days in office, and he has not delivered. It is fair to assume that he did not anticipate a financial scandal as he stepped into office.
Tibet & China
The Dalai Lama is an excellent proselytizer for Lamaism, a form of Buddhism--based on animism--indigenous to Tibet. In the case of His Holiness, admirers in the West seem willing to overlook the principles of separation of church and state. No doubt he is the religious leader of a majority (but not all) of the Tibetans. As a secular leader, he represents perhaps the 5% of the population that formerly belonged to the privileged ruling class. In his days, the other 95% were serfs and had no rights whatsoever. Today, China has invested heavily in the infrastructure and offered every Tibetan the opportunity to an education and the freedom to make a decent living by the dint of his/her own efforts. When Dalai Lama ruled Tibet, the average life expectancy was not even 36 years of age, now it’s 67; still less than China’s national average but far better than what it was. Today, Dalai Lama cannot legitimately champion the human rights of the Tibetan masses that had no rights when he was the titular ruler. I am planning to visit Tibet next year. Perhaps I will have more to say about this matter then.
At the beginning of my talk, I proposed raising a perspective about China different from the mainstream to stimulate your interest. I hope I have been provocative enough for this audience. I don’t know why it is that China is the favorite punching bag in the West--sometimes, I refer China as the go to piƱata—but I believe this attitude is in for some adjustment. Let me quickly raise some other issues without elaboration to round out our topic.
• China has just put three astronauts in space along with a space walk and has plans to go to the moon. Heretofore, the U.S. has specifically excluded China from the space consortium membership that included Russia. Now NASA has been quietly meeting with China’s space officials about cooperation and leverage from technology that China has developed that NASA does not own. If we weren’t so darn sure that the Chinese needs to steal everything from us, we might have come to this realization sooner.
• China has steadfastly been buying U.S. treasury bills and agency notes and now owns close to $1 trillion of American debt. They have been buying even as Japan has been decreasing their holding for the very practical reason that the dollar is worth less and less. If you ask, the Treasury Department officials will privately admit to you that without China’s financial support, our economy would be in worse shape than it is.
• The Bush Administration made a hash of the relationship with North Korea. Without China’s assistance and leadership, the situation would be even more unstable than it is now.
• China built their Great Wall to keep foreigners out. They do not have the mentality or a history of conquering and occupying other countries. If that is the U.S. goal, China is unlikely to stand in the way. There is no need to regard China as an adversary so long we do not insist on their seeing everything our way.
• Just as China is rapidly becoming one of the most popular tourist destinations, China is also fast becoming the largest source of international tourists. Europeans will tell you that tourists from China are bigger spenders than Americans or Japanese. Until recently, we did not welcome tourists from China. This situation is changing to the potential benefit of our local economy.
• Just as China has become America’s largest source of foreign graduate students, China is also becoming a popular destination for foreign student. According to the most recent tally, China is the 6th most popular destination of the world for students going abroad. I hope some of you will take advantage study abroad opportunities to go to China and see for yourself. With more exchange of people will come improved mutual understanding and more acceptance of the other and different points of view and way of life. I believe this is important to the prospects of attaining world peace.
Now, I want to thank you for your attention and I welcome the opportunity to extend our discussion in any manner you, the audience would like. Please do allow me one small commercial. Much of what I presented today has been elaborated under various entries in my blog. I invite you to visit www.georgekoo.com and to share with others. I have also posted today’s speech on my blog if you wish to refer to anything I've said. Thank you.
Showing posts with label speeches. Show all posts
Showing posts with label speeches. Show all posts
Wednesday, October 1, 2008
Thursday, September 25, 2008
What America Needs to Know about China
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The text of this speech will be posted after October 2, 2008.
Tuesday, April 8, 2008
China's Economy is not a Zero-Sum
Invited speaker
Barbara & Richard M. Rosenberg Institute for East Asian Studies
Suffolk University, Boston, April 8, 2008
Ladies and Gentlemen,
It is a great honor to be an invited speaker at this inaugural conference of the Rosenberg Institute of East Asian Studies. I would like to add my personal congratulations to Barbara and Richard Rosenberg for their wisdom and leadership. Recent events strongly suggest that Americans and for that matter the people in the West do not understand East Asia and China. Yet students today better get to know about the cultures and peoples of East Asia, because such knowledge or lack of it will impact their careers. I applaud the Rosenberg’s attempt to rectify this deficiency by establishing this Institute.
I picked as the title for my talk, “China’s Economy is not a Zero Sum,” for a very specific reason. I am keenly aware of America’s rather dismal understanding of China and I hope that today I will have the opportunity to clear up some of the false premises about China, either through my prepared remarks or in the Q&A that follows. For the sake of clarity and continuity, I am eschewing the usual PowerPoint presentation, although the organizers have very kindly provided each of you with a set of hand-outs that back-up the factual part of my talk. The hand-outs are in the order of my talk.
My talk will touch on three inter-related issues. Namely, a description of today’s China economy, how China got to this point and what China is not and in doing so, take the opportunity to debunk some of the notions that are flat out wrong about China. As we enter into the heated presidential campaign, China appears to be once again the piƱata of choice, a convenient scapegoat for everything wrong in this world. I hope today to neutralize some of the ill wind or at least point out how silly some of the rhetoric about China can get.
It is important that I make a disclaimer at this point of my talk. Although I am an employee of Deloitte and proud to be part of that global firm and rely on the research material and resources from the firm, my remarks today are strictly my own and does not represent in any way the views of my employer.
By any measure, China’s economic growth over the last three decades has been nothing short of miraculous. Nothing of this scale and growth rate of economic expansion has happened in humankind’s recorded history of 5000 some years. China’s annual GDP is now around $3 trillion, having overtaken Germany (or will overtake Germany soon, the uncertainty is due in part to fluctuating exchange rates) to become the third largest in the world. In 2000, China was the 6th largest (just ahead of California) and ten years earlier in 1990, China was 19th just one place ahead of Taiwan, but with a population 50 times larger, and back in 1980 when China had just barely began its economic reform, China was in 30th place with an economy smaller than even Nigeria, Argentina and Iran. Since 1978, China’s economy has been doubling every seven years.
Since China joined WTO in December 2001, its exports have grown five fold in five years. By 2006, China overtook the U.S. as the second largest exporter of goods and is expected to surpass Germany sometime this year. In the early ‘90s, China’s foreign currency reserve was an anemic $20 billion or so. Today, China’s reserve has exceeded $1.5 trillion, an increase of 75 fold in roughly 15 years.
During this period, the lives of the Chinese people have significantly improved. Over 400 million have been lifted out of poverty. China now has more than 140 metropolitan areas with populations over 1 million. The portion of the population now living in urban areas is approaching 50% from around 20% when reform began in 1978. Just about every household, including those in the rural area now owns a TV set. There are over 500 million mobile phones in use, 220 million Internet users, 190 million PC owners.
Already China has more mobile phone and Internet users than the U.S. and closing fast in PC ownership. And these numbers are constantly changing because new wealth is constantly being created. China is the fastest growing market for Bentleys that sell for $3-400,000 each. China is overtaking the U.S. as the source of greatest number of tourists traveling abroad; China sent 35 million abroad in 2006. Furthermore, as Europeans in the hospitality business will tell you, the average spending per Chinese tourist is 2-3 times higher than the American tourist.
How did this come about? Ironically, while the rate of change in China seemed so breath taking, the fiscal policy behind it was cautious with emphasis on gradual, trial and error approach. The policy makers in Beijing took to heart Deng Xiaoping’s advice to carefully grope for the stones while crossing the river. After Deng returned to power in 1978, there have been three premiers that implemented policies of economic reform.
Under Zhao Ziyang, the first premier after Deng’s return, the communes were disbanded giving farmers the chance to determine their destiny by working harder and smarter. Some of the farmers turned to higher value added crops and were soon shipping tulips to Holland, Shiitake mushrooms to Japan and garlic to Gilroy California. Others turn to cottage industries and started collectively owned enterprises. These township and village enterprises were the first non-state owned sector to make a significant economic contribution. Economic experiments were carefully monitored by a dual track system. In other words, a local price in local currency the RMB and a higher price in foreign exchange certificates that that visiting tourists get when they convert their hard currency—not a system pleasing to visiting foreigners.
Zhu Rongji took over as the economic czar, though not formally as premier, shortly after the Tiananmen incident, the memory of which, by the way, has become indelible in the minds of the West, but virtually forgotten in China. He tamed the run away inflation when he first seized control of the national economy—he introduced the economic concept of hong guan tiao kong （å®č§č°ę§） (macroeconomic control) to the Chinese population for the first time. Following Deng Xiaoping’s edict that to get rich is glorious, he proceeded to open China wide to foreign direct investments. 1993 was the first year when registered FDI exceeded $30 billion for the year. It has been increasing steadily and leveling off recently at around $60 to $70 billion of new foreign investments every year. No other country other than the U.S. has attracted as much foreign investments.
By the time Zhu retired in 2003, China had entered the WTO and rapidly became the factory of the world. By the time Zhu’s successor Wen Jiaobao took over, a new set of challenges were awaiting. Huge gaps now exist between the wealthy and the poor, the urban and the rural, the coastal region and the interior. Theses gaps are sources of social tension. Ironically, universities have greatly increased their capacity and are now generating many more college graduates than ever. This too adds pressure to growing the economy and creating jobs to meet the expectations of the new graduates. And, I have to tell you that China is struggling to deal with all these challenges and will be doing so in years ahead.
The current premier Wen has a challenging balancing act. On the one hand he has to keep the economy growing to create jobs. On the other he is concerned with inflation. The economic figures for the first two months of this year show ominous signs of inflation as if to reinforce his worry. He has to deal with a strengthening RMB, which has appreciated about 16% since it was taken off the peg to the dollar in July 2005. As a consequence, multinational companies are beginning to look elsewhere to put in their next plant. He also has to worry about the $1.5 trillion of reserves he is holding in dollars that are eroding in value by the day. He is facing rising labor cost, rising energy cost, the need to bring environmental degradation under control and exert tighter enforcement of labor laws. He has just begun his second term of office and he has a tough job ahead of him.
So what did China do to be so successful so far? I would say three main factors.
First, ever since Deng Xiaoping returned to power, China has been stable and had an orderly transition of leadership. Increasingly the leaders are highly educated, all college graduates and some with advanced degrees. The Jiang/Zhu generation was all engineers. In the current generation, a few economists and lawyers have been allowed into the inner circle. More importantly, every leader has been tested and proven that they are capable each step along the way as they rose in rank. Sons and daughters of senior leaders sometimes do enjoy the inside track but only the capable ones end up in key positions while less capable or motivated are assigned to cream puff positions.
Secondly, since Deng, China has taken down the bamboo curtain of Mao days and opened the country to outside ideas. In the early 1980s, China invited Robert McNamara, then president of the World Bank into China. Beijing wanted not just World Bank financing but the rules and conditions that go with the financing. Beijing wanted the World Bank guidance as a framework to establish their own rules of governance for banking and financial institutions, a matter where they had no experience from their past as a planned economy to draw from. This is not your typical third world response where they just want the money but not the discipline and constraints. No wonder then that to this day, the World Bank considers China to be their most successful client. And, as a historical note of interest, the leader representing China in the working group with the World Bank was Zhu Rongji.
Another example of China’s openness is their entry into the WTO. There was a lot of resistance inside China to the idea of entering WTO. Many state-owned enterprises feared open competition in the global market and wanted to protect their domestic piece of the pie. Indeed in the transition, many inefficient factories were closed and more than 30 million jobs were lost. But Premier Zhu recognized that despite near term pain, in the long run, China needs to compete at the international level and forced the country into this multilateral agreement over the objections of many. He was right, of course. Sadly, the need to compete in the global market is a principle some of our political leaders seem to have forgotten.
Third important factor, I feel, is China’s willingness to invest in infrastructure--heavily so. From the first World Bank financing, China has placed high priority to infrastructure investments even when they did not have the funds from internally generated sources to do so. Consequently, China now has a highway network that rival the U.S. Interstate system. There was just one bridge across the mighty Yangtze River when my wife and I visited China in 1974. There are now so many that nobody bothers to keep track. I believe the most recent is around 18 miles long near the mouth of the river connecting Suzhou in the south to Nantong in the north. China has constructed at least two bridges that I know of over 20 miles long, over open water. The port handling facilities, airports, the train system (including the only one in the world to operate above 4000 meters in altitude), the power plants and grid, the telecommunications networks and Internet broadband are all constantly increasing in capacity and improving to keep up with demand. The Beijing government has been running deficits to keep their infrastructure in pace with their economic development and by and large they have been successful.
In summary, many developing countries are now looking at China as a model for development. What they see is a stable government that allows the leadership to concentrate their attention on economic development including prioritizing infrastructure projects and moving away from a planned economy to one where the market is the driver.
Of course, phenomenal as China’s economic growth has been, it has not been without some serious costs. In growing the economy, China unfortunately hewed to the traditional western model, which was pollute now and worried about it later. Anyone that have visited China over a period of years can see that this approach has devastated the quality of air around most cities and severely constrained the availability of already tight supply of clean water. More recently, one can spot occasional improvement in air quality—a friend of mine just returned from Beijing where she saw 5 continuous days of blue sky and she has changed her mind and decided to take her son to the Olympics--but China has a long ways to go. In pollution control and environment remediation, the West has a lot to offer and China represents a market of huge potential.
China is also in the process of rebuilding its tattered social safety net—a system that broke down in the transition from a planned economy to a free market. Their need to restore and improve their health care system is another very large market for outside technology and services. Their need to construct a sturdy national retirement pension plan represents opportunities for financial and macroeconomic experts from everywhere.
All in all, China economic development has been a win for its Asian neighbors that trade with China, for Latin America and Africa where most of China’s foreign investments have been going, and for the West that buys from China, because up to now, the prices have been stable and low and thus help keep us, the American consumer, in a style we are accustomed, all at a reasonable price. Not only China’s economy has not been a zero sum but has been an all around win.
Some critics of China accused China of predatory trade practices and frequently link China to the mercantilist policies of Japan. I see two entirely different models of external trade. The U.S. has been blaming China for its booming trade deficit. Let me break this down for you. In 1997, 27% of our trade deficit is from China while another 43% is from the rest of East Asia, (mainly from Japan, Korea, Taiwan and Singapore). That means a total of 70% of America’s trade deficit came from East Asia. In 2006, ten years later, China accounts for 28% while East Asia adds another 17% to our trade deficit for a total of 45%. The reason is that much of the manufacturing that used to be done in other countries has now been shifted to China.
In percentage terms, our trade deficit with East Asia including China has actually shrunk. Some members of Congress has blamed China’s pegged exchange rate as the cause of “manipulated trade.” Since China’s RMB was taken off the peg, it has appreciated by about 16% but our trade deficit has continued to rise. In absolute terms, our government has not been able to manage our trade and fiscal policies. Our policy makers’ inability to balance our trade should not be blamed on China.
To reinforce this point, nearly 60% of China’s exports come from foreign invested enterprises (FIE), about half from wholly foreign owned factories. On the high end of the export products, anywhere from 85 to 90% of the goods are made for foreign invested enterprises. Let me just cite just one example. China is a major exporter of boom boxes. In 2006, 34% of the exports came from FIEs but accounted for 73% of the total value of this export category. If you do the math, FIE made boom boxes came out 5 times higher in average value than the domestically made ones.
In other words, everybody is benefiting from China’s open economy, not just China.
The U.S. is an important market for China but our perceived leverage may be overblown. In 2007, 21% of China exports were sent to North America including Canada. Europe took 23.5% while Asia is the destination for 46.6% of China’s export.
Another misleading statement frequently bandied about is the lack of consumer spending in China. One recently published book by a veteran Western journalist even goes so far as to say that China has a policy to suppress consumerism. Maybe not comparable to the American consumer but these views fly in the face of the density of TVs, mobile phones and PCs that I mentioned earlier. It is also not consistent with the maker of Bentleys and others who regard China as the fastest growing market for their high profile brands of luxury products.
China’s annual retail sales is already over $1.2 trillion and growing at almost twice as fast the GDP, which as I said is doubling every 7 years. Wal-Mart clearly sees China as its most important market of the future. They have just over 100 stores in China, having added 23 in just last year. The per store sales in 2006 was half of their experience in the U.S. Their public statements indicate that they see an as yet largely untapped potential ahead for China.
According to recent poll of American companies already operating in China, 68% of them are planning to increase their resource commitment in China over the next 12 months, while 30% plans to hold steady and only 2% are pulling back. When asked of their 5-year business outlook in China, 55% are optimistic, 38% are somewhat optimistic and nobody is pessimistic.
While China is one of America’s major trading partner, a major holder of our national debt, and a partner in anti terrorism, for reasons hard to understand, U.S. policy makers insist on seeing China as an adversary. This hostility has a deleterious effect on every Chinese American living in the U.S. The FBI special agent has publicly declared that every ethnic Chinese working in Silicon Valley is a potential spy for China. The federal government nearly succeeded in railroading Dr. Wen Ho Lee to a sentence of life imprisonment on a trump up charge. Recently, an engineer in Southern California was sentenced to 24 years after being convicted of trying to send publicly available, non-classified information to China. The sentencing judge even said that the sentence was intended to warn others of the consequences of spying for China—the judge even used a classic Chinese strategy of killing the chicken to frighten the monkey.
The rhetoric can get down right hysterical sometimes. Let me say for the record that China detonated its first atomic bomb and launched the first guided missile in 1964, detonated the first hydrogen bomb in 1967 and launched the first unmanned satellite in 1970. All of this before Nixon met Mao in 1972 and bilateral relations were normalized in 1979. During that pre-normalization era, there couldn’t be much exchange between China and the U.S. and hard to make a case of blaming China’s achievements on stolen secrets from the U.S.
The Pentagon is proposing a military budget of $515 billion for the coming fiscal year, not including the extraordinary expenditures for Afghanistan and Iraq. The budget will include development of advanced fighter, advanced aircraft carrier, advanced destroyer and advanced submarine. The DOD is not pretending that this is for combat against the global terrorists. The largest one year expenditure request since WWII is for the prospects of meeting a future unnamed adversary. Want to guess who is the unnamed adversary? In the interest of brevity, I will simply make the observation that China’s military budget well under one fifth of the U.S. budget rests on a strategy of maintaining a credible retaliatory threat, a second strike capability against any other global power but otherwise concentrate on domestic economic priorities.
I am a member of the Committee of 100, a national organization of Chinese Americans. At their conference I attended last November in Beijing, China’s Vice Foreign Minister, Zhang Yesui was one of the invited speakers. He said, “We should observe the purposes of principles of the UN Charters and the universally recognized norms governing international relations to promote democracy, harmony, cooperation and win-win progress in international relations.” He goes on the say, “China cannot develop itself in isolation from the world, and the world cannot sustain prosperity and stability without China. China’s active participation and constructive role in the international affairs has boosted its own growth and promoted world’s peace and prosperity.”
Indeed China’s foreign policy has been to work within the confines of the United Nations. They have contributed troops and police in 13 of 17 on going UN Peacekeeping operations. Since 1990, China has contributed 9000 peacekeepers in 22 UN operations, more than the combined total of the other four permanent members of the Security Council. As of the end of 2007, China has exercised its veto power on the Security Council a total of 6 times since they joined that body. During that same period, USSR/Russia cast 123 vetoes, the U.S. 80 times, UK 32 and France 18.
Permit me to just mention one example of China’s foreign policy to this audience. In September 2007, China signed a deal with Congo to work on infrastructure projects in accordance with the Congo government’s priorities, which were water, electricity, education, health and transportation. The total cost will exceed $9 billion, far more than Congo’s annual budget of $1.3 billion. To pay for the infrastructure investment, China formed a JV with Congo to extract copper, nickel and cobalt, a $3 billion investment. Other parts of the deal include technology transfer and training of Congolese staff, work on social welfare and environment and subcontracting certain work to local Congolese companies. The deal is neither colonial exploitation nor charity to a destitute developing nation. China is not telling the Congo government how to run their country and make no judgment on whether the government is to their liking. Instead, they just structured a win-win arrangement that will make a difference in Congo quickly. Hopefully the Congolese government is up to the task and its people will see and reap the benefits of this kind of venture.
We can talk about Tibet, Sudan and Darfur and human rights and whatever else in the Q&A if there is an interest. I would like to conclude my presentation by mentioning a historical character that happens to be from state of Massachusetts. How many of you have heard of Anson Burlingame? He was a Congressman from Massachusetts who was appointed ambassador to China by Abraham Lincoln in 1861. He spent about 6 years in China. As he was ready to come home, he was asked by the Chinese imperial Manchu court to serve as the envoy to negotiate with the West while representing China. To my knowledge he is the only person in history who had the privilege of holding successive flip-flop diplomatic posts for two nations. (You can visit my blog, www.georgekoo.com for more about Burlingame.)
My fervent wish is that with the inauguration of the Rosenberg Institute of East Asia Studies in Suffolk University we will see in the future more ambassadors that can bridge the two countries and two cultures and replace the ill will that stems from ignorance with good will that comes from an informed public between the peoples of America and Asia. Thank you for your attention.
Barbara & Richard M. Rosenberg Institute for East Asian Studies
Suffolk University, Boston, April 8, 2008
Ladies and Gentlemen,
It is a great honor to be an invited speaker at this inaugural conference of the Rosenberg Institute of East Asian Studies. I would like to add my personal congratulations to Barbara and Richard Rosenberg for their wisdom and leadership. Recent events strongly suggest that Americans and for that matter the people in the West do not understand East Asia and China. Yet students today better get to know about the cultures and peoples of East Asia, because such knowledge or lack of it will impact their careers. I applaud the Rosenberg’s attempt to rectify this deficiency by establishing this Institute.
I picked as the title for my talk, “China’s Economy is not a Zero Sum,” for a very specific reason. I am keenly aware of America’s rather dismal understanding of China and I hope that today I will have the opportunity to clear up some of the false premises about China, either through my prepared remarks or in the Q&A that follows. For the sake of clarity and continuity, I am eschewing the usual PowerPoint presentation, although the organizers have very kindly provided each of you with a set of hand-outs that back-up the factual part of my talk. The hand-outs are in the order of my talk.
My talk will touch on three inter-related issues. Namely, a description of today’s China economy, how China got to this point and what China is not and in doing so, take the opportunity to debunk some of the notions that are flat out wrong about China. As we enter into the heated presidential campaign, China appears to be once again the piƱata of choice, a convenient scapegoat for everything wrong in this world. I hope today to neutralize some of the ill wind or at least point out how silly some of the rhetoric about China can get.
It is important that I make a disclaimer at this point of my talk. Although I am an employee of Deloitte and proud to be part of that global firm and rely on the research material and resources from the firm, my remarks today are strictly my own and does not represent in any way the views of my employer.
By any measure, China’s economic growth over the last three decades has been nothing short of miraculous. Nothing of this scale and growth rate of economic expansion has happened in humankind’s recorded history of 5000 some years. China’s annual GDP is now around $3 trillion, having overtaken Germany (or will overtake Germany soon, the uncertainty is due in part to fluctuating exchange rates) to become the third largest in the world. In 2000, China was the 6th largest (just ahead of California) and ten years earlier in 1990, China was 19th just one place ahead of Taiwan, but with a population 50 times larger, and back in 1980 when China had just barely began its economic reform, China was in 30th place with an economy smaller than even Nigeria, Argentina and Iran. Since 1978, China’s economy has been doubling every seven years.
Since China joined WTO in December 2001, its exports have grown five fold in five years. By 2006, China overtook the U.S. as the second largest exporter of goods and is expected to surpass Germany sometime this year. In the early ‘90s, China’s foreign currency reserve was an anemic $20 billion or so. Today, China’s reserve has exceeded $1.5 trillion, an increase of 75 fold in roughly 15 years.
During this period, the lives of the Chinese people have significantly improved. Over 400 million have been lifted out of poverty. China now has more than 140 metropolitan areas with populations over 1 million. The portion of the population now living in urban areas is approaching 50% from around 20% when reform began in 1978. Just about every household, including those in the rural area now owns a TV set. There are over 500 million mobile phones in use, 220 million Internet users, 190 million PC owners.
Already China has more mobile phone and Internet users than the U.S. and closing fast in PC ownership. And these numbers are constantly changing because new wealth is constantly being created. China is the fastest growing market for Bentleys that sell for $3-400,000 each. China is overtaking the U.S. as the source of greatest number of tourists traveling abroad; China sent 35 million abroad in 2006. Furthermore, as Europeans in the hospitality business will tell you, the average spending per Chinese tourist is 2-3 times higher than the American tourist.
How did this come about? Ironically, while the rate of change in China seemed so breath taking, the fiscal policy behind it was cautious with emphasis on gradual, trial and error approach. The policy makers in Beijing took to heart Deng Xiaoping’s advice to carefully grope for the stones while crossing the river. After Deng returned to power in 1978, there have been three premiers that implemented policies of economic reform.
Under Zhao Ziyang, the first premier after Deng’s return, the communes were disbanded giving farmers the chance to determine their destiny by working harder and smarter. Some of the farmers turned to higher value added crops and were soon shipping tulips to Holland, Shiitake mushrooms to Japan and garlic to Gilroy California. Others turn to cottage industries and started collectively owned enterprises. These township and village enterprises were the first non-state owned sector to make a significant economic contribution. Economic experiments were carefully monitored by a dual track system. In other words, a local price in local currency the RMB and a higher price in foreign exchange certificates that that visiting tourists get when they convert their hard currency—not a system pleasing to visiting foreigners.
Zhu Rongji took over as the economic czar, though not formally as premier, shortly after the Tiananmen incident, the memory of which, by the way, has become indelible in the minds of the West, but virtually forgotten in China. He tamed the run away inflation when he first seized control of the national economy—he introduced the economic concept of hong guan tiao kong （å®č§č°ę§） (macroeconomic control) to the Chinese population for the first time. Following Deng Xiaoping’s edict that to get rich is glorious, he proceeded to open China wide to foreign direct investments. 1993 was the first year when registered FDI exceeded $30 billion for the year. It has been increasing steadily and leveling off recently at around $60 to $70 billion of new foreign investments every year. No other country other than the U.S. has attracted as much foreign investments.
By the time Zhu retired in 2003, China had entered the WTO and rapidly became the factory of the world. By the time Zhu’s successor Wen Jiaobao took over, a new set of challenges were awaiting. Huge gaps now exist between the wealthy and the poor, the urban and the rural, the coastal region and the interior. Theses gaps are sources of social tension. Ironically, universities have greatly increased their capacity and are now generating many more college graduates than ever. This too adds pressure to growing the economy and creating jobs to meet the expectations of the new graduates. And, I have to tell you that China is struggling to deal with all these challenges and will be doing so in years ahead.
The current premier Wen has a challenging balancing act. On the one hand he has to keep the economy growing to create jobs. On the other he is concerned with inflation. The economic figures for the first two months of this year show ominous signs of inflation as if to reinforce his worry. He has to deal with a strengthening RMB, which has appreciated about 16% since it was taken off the peg to the dollar in July 2005. As a consequence, multinational companies are beginning to look elsewhere to put in their next plant. He also has to worry about the $1.5 trillion of reserves he is holding in dollars that are eroding in value by the day. He is facing rising labor cost, rising energy cost, the need to bring environmental degradation under control and exert tighter enforcement of labor laws. He has just begun his second term of office and he has a tough job ahead of him.
So what did China do to be so successful so far? I would say three main factors.
First, ever since Deng Xiaoping returned to power, China has been stable and had an orderly transition of leadership. Increasingly the leaders are highly educated, all college graduates and some with advanced degrees. The Jiang/Zhu generation was all engineers. In the current generation, a few economists and lawyers have been allowed into the inner circle. More importantly, every leader has been tested and proven that they are capable each step along the way as they rose in rank. Sons and daughters of senior leaders sometimes do enjoy the inside track but only the capable ones end up in key positions while less capable or motivated are assigned to cream puff positions.
Secondly, since Deng, China has taken down the bamboo curtain of Mao days and opened the country to outside ideas. In the early 1980s, China invited Robert McNamara, then president of the World Bank into China. Beijing wanted not just World Bank financing but the rules and conditions that go with the financing. Beijing wanted the World Bank guidance as a framework to establish their own rules of governance for banking and financial institutions, a matter where they had no experience from their past as a planned economy to draw from. This is not your typical third world response where they just want the money but not the discipline and constraints. No wonder then that to this day, the World Bank considers China to be their most successful client. And, as a historical note of interest, the leader representing China in the working group with the World Bank was Zhu Rongji.
Another example of China’s openness is their entry into the WTO. There was a lot of resistance inside China to the idea of entering WTO. Many state-owned enterprises feared open competition in the global market and wanted to protect their domestic piece of the pie. Indeed in the transition, many inefficient factories were closed and more than 30 million jobs were lost. But Premier Zhu recognized that despite near term pain, in the long run, China needs to compete at the international level and forced the country into this multilateral agreement over the objections of many. He was right, of course. Sadly, the need to compete in the global market is a principle some of our political leaders seem to have forgotten.
Third important factor, I feel, is China’s willingness to invest in infrastructure--heavily so. From the first World Bank financing, China has placed high priority to infrastructure investments even when they did not have the funds from internally generated sources to do so. Consequently, China now has a highway network that rival the U.S. Interstate system. There was just one bridge across the mighty Yangtze River when my wife and I visited China in 1974. There are now so many that nobody bothers to keep track. I believe the most recent is around 18 miles long near the mouth of the river connecting Suzhou in the south to Nantong in the north. China has constructed at least two bridges that I know of over 20 miles long, over open water. The port handling facilities, airports, the train system (including the only one in the world to operate above 4000 meters in altitude), the power plants and grid, the telecommunications networks and Internet broadband are all constantly increasing in capacity and improving to keep up with demand. The Beijing government has been running deficits to keep their infrastructure in pace with their economic development and by and large they have been successful.
In summary, many developing countries are now looking at China as a model for development. What they see is a stable government that allows the leadership to concentrate their attention on economic development including prioritizing infrastructure projects and moving away from a planned economy to one where the market is the driver.
Of course, phenomenal as China’s economic growth has been, it has not been without some serious costs. In growing the economy, China unfortunately hewed to the traditional western model, which was pollute now and worried about it later. Anyone that have visited China over a period of years can see that this approach has devastated the quality of air around most cities and severely constrained the availability of already tight supply of clean water. More recently, one can spot occasional improvement in air quality—a friend of mine just returned from Beijing where she saw 5 continuous days of blue sky and she has changed her mind and decided to take her son to the Olympics--but China has a long ways to go. In pollution control and environment remediation, the West has a lot to offer and China represents a market of huge potential.
China is also in the process of rebuilding its tattered social safety net—a system that broke down in the transition from a planned economy to a free market. Their need to restore and improve their health care system is another very large market for outside technology and services. Their need to construct a sturdy national retirement pension plan represents opportunities for financial and macroeconomic experts from everywhere.
All in all, China economic development has been a win for its Asian neighbors that trade with China, for Latin America and Africa where most of China’s foreign investments have been going, and for the West that buys from China, because up to now, the prices have been stable and low and thus help keep us, the American consumer, in a style we are accustomed, all at a reasonable price. Not only China’s economy has not been a zero sum but has been an all around win.
Some critics of China accused China of predatory trade practices and frequently link China to the mercantilist policies of Japan. I see two entirely different models of external trade. The U.S. has been blaming China for its booming trade deficit. Let me break this down for you. In 1997, 27% of our trade deficit is from China while another 43% is from the rest of East Asia, (mainly from Japan, Korea, Taiwan and Singapore). That means a total of 70% of America’s trade deficit came from East Asia. In 2006, ten years later, China accounts for 28% while East Asia adds another 17% to our trade deficit for a total of 45%. The reason is that much of the manufacturing that used to be done in other countries has now been shifted to China.
In percentage terms, our trade deficit with East Asia including China has actually shrunk. Some members of Congress has blamed China’s pegged exchange rate as the cause of “manipulated trade.” Since China’s RMB was taken off the peg, it has appreciated by about 16% but our trade deficit has continued to rise. In absolute terms, our government has not been able to manage our trade and fiscal policies. Our policy makers’ inability to balance our trade should not be blamed on China.
To reinforce this point, nearly 60% of China’s exports come from foreign invested enterprises (FIE), about half from wholly foreign owned factories. On the high end of the export products, anywhere from 85 to 90% of the goods are made for foreign invested enterprises. Let me just cite just one example. China is a major exporter of boom boxes. In 2006, 34% of the exports came from FIEs but accounted for 73% of the total value of this export category. If you do the math, FIE made boom boxes came out 5 times higher in average value than the domestically made ones.
In other words, everybody is benefiting from China’s open economy, not just China.
The U.S. is an important market for China but our perceived leverage may be overblown. In 2007, 21% of China exports were sent to North America including Canada. Europe took 23.5% while Asia is the destination for 46.6% of China’s export.
Another misleading statement frequently bandied about is the lack of consumer spending in China. One recently published book by a veteran Western journalist even goes so far as to say that China has a policy to suppress consumerism. Maybe not comparable to the American consumer but these views fly in the face of the density of TVs, mobile phones and PCs that I mentioned earlier. It is also not consistent with the maker of Bentleys and others who regard China as the fastest growing market for their high profile brands of luxury products.
China’s annual retail sales is already over $1.2 trillion and growing at almost twice as fast the GDP, which as I said is doubling every 7 years. Wal-Mart clearly sees China as its most important market of the future. They have just over 100 stores in China, having added 23 in just last year. The per store sales in 2006 was half of their experience in the U.S. Their public statements indicate that they see an as yet largely untapped potential ahead for China.
According to recent poll of American companies already operating in China, 68% of them are planning to increase their resource commitment in China over the next 12 months, while 30% plans to hold steady and only 2% are pulling back. When asked of their 5-year business outlook in China, 55% are optimistic, 38% are somewhat optimistic and nobody is pessimistic.
While China is one of America’s major trading partner, a major holder of our national debt, and a partner in anti terrorism, for reasons hard to understand, U.S. policy makers insist on seeing China as an adversary. This hostility has a deleterious effect on every Chinese American living in the U.S. The FBI special agent has publicly declared that every ethnic Chinese working in Silicon Valley is a potential spy for China. The federal government nearly succeeded in railroading Dr. Wen Ho Lee to a sentence of life imprisonment on a trump up charge. Recently, an engineer in Southern California was sentenced to 24 years after being convicted of trying to send publicly available, non-classified information to China. The sentencing judge even said that the sentence was intended to warn others of the consequences of spying for China—the judge even used a classic Chinese strategy of killing the chicken to frighten the monkey.
The rhetoric can get down right hysterical sometimes. Let me say for the record that China detonated its first atomic bomb and launched the first guided missile in 1964, detonated the first hydrogen bomb in 1967 and launched the first unmanned satellite in 1970. All of this before Nixon met Mao in 1972 and bilateral relations were normalized in 1979. During that pre-normalization era, there couldn’t be much exchange between China and the U.S. and hard to make a case of blaming China’s achievements on stolen secrets from the U.S.
The Pentagon is proposing a military budget of $515 billion for the coming fiscal year, not including the extraordinary expenditures for Afghanistan and Iraq. The budget will include development of advanced fighter, advanced aircraft carrier, advanced destroyer and advanced submarine. The DOD is not pretending that this is for combat against the global terrorists. The largest one year expenditure request since WWII is for the prospects of meeting a future unnamed adversary. Want to guess who is the unnamed adversary? In the interest of brevity, I will simply make the observation that China’s military budget well under one fifth of the U.S. budget rests on a strategy of maintaining a credible retaliatory threat, a second strike capability against any other global power but otherwise concentrate on domestic economic priorities.
I am a member of the Committee of 100, a national organization of Chinese Americans. At their conference I attended last November in Beijing, China’s Vice Foreign Minister, Zhang Yesui was one of the invited speakers. He said, “We should observe the purposes of principles of the UN Charters and the universally recognized norms governing international relations to promote democracy, harmony, cooperation and win-win progress in international relations.” He goes on the say, “China cannot develop itself in isolation from the world, and the world cannot sustain prosperity and stability without China. China’s active participation and constructive role in the international affairs has boosted its own growth and promoted world’s peace and prosperity.”
Indeed China’s foreign policy has been to work within the confines of the United Nations. They have contributed troops and police in 13 of 17 on going UN Peacekeeping operations. Since 1990, China has contributed 9000 peacekeepers in 22 UN operations, more than the combined total of the other four permanent members of the Security Council. As of the end of 2007, China has exercised its veto power on the Security Council a total of 6 times since they joined that body. During that same period, USSR/Russia cast 123 vetoes, the U.S. 80 times, UK 32 and France 18.
Permit me to just mention one example of China’s foreign policy to this audience. In September 2007, China signed a deal with Congo to work on infrastructure projects in accordance with the Congo government’s priorities, which were water, electricity, education, health and transportation. The total cost will exceed $9 billion, far more than Congo’s annual budget of $1.3 billion. To pay for the infrastructure investment, China formed a JV with Congo to extract copper, nickel and cobalt, a $3 billion investment. Other parts of the deal include technology transfer and training of Congolese staff, work on social welfare and environment and subcontracting certain work to local Congolese companies. The deal is neither colonial exploitation nor charity to a destitute developing nation. China is not telling the Congo government how to run their country and make no judgment on whether the government is to their liking. Instead, they just structured a win-win arrangement that will make a difference in Congo quickly. Hopefully the Congolese government is up to the task and its people will see and reap the benefits of this kind of venture.
We can talk about Tibet, Sudan and Darfur and human rights and whatever else in the Q&A if there is an interest. I would like to conclude my presentation by mentioning a historical character that happens to be from state of Massachusetts. How many of you have heard of Anson Burlingame? He was a Congressman from Massachusetts who was appointed ambassador to China by Abraham Lincoln in 1861. He spent about 6 years in China. As he was ready to come home, he was asked by the Chinese imperial Manchu court to serve as the envoy to negotiate with the West while representing China. To my knowledge he is the only person in history who had the privilege of holding successive flip-flop diplomatic posts for two nations. (You can visit my blog, www.georgekoo.com for more about Burlingame.)
My fervent wish is that with the inauguration of the Rosenberg Institute of East Asia Studies in Suffolk University we will see in the future more ambassadors that can bridge the two countries and two cultures and replace the ill will that stems from ignorance with good will that comes from an informed public between the peoples of America and Asia. Thank you for your attention.
Sunday, March 2, 2008
Career Challenges and Opportunities in the Coming China Century
Keynote speech at International Career Fair, San Francisco, February 29, 2008
China has been the fastest growing economy in the 5000 year memory of human history. By quadrupling every 14 years, that’s almost 20 fold since reform began in 1978, China has left most of professional economists breathless in trying to keep up, much less explain why China has been so successful.
China is now a global economic force and has impact on the economic development in all corners of the world. It is a great trading nation, just next to the U.S. in scale and is most likely the third largest economy in the world already, having surpassed Germany sometime last year. In terms of purchasing parity, China has been the second largest economy for a number of years. Purchasing parity, another economic term, is why it is possible to take a salary cut and still thrive in China. A dollar or euro just goes much further there.
China is also fast becoming a major source of foreign direct investment in other parts of the world. Their exercise of multi-lateral and multi-faceted diplomacy, commonly called soft power, has been particularly notable in the 3rd world such as Latin America, Africa and elsewhere in Asia.
Of course, there are always nay Sayers that predict the imminent demise of China or the pop of the bubble, etc. One of these so-called pundits even wrote a book about the coming collapse of China. Since that book was published, China has doubled its GDP and now sits on top of nearly $1.5 trillion of hard currency reserve. If you wish, you can devote your energy criticizing China for human rights problems, official corruption and flimsy banking system, and to varying degrees you’d be right. But it would be hard to make a living at it.
But if you are interested in developing your career where the action is--and will be for a long time to come--China is the arena you should be looking into.
It has been thirty years when I first joined Chase Manhattan Bank and later Bear Stearns to advise American companies on doing business in China. In the early days, we used to try to make business appointments first thing in the morning from our hotel rooms and we’d get a busy signal even before we finish dialing--a most disconcerting experience. Today, China has roughly 500 million cellular phones and equal or more land lines. In some cities, completely wired in glass fibers, one can even order and get a phone installed the same day—not possible in countries with copper wire legacy systems such as America.
In those early days, there were just a handful of us doing this kind of work and one can hardly describe it as a career. Today, with China’s prominent place in the age of globalization, cross border business consulting, which was what I was doing, is a popular career choice and in demand, but it is not the only game in town. Let me simply enumerate some of the careers that have opened up with the emergence of China.
First of all, China has become a magnet for all sorts of professions seeking new and developing opportunities.
Jim Rogers, famous for starting the first mega private equity fund with George Soros, has written several books about China and is putting his money where his mouth is. He is cashing out of America and investing in China. He is also taking his family to live in China—well, not quite, but is moving to Singapore to get closer to where action is.
Dick Kramlich, senior partner of New Enterprise Associates, a major venture capital firm in the Bay Area, has some success investing in China and is so impressed with the potential that he too is moving to China. He will actually live in Shanghai to get even closer to where it is all happening.
One of Kramlich’s investment was Semiconductor Manufacturing International Corporation in Shanghai. SMIC was the first semiconductor foundry to be established inside China, wholly foreign owned with capital from the West and a management team headed by a Taiwanese executive. During the early period of this company, one out of three employees were returnees from the West, many from Silicon Valley. These returnees gladly took a 75% pay cut to get on the ground floor with stock options and subsidized housing and enjoyed the generally much lower cost of living.
Returnees with middle management experience have been able to land senior positions in China. Scientists and professors with their own lab in the U.S. have gone back to become head of research institutes and department heads. China has shown a hunger for talented individuals with valuable experience gained from the West.
But as I mentioned in the examples of Jim Rogers and Dick Kramlich, you don’t have to be ethnic Chinese or even Chinese speaking to find opportunities in China. Let me tell you the story of a French chef in Shanghai.
He was originally the master chef in San Francisco. The owner, a Chinese American, sent him along with the maitre ‘D and a manager to open a new fusion restaurant in the Xintiandi district of Shanghai. Any of you that have been to Shanghai would know that Xintiandi is the high profile, upscale place to be seen.
I had dinner there shortly after the restaurant opened and I asked the three of them how they liked living and working in Shanghai, none of whom speak any Chinese. Their enthusiastically responded that Shanghai is their future, San Francisco is passĆ©. They expect to build their fame and fortune in China’s and for that matter, world’s most cosmopolitan city.
A few weeks later I had a networking breakfast meeting with an investment banker who had just relocated to Shanghai to begin a new career doing deals in China. He was also a non-Chinese speaking white American but he too was really excited about the prospect of working in China.
I told him that he reminded me of this restaurant in Xintiandi and the three founders there. He said, “Yes, yes, I know all about that place, I’ve eaten there many times.” I said, “Well, you know what I mean about your common background and putting a stake on the ground in Shanghai.”
He said, “You know, George, that restaurant is going to fail!” I was surprised since the restaurant had just newly opened. “What do you mean?” I said. The investment banker, with greatest authority declared, “Can’t you see, the fengshui of that place is terrible.” Sure enough, the next time I saw him, he confirmed that the restaurant had indeed gone belly up.
So, as you can see, sometimes a laowai knows more about Chinese customs than even an ethnic Chinese.
Of course, as China is increasingly integrated into the globalization trend, career opportunities are not all in China. Chinese businesses and companies are going to come to the U.S. and Europe and elsewhere to establish their presence for a host of usual reasons. Initially, local Bay Area travel service that caters to Chinese visitors was the first to profit. They know where Chinese visitors like to stay and eat and where to go to buy real Prada and Coach handbags. Investment bankers, lawyers, accountants, tax advisors, consultants, site selection experts, real estate agents are next to line up and offer their services.
Those that are agile and can see the opportunities will be successful. Let me mention one example. Up to now, though the situation in China is constantly changing, privately held companies have difficulty getting financing at home. A popular route has been a so-called PIPE linked to RTO transaction to get a back door listing on NASDAQ. PIPE means private investment into a public equity achieved by reverse takeover (the RTO part) of a shell company. By this transaction, the company ensures raising some capital as part of the exercise. Companies learned through disappointment that simply backing into a shell company without PIPE does not guarantee raising capital because of a lack of investor interest in pink sheet listings.
Once listed the company then worked hard to drum up investor interest, raise secondary rounds and eventually graduate on to the main NASDAQ board. There are private equity and hedge funds that find investing in promising Chinese companies via this route very lucrative.
There are law firms and boutique investment banks that specialize in this kind of financing. What I find particularly interesting is the public relations firm that helps the RTO entity gain traction with the investors. I found one firm that concentrates of serving Chinese companies. The PR firm formed an office in Hong Kong and regularly conducted seminars inside China on the IPO process on the U.S. stock market. The firm accompanies their Chinese client on their road shows and participation in investment conferences and they coach their clients on how to present themselves to investors in the best light.
So, what will it take to participate and establish a career based in China related businesses? There are the usual requirements that would qualify you and there is one specific “watch out” that you have to be sensitive to.
First, the basic attributes to succeed in any cross culture, bi-lingual career is the ability to form empathy with anyone that looks different, talks and thinks differently. If you see yourself as a hard nosed, successful entrepreneur or a fast track, go-getter executive and know everything about international business and you act on your self image, then you are likely to fail. Whatever your self image, you need to show respect and you need to know how to listen. You need to understand where your counterpart is coming from. To do this you need to spend time understanding Chinese culture and how they think, and you need to keep up with recent developments in China so that you know their priorities.
You need to be able to communicate. Knowing how to speak Chinese helps but for those of you in the audience that already know how to speak Chinese, may I remind you that speaking the language is not the same as communicating—the difference is between talking to each other or talking at or past each other.
Now some bad news. Any of you that decide on a career involving China, especially in Silicon Valley, needs to know that you run some risk of going to jail. No, not the Chinese jail, but the American jail. You should be aware that deep seated racial bias still exists with the U.S. government and the FBI. I am not joking. Please do not take this lightly.
Some of you may remember the spy case involving Dr. Wen Ho Lee of Los Alamos Lab. He did not even do any work with China. He was merely ethnic Chinese. At the time the right wing Republican Party was accusing the Clinton Administration of being soft on China and allowing precious missile technology to be stolen and sent to China. The Energy Secretary, Bill Richardson, promptly offered Dr. Lee as the scapegoat and Attorney General Janet Reno looked the other way. The outcome was a farce in which the presiding judge actually apologized to Dr. Lee for government misconduct.
This is no isolated case. There were Chinese American victims of racial profiling before Lee and continues to this day. Some of you may recall the famous double agent (or was it triple agent?) case involving Katrina Leung and her FBI handler, J.J. Smith. Until they were caught in bed together, the FBI LA office had no clue as to how information seemed to be leaking from their office. Their natural reaction was to suspect two of their top ranked agents who happened to be ethnic Chinese and women to boot, Anita Chiang and Denise Woo. They had distinguished careers up to then but suddenly they became the in-house Mata Hari’s. Their careers were abruptly terminated by FBI’s long standing practice of racial profiling and never got compensation by the government for wrongful termination. Later when JJ Smith was apprehended, he got three months probation.
More recently, there was a Bill Chen who was accused to selling shaker tables to a Chinese missile operation which he vigorously denied. Originally his Silicon Valley employer defended him but then the U.S. government told the company that if they expect to do any more business with the government, they need to fire Chen. A few months ago, the government dropped all charges but a disillusioned Chen said that his career is ruined and he is taking his family back to China.
I spoke to a biotech scientist who came to the government’s attention because he was holding a nice job and felt secured enough to buy a house. He needed help with the down payment so his parents and brother wired him $20,000 from China. The Homeland Security folks apparently concluded that something fishy was going on and turned his life upside down. At the time, China was well on its way to holding a trillion dollars of foreign reserve but our government agents can’t seem to believe private individuals from China has $20,000 to send and therefore something nefarious was going on.
I could go on and on. Go to my website, www.georgekoo.com, and pick the heading “Racial Profiling in America” and read more.
Those of you working in technology sector or in Silicon Valley have to be extra careful. The FBI special agent in charge of Silicon Valley has in public interviews proclaimed that the valley is crawling with spies sent from China. That means you and you and you (in the audience) are all potential spies. The agent’s name is Pryzbyla but no one has accused him of being an undercover spy for some Eastern European country.
If you go to China frequently, if you speak Chinese or if you work for a high tech company (and you don’t have to be all of the above, any one of those can put you under surveillance), you need to know about dual use and export license. Dual use applies to technology products and know-how that have civilian use but can also be used in military applications. Such items require export license which is obtained by applying to the Department of Commerce. Of course, export license is required for a lot of products made in Silicon Valley. Typical of bureaucracy, the range of products subject to license seems to only expand, but that’s another story. Go to my blog and you can see why I think the idea of dual use has hampered the competitiveness of American export.
My takeaway to you today is that you need to know the regulations governing export from the U.S., not just products but information as well. Sending your own technical publications to China could get you in hot water as it did in the case of Chi Mak, another miscarriage of justice. On the other hand, just looking at the increased interest in learning Chinese in K-12, you can see that everybody sees the importance of China in the coming century.
This is the best of times to pursue a cross border, cross cultural career and I wish all of you every success.
China has been the fastest growing economy in the 5000 year memory of human history. By quadrupling every 14 years, that’s almost 20 fold since reform began in 1978, China has left most of professional economists breathless in trying to keep up, much less explain why China has been so successful.
China is now a global economic force and has impact on the economic development in all corners of the world. It is a great trading nation, just next to the U.S. in scale and is most likely the third largest economy in the world already, having surpassed Germany sometime last year. In terms of purchasing parity, China has been the second largest economy for a number of years. Purchasing parity, another economic term, is why it is possible to take a salary cut and still thrive in China. A dollar or euro just goes much further there.
China is also fast becoming a major source of foreign direct investment in other parts of the world. Their exercise of multi-lateral and multi-faceted diplomacy, commonly called soft power, has been particularly notable in the 3rd world such as Latin America, Africa and elsewhere in Asia.
Of course, there are always nay Sayers that predict the imminent demise of China or the pop of the bubble, etc. One of these so-called pundits even wrote a book about the coming collapse of China. Since that book was published, China has doubled its GDP and now sits on top of nearly $1.5 trillion of hard currency reserve. If you wish, you can devote your energy criticizing China for human rights problems, official corruption and flimsy banking system, and to varying degrees you’d be right. But it would be hard to make a living at it.
But if you are interested in developing your career where the action is--and will be for a long time to come--China is the arena you should be looking into.
It has been thirty years when I first joined Chase Manhattan Bank and later Bear Stearns to advise American companies on doing business in China. In the early days, we used to try to make business appointments first thing in the morning from our hotel rooms and we’d get a busy signal even before we finish dialing--a most disconcerting experience. Today, China has roughly 500 million cellular phones and equal or more land lines. In some cities, completely wired in glass fibers, one can even order and get a phone installed the same day—not possible in countries with copper wire legacy systems such as America.
In those early days, there were just a handful of us doing this kind of work and one can hardly describe it as a career. Today, with China’s prominent place in the age of globalization, cross border business consulting, which was what I was doing, is a popular career choice and in demand, but it is not the only game in town. Let me simply enumerate some of the careers that have opened up with the emergence of China.
First of all, China has become a magnet for all sorts of professions seeking new and developing opportunities.
Jim Rogers, famous for starting the first mega private equity fund with George Soros, has written several books about China and is putting his money where his mouth is. He is cashing out of America and investing in China. He is also taking his family to live in China—well, not quite, but is moving to Singapore to get closer to where action is.
Dick Kramlich, senior partner of New Enterprise Associates, a major venture capital firm in the Bay Area, has some success investing in China and is so impressed with the potential that he too is moving to China. He will actually live in Shanghai to get even closer to where it is all happening.
One of Kramlich’s investment was Semiconductor Manufacturing International Corporation in Shanghai. SMIC was the first semiconductor foundry to be established inside China, wholly foreign owned with capital from the West and a management team headed by a Taiwanese executive. During the early period of this company, one out of three employees were returnees from the West, many from Silicon Valley. These returnees gladly took a 75% pay cut to get on the ground floor with stock options and subsidized housing and enjoyed the generally much lower cost of living.
Returnees with middle management experience have been able to land senior positions in China. Scientists and professors with their own lab in the U.S. have gone back to become head of research institutes and department heads. China has shown a hunger for talented individuals with valuable experience gained from the West.
But as I mentioned in the examples of Jim Rogers and Dick Kramlich, you don’t have to be ethnic Chinese or even Chinese speaking to find opportunities in China. Let me tell you the story of a French chef in Shanghai.
He was originally the master chef in San Francisco. The owner, a Chinese American, sent him along with the maitre ‘D and a manager to open a new fusion restaurant in the Xintiandi district of Shanghai. Any of you that have been to Shanghai would know that Xintiandi is the high profile, upscale place to be seen.
I had dinner there shortly after the restaurant opened and I asked the three of them how they liked living and working in Shanghai, none of whom speak any Chinese. Their enthusiastically responded that Shanghai is their future, San Francisco is passĆ©. They expect to build their fame and fortune in China’s and for that matter, world’s most cosmopolitan city.
A few weeks later I had a networking breakfast meeting with an investment banker who had just relocated to Shanghai to begin a new career doing deals in China. He was also a non-Chinese speaking white American but he too was really excited about the prospect of working in China.
I told him that he reminded me of this restaurant in Xintiandi and the three founders there. He said, “Yes, yes, I know all about that place, I’ve eaten there many times.” I said, “Well, you know what I mean about your common background and putting a stake on the ground in Shanghai.”
He said, “You know, George, that restaurant is going to fail!” I was surprised since the restaurant had just newly opened. “What do you mean?” I said. The investment banker, with greatest authority declared, “Can’t you see, the fengshui of that place is terrible.” Sure enough, the next time I saw him, he confirmed that the restaurant had indeed gone belly up.
So, as you can see, sometimes a laowai knows more about Chinese customs than even an ethnic Chinese.
Of course, as China is increasingly integrated into the globalization trend, career opportunities are not all in China. Chinese businesses and companies are going to come to the U.S. and Europe and elsewhere to establish their presence for a host of usual reasons. Initially, local Bay Area travel service that caters to Chinese visitors was the first to profit. They know where Chinese visitors like to stay and eat and where to go to buy real Prada and Coach handbags. Investment bankers, lawyers, accountants, tax advisors, consultants, site selection experts, real estate agents are next to line up and offer their services.
Those that are agile and can see the opportunities will be successful. Let me mention one example. Up to now, though the situation in China is constantly changing, privately held companies have difficulty getting financing at home. A popular route has been a so-called PIPE linked to RTO transaction to get a back door listing on NASDAQ. PIPE means private investment into a public equity achieved by reverse takeover (the RTO part) of a shell company. By this transaction, the company ensures raising some capital as part of the exercise. Companies learned through disappointment that simply backing into a shell company without PIPE does not guarantee raising capital because of a lack of investor interest in pink sheet listings.
Once listed the company then worked hard to drum up investor interest, raise secondary rounds and eventually graduate on to the main NASDAQ board. There are private equity and hedge funds that find investing in promising Chinese companies via this route very lucrative.
There are law firms and boutique investment banks that specialize in this kind of financing. What I find particularly interesting is the public relations firm that helps the RTO entity gain traction with the investors. I found one firm that concentrates of serving Chinese companies. The PR firm formed an office in Hong Kong and regularly conducted seminars inside China on the IPO process on the U.S. stock market. The firm accompanies their Chinese client on their road shows and participation in investment conferences and they coach their clients on how to present themselves to investors in the best light.
So, what will it take to participate and establish a career based in China related businesses? There are the usual requirements that would qualify you and there is one specific “watch out” that you have to be sensitive to.
First, the basic attributes to succeed in any cross culture, bi-lingual career is the ability to form empathy with anyone that looks different, talks and thinks differently. If you see yourself as a hard nosed, successful entrepreneur or a fast track, go-getter executive and know everything about international business and you act on your self image, then you are likely to fail. Whatever your self image, you need to show respect and you need to know how to listen. You need to understand where your counterpart is coming from. To do this you need to spend time understanding Chinese culture and how they think, and you need to keep up with recent developments in China so that you know their priorities.
You need to be able to communicate. Knowing how to speak Chinese helps but for those of you in the audience that already know how to speak Chinese, may I remind you that speaking the language is not the same as communicating—the difference is between talking to each other or talking at or past each other.
Now some bad news. Any of you that decide on a career involving China, especially in Silicon Valley, needs to know that you run some risk of going to jail. No, not the Chinese jail, but the American jail. You should be aware that deep seated racial bias still exists with the U.S. government and the FBI. I am not joking. Please do not take this lightly.
Some of you may remember the spy case involving Dr. Wen Ho Lee of Los Alamos Lab. He did not even do any work with China. He was merely ethnic Chinese. At the time the right wing Republican Party was accusing the Clinton Administration of being soft on China and allowing precious missile technology to be stolen and sent to China. The Energy Secretary, Bill Richardson, promptly offered Dr. Lee as the scapegoat and Attorney General Janet Reno looked the other way. The outcome was a farce in which the presiding judge actually apologized to Dr. Lee for government misconduct.
This is no isolated case. There were Chinese American victims of racial profiling before Lee and continues to this day. Some of you may recall the famous double agent (or was it triple agent?) case involving Katrina Leung and her FBI handler, J.J. Smith. Until they were caught in bed together, the FBI LA office had no clue as to how information seemed to be leaking from their office. Their natural reaction was to suspect two of their top ranked agents who happened to be ethnic Chinese and women to boot, Anita Chiang and Denise Woo. They had distinguished careers up to then but suddenly they became the in-house Mata Hari’s. Their careers were abruptly terminated by FBI’s long standing practice of racial profiling and never got compensation by the government for wrongful termination. Later when JJ Smith was apprehended, he got three months probation.
More recently, there was a Bill Chen who was accused to selling shaker tables to a Chinese missile operation which he vigorously denied. Originally his Silicon Valley employer defended him but then the U.S. government told the company that if they expect to do any more business with the government, they need to fire Chen. A few months ago, the government dropped all charges but a disillusioned Chen said that his career is ruined and he is taking his family back to China.
I spoke to a biotech scientist who came to the government’s attention because he was holding a nice job and felt secured enough to buy a house. He needed help with the down payment so his parents and brother wired him $20,000 from China. The Homeland Security folks apparently concluded that something fishy was going on and turned his life upside down. At the time, China was well on its way to holding a trillion dollars of foreign reserve but our government agents can’t seem to believe private individuals from China has $20,000 to send and therefore something nefarious was going on.
I could go on and on. Go to my website, www.georgekoo.com, and pick the heading “Racial Profiling in America” and read more.
Those of you working in technology sector or in Silicon Valley have to be extra careful. The FBI special agent in charge of Silicon Valley has in public interviews proclaimed that the valley is crawling with spies sent from China. That means you and you and you (in the audience) are all potential spies. The agent’s name is Pryzbyla but no one has accused him of being an undercover spy for some Eastern European country.
If you go to China frequently, if you speak Chinese or if you work for a high tech company (and you don’t have to be all of the above, any one of those can put you under surveillance), you need to know about dual use and export license. Dual use applies to technology products and know-how that have civilian use but can also be used in military applications. Such items require export license which is obtained by applying to the Department of Commerce. Of course, export license is required for a lot of products made in Silicon Valley. Typical of bureaucracy, the range of products subject to license seems to only expand, but that’s another story. Go to my blog and you can see why I think the idea of dual use has hampered the competitiveness of American export.
My takeaway to you today is that you need to know the regulations governing export from the U.S., not just products but information as well. Sending your own technical publications to China could get you in hot water as it did in the case of Chi Mak, another miscarriage of justice. On the other hand, just looking at the increased interest in learning Chinese in K-12, you can see that everybody sees the importance of China in the coming century.
This is the best of times to pursue a cross border, cross cultural career and I wish all of you every success.
Friday, November 23, 2007
Three Troubling Trajectories
Speech at Kyoto University, Economics Department, November 2007
Ladies and gentlemen,
I am honored to be invited to speak before you at the world renowned Kyoto University and it is a distinct personal pleasure to be here. I have been to Kyoto a number of times but have always treasured my first visit. It was in October 1975, just a little over 32 years ago. I was on business for SRI International and my then colleague and now dear friend, Takaoka-san, took time out to show me Kyoto. He was then the executive director of SRI’s office in Asia. He was obviously proud of Kyoto and proud to be an alumnus of Kyoto U. And his pride made my visit that much more memorable.
I really enjoy traveling around the world. Each time and each place affords so many opportunities to learn about history, culture and the diversity of the people that populate our world. For example, my wife and I just spend ten days in Sicily, our very first visit there. I learned from this trip that Sicily was probably one of the earliest beneficiaries of ethnic diversity. You see, Sicily has rich soil constantly added by active volcanoes, lots of sun shine and a warm climate—a California of the Mediterranean. Many people came to settle there, Phoenicians, Greeks, Romans, Byzantines, Moors, Normans and now young Chinese selling souvenirs at tourist attractions. Each brought their culture and values to enrich Sicily and added to the island’s rich heritage.
I will be coming back to Sicily later in my talk. But I am here today to talk about China, Japan and the U.S. Except for elementary school education in China, I was educated in the U.S. and grew up in America. I have been visiting China regularly on business consulting assignments since 1978. I write commentaries about the sometimes troubled U.S. China bilateral relations. I think I know the two countries pretty well. I have been to Japan less frequently and can not claim to be an expert on Japan. So forgive me, if my presentation today appears unbalanced.
Nonetheless, I would like to take this opportunity to present some personal views that may sound blunt and direct. I hope you will forgive me if some of my statements sound untactful. My American upbringing is urging me to “tell it like it is,” and I would be remiss to pass up this chance to share some very serious concerns with this distinguished audience by obscuring my remarks in polite but ambiguous language. I hope you’ll find my remarks provocative but not offensive.
Some might argue whether China, Japan and the U.S. are the three major powers in the world, but there can be no doubt that they are the most important nations around Asia Pacific. Each shares many common interests but also has important differences in values and priorities. Each faces some ominous dark clouds in the horizon that I would like to discuss with you. The peace and stability of the Asia Pacific region depends on the three countries getting along with each other and staying in good health.
First, let’s talk about China. When I first went to China on business trips, late ‘70s to early ‘80s, just trying to place a phone call to make an appointment was a frustrating experience. There were so few telephone lines in Beijing in those days that I would get the busy signal even before I finished dialing the number. Today there are 500 million cellphone users in China and no bottlenecks at the switch boards.
In 1985, one of my clients, a maker of automotive components, celebrated the formation of a JV in China. That same year, Germany’s VW JV in Shanghai started production. At the time China’s total yearly production of motor vehicles was less half of million, most of them trucks and buses. Only 5000 passenger sedans were produced that year. In 2006, 21 years later, China’s vehicle production exceeded 7 million of which about 4.5 million are passenger cars. So vehicle production has increased more than 14 fold over this period of time while passenger cars grew by a phenomenal 900 times. China is now the third largest auto producing country in the world, after Japan and the U.S.
Today, everybody knows that China’s economy has been doubling every 7 years for nearly the last three decades. For a long time, skeptics found it hard to believe that this kind of unprecedented growth was possible and doubted the official statistics. They would point out that 28 out of 29 reporting provinces report their annual GDP growth as higher than the national average—clearly a mathematical impossibility. It was discovered later that the central government’s calculation for the national average was too low and less precise than the regional reports.
How did China accomplish such phenomenal growth? The full explanation is much more complicated than I can present today but I would like to outline a few highlights that I think were key developments.
In the early 1980’s, China removed the commune system in the rural sector. Farmers were essentially free to plant what they want and to pursue other livelihoods. Many, especially those living south of the Yangtze River became wealthy and even had time and energy to start small businesses. This was the beginning of the township and village enterprises which played an important role in China’s early economic reform.
Shortly after, China began a small experimental step and established a handful of special economic zones, most notably Shenzhen right next to Hong Kong. Hong Kong business took almost immediate advantage and moved their factories from Hong Kong to next door to maintain their competitive cost advantages. The whooshing sound that Ross Perot predicted for the U.S when North America Free Trade Agreement was signed, actually took place in Hong Kong, leaving many multi-storied factory buildings empty.
Following the Hong Kong businesses were business people from Taiwan and Southeast Asia, virtually all of them ethnic Chinese, who began to locate their manufacturing inside China. During this time, there was still much internal debate in Beijing between those wishing to remain with the planned economic model and those wishing to pry the economy wide open. One of the senior leaders was Chen Yun（éäŗ）who famously coined the term, “bird cage” economics （éøē¬¼ē»ęµ）. The nation’s economy, Chen said, must be kept in the cage. Sometime the cage can be loose and other times tight but the economy must never be allowed to fly away.
In 1992, Deng Xiaoping decided to break the debate in favor of the free market proponents. He made the now famous tour of Shenzhen and declared that “to get rich is glorious.” And thus, China opened its doors wide and began to attract foreign direct investments at a rapidly increasing rate, first $30 billion at year, then $40 billion, $50 and now over $60 billion annually. Today, China has become the most open of market economies in the world and the most attractive magnet for foreign direct investment.
In terms of economic policy, China’s approach from Zhao Ziyang to Zhu Rongji to Wen Jiabao has been cautious, step by step and trial and error. “Crossing the stream by groping the stones,” another of Deng’s saying, describes the approach. The policy makers saw what happened to Soviet Union when they quickly adopted the western capitalism without the controls and thus imploded. Beijing looked to Singapore as their template for development and gradually loosened their control as the economy expanded.
In the early 1980’s China approached the World Bank for development loans. Unlike many 3rd world countries, China did not just want the money but also wanted to work with World Bank on the terms and conditions for those loans. Those terms and conditions, Beijing saw as a necessary learning process to establishing rules for internal control and to instilling financial discipline. To transition from a totally planned economy to a market economy, China needed outside guidance on rules, financial process and implementation of controls and they recognized the need and were willing to learn from outside sources. An interesting historical footnote is that the person that led the Chinese team in working with the World Bank was Zhu Rongji.
Subsequently, Zhu Rongji as premier dragged China into WTO over considerable internal opposition. He believed the discipline imposed on WTO treaty nations would be good for China and raise its competitiveness. By having to meet world competition, China would raise the quality of Chinese manufacturing and force inefficient factories out of business. The transition would be painful, as some 30 million or more for the workforce became under employed or unemployed. But give China credit, they have been willing to undergo short term pain for the long term benefits.
Today, China has become or will soon become the world’s third largest economy, amassed a foreign exchange reserve well over $1 trillion dollars, raised hundreds of millions out of the poverty line, and has become skillful in the exercise of soft power and making its presence felt in such places as Africa, South America and of course, the rest of Asia. Unfortunately, this is not the whole picture, but before discussing the dark side of China’s rise, I would like to summarize briefly what I think China has done right.
When China began its reform in 1978, the country had been cut off from the rest of the world for nearly 30 years. I believe their go-slow, trial and error approach to policy changes turned out to be the right approach. One aspect where the Beijing government did not go slow was recognizing early the importance of infrastructure investments. Not only the World Bank financing went toward infrastructure but Beijing even went into deficit spending to improve port facilities, increase power plants, double tracking of rails and construction of a network of superhighways. No other country, certainly not India, has made such a commitment to economic growth.
China is blessed with over 60 million ethnic Chinese living outside of the mainland including Taiwan. Many of these overseas Chinese, even if they are born outside of China, never lost their sense of identity and cultural ties to their motherland. Both the governments of Taiwan and Beijing go out of their way to encourage this sense of affiliation and kinship to their ancestral home. In turn, overseas Chinese including those living in Hong Kong were the first to invest in China. At the beginning of China’s reform before Deng’s southern tour of 1992, overseas Chinese investments were the major source of FDI. Taiwan investments, whether officially approved by their government or not, played a major role not only in job creation but in introducing to the mainland the methodology and approach needed to make consistently good quality products. (Some of you may be thinking, what about the recent rash of faulty products coming from China? Unfortunately, the propensity to take short cuts （äøęęæē，äøęåƹē）is part of the Chinese character. I have a partial solution to this problem which we can discuss during the Q&A if you the audience is interested.)
For the last ten years, FDI has been coming from all over the world, Japan, S. Korea, the U.S. and Europe. Before then, it was mostly from overseas Chinese. No other country has this kind of diasporas to draw on with the possible exception of Israel. It was Beijing’s deliberate policy to risk letting a few Western flies in order to open its door wide open for foreign investment. Again, no other country has been as open or as successful.
Unfortunately, China followed the Western model of economic development without modification and failed to learn the price paid by all the predecessor nations that developed in that manner. Namely, it was economic growth without any regard to environmental consequences. Factories pollute, the society bears the cost and the common people paid the price in sickness and shortened life expectancy. Because of the size of China and the rapid rate of economic growth, the undesirable side effects are unfortunately magnified. The current generation of leaders is beginning to understand the grave consequences but have not found an effective way to deal with this problem. The more China’s economy expands, the darker is the air, dirtier the land and more toxic become the rivers and stream. The desertification of China has increased by 60% in 12 years. In 1994, 17.6% of China was desert. Now it is 27.5%. For those of us fortunate enough to enjoy fresh air, blue skies, clean water and green parks, this is a very depressing picture.
The reason this has become such a difficult problem for Beijing is their need to continue to expand their economy and create jobs to serve a huge population. The central government has made a deliberate policy to greatly increase college enrollment, an investment in human capital, but now they are faced with the need to find jobs that match with their training and aspirations, along with a range of new jobs over the entire economic spectrum. This drive to maintain economic growth is almost out of control. Local officials are still driven by how quickly their GDP is growing. Beijing has been trying to measure a “green” GDP by subtracting the environment damage and cost of remediation from the reported GDP, but so far they have not been able to find a way of calculating the down side of rampant economic growth and have not been able to convince the local officials to pay equal attention to environmental protection.
Today, any visitor to China, and one does not have to be an environmental scientist, can see the enormity of this problem and challenge. There is a real opportunity for Western technology to go into China and help restore the balance. Whether it’s the power plants or the motor vehicles, China is wasting a lot of energy and throwing off too many pollutants. China is already extremely water poor with only one quarter of the world average per capita and this problem will get worse. These are just a couple of areas where foreign technology can make a difference. Helping China remediate their environmental degradation not only can be profitable but is in our self interest. After all, the consequence of pollution respects no national boundaries.
Part of China’s problem is, of course, that it is not yet a rule based country. Too much latitude and inconsistency can take place when it is dependent on who has the authority. There is too much room for corrupt practices. China’s President Hu Jintao has again proclaimed a systematic crackdown on corruption at the recent People’s Congress. It remains to be seen how successful he will be. I think China is much too big for any central authority to be able to enforce anti-corrupt practices uniformly and effectively.
I do see help coming along in the form of the Internet and the cell phone. China recognized both as important communications tools and encouraged their growth while trying to control its use. I believe the flow of information will always outpace the authority’s attempt to monitor and restrict flow of information. Instead of control, I wish Beijing would find a way to channel the webpages, blogs, emails and sms in such a way as to bring more transparency to the country and allow the general population to shine the spotlight on the corrupt officials and wrong doers. Even if the central government does not encourage such practices, I think the use of these devices will inevitably increase, people’s voices will grow louder and the public will benefit.
Unlike the prevailing American sentiment, I do not believe a democratic form of government is necessarily the solution for China, certainly not the form of democracy that is being practiced in the United States today. In America, democracy is measured by the dollar sign. The likely success of a political candidate depends on the amount of money backing his/her candidacy. The first thing a candidate has to do, even running for the local dog catcher, is to raise money. Should the candidate be successful, the first thing after being elected is to raise more money, to ensure that as an incumbent, the candidate will not face a serious challenge for re-election.
In America, money has trumped all other aspects of the democratic process. The candidates themselves have to have a large war chest for TV ads but they are technically limited by the amount they can raise. Therefore, special interest groups compensate by raising unlimited amounts of money mostly for attack ads against candidates they do not like or issues they are against. These attack ads are unencumbered by facts and truths but deal with innuendos and outright lies. They can get away with lies with impunity, because they hide behind anonymous groups and storefront organizations.
In this environment, it is possible for a petty scam artist to make a lot of money for himself by posing as a big political donor. There is a case going on in America right now, a Norman Hsu who discovered that by giving investors’ money to cash hungry candidates in lieu of making legitimate investments, he became instantly respectable and have no trouble raising more money from others. There will always be con-artists but America’s current climate provides them the arena to make it big, albeit illegally. In short, the American democracy has drifted so far from the original ideals that the founding fathers would not recognize the country they founded.
The state of U.S. China bilateral relations is like a roller coaster riding on the rails of American domestic politics. Periodically, China becomes the convenient whipping boy for aspiring politicians who should know better but cannot resist the temptation to put the blame of American domestic problems on China. Trade deficit is just one example. In 1997, China accounted for 27% of America’s trade deficit while rest of East Asia, including Japan, accounted for another 47% for a total of 74%, almost ¾ of the overall U.S. deficit. In 2006, China accounted for 28% while rest of East Asia accounted for only 17% for a total of only 45%. A reasonable and objective observer would say that much of the manufacturing from East Asia has moved to China and that the ballooning trade deficit is due to fiscal policies of Washington and not because of any alleged predatory practices. However, the American propensity to spend beyond their earnings, the weak dollar, the barriers to export and other domestic causes are too difficult for politicians to tackle and it is just much easier to go on the podium and blame China for everything that is wrong.
For Washington (and for that matter for Tokyo) to feel threatened by China’s military expenditure is even more ludicrous. Former Secretary of Defense Rumsfeld made a fool of himself, when he, figuratively speaking, stood the deck of the American carrier off China’s coast line and accused China of aggressive intentions by daring to develop a navy with blue water capability. It will be years before China’s military firepower can match Japan’s technology and even longer to America. China has too much to do in their domestic agenda to entertain a confrontation with the U.S. However, one can understand China’s desire to continue their domestic agenda unmolested by foreign interference. Best assurance is to make sure they have a credible retaliatory strike capability. I would call it the porcupine defense.
I am absolutely convinced that the September 11 attack on the World Trade Center changed the course of world history. Just April of that year, the world was transfixed by the spy plane incident where a Chinese jet collided with an American air reconnaissance plane off Hainan Island. Thanks to the neoconservatives who had taken over Washington, China and the U.S. were on a collision course. After 9-11, Washington found a real enemy and China became a tenuous ally in the fight against terrorism instead of being the adversary of choice.
I don’t believe bin Laden in his wildest dream could have anticipated the success of 9-11 in unraveling America. Instead of finishing off the military task in Afghanistan, the Bush Administration allowed bin Laden to get away, charged into a war in Iraq and blundered the aftermath in the most appallingly incompetent manner. Thanks to Guantanamo and Abu Ghraib, the U.S. has lost all moral high grounds when it comes to human rights issues. The Bush Administration even invented a new terminology, “enemy combatant” in order to circumvent the Geneva Conventions—not being prisoners of war, the reasoning goes, means it was OK to deprive them of human rights and dignity. America’s message has become “do as I say, and not as I do.” American prestige world wide is at an all time low and Washington is finding out that even the world’s greatest military power cannot solve the world’s problems unilaterally and simply by relying on guns and bombs. Unless the next administration consists of capable, clear-eyed, non-ideologs willing to undo the damage of Iraq, I am afraid history will identify the Bush response to 9-11, not 9-11 itself but Bush response, to be the slippery slope of America’s decline. Of all the trajectories, this is the most troubling to me.
While visiting the city of Syracuse on Sicily, I learned an interesting history lesson. Syracuse was a powerful city state during the Greco period. In 413 BC, the invading Athenian navy was annihilated by Syracuse defenders which led to the decline of Athens and a relative peaceful period for Syracuse. For a brief while, Syracuse experimented with a form of democracy but then the people from Carthage came to invade Sicily. The people of Syracuse quickly elected Dionysius as their tyrant to lead them in the battle against the Carthaginians. Then as now, in times of war, people find comfort in relying on an authoritarian leader. I believe Bush’s advisors understood the psychology which is why he declared war on terror. Only difference is that Dionysius was a brilliant and effective leader.
Despite the gloomy future I see for America because of the self-inflicted injury by the Bush Administration, there are some inherent strengths that America possess that others can only envy. Thanks to a university system that continues to offer quality education, America remains the most desired destination for the best and brightest from all over the world. Right now, we are undergoing some back lash against immigrants, but by and large, America has had its welcome mat out for the best minds of the world. This is very important to America’s future because America’s school system below the college level is failing. Too many of the children born in America are not properly trained to face a future of high technology and globalization, instead they are getting an equal dose of pseudo sciences such as creationism and intelligent design along with biology and evolution.
Silicon Valley remains a beacon of strength for America. Silicon Valley continues to be the center of innovation because it continues to attract the world’s most entrepreneurial and talented people. As you may know, the two founders of Google are from Russia. One of the two founders of Yahoo is born in Taiwan. One of the original founders of Sun Microsystems who has become a high profile venture capitalist is from India. A Chinese who grew up in Vietnam then Hong Kong founded Lam Research a major semiconductor equipment company. A Chinese from Beijing who immigrated to South America, came to the U.S. for education founded Qume, a major printer company in its days. Silicon Valley is unlike any other parts of the United States. About 2% of the U.S. population resides in Silicon Valley and yet every year, around 30% of the all the venture capital is invested there. Why? Because this is where anybody with a bright idea has a chance to form a team and get financing, where failure in starting a venture is tolerated and counted as valuable experience. This tolerance for failure encourages people to take risks and think out of the box because they know that if they fail, it would not be the end of the world.
Can you see how my remarks so far is leading to what I am about to say about Japan? Historically, China and Japan have had a complicated relationship. For a long time, China was the teacher and Japan the student. Then in the 19th century, China became the student as the country began to send many of their brightest minds to Japan for further education and to learn how Japan was able to catch up to the Western powers so quickly. Many of these students such as Chiang Kai-shek became leaders of the revolution that overthrew the Manchu dynasty and led China into the republic form of government.
Then when economic reform began during the Deng Xiaoping era, Japan again became an important partner for China, not only for the loans on friendly terms but the opportunity to learn from Japan’s management style, particularly the just-in-time and continuous improvement manufacturing processes. Japanese trading companies were among the earliest to establish offices in China, not just in Beijing or Shanghai but quickly spread their presence to lower tiered cities. Matsushita established a manufacturing joint venture in Beijing even before China began the special economic zones. Nissan began a long relationship with Dongfeng Motors, at the time China’s largest automotive operation, and eventually formed a 50/50 joint venture. These are just some of the examples of the close economic and business cooperation between China and Japan and Japanese presence in China was generally earlier than the Americans or Western Europeans.
However, tensions between the two countries, and for that matter with rest of Asia, will persist until Japan rid itself of national amnesia concerning what happened in World War II. People of Japan have forgotten about the role of Imperial troops as brutal aggressors and only Hiroshima to remind them of being victims of the war. But other people especially in Asia have not forgotten about the war and will not sympathize with Japan’s self image. I believe it is in Japan’s national interest to face history forthrightly. Only then can other people forgive and begin to forget. Only then can future generations of Japanese travel around world and not be puzzled by the undertone of resentment. Japan has been the most generous nation in dispensing of foreign aid around the world, even more generous than the U.S., not counting American aid in weapons and arms. Surely Japan deserves to be a leading nation in the world and take a seat on the Security Council but I am very pessimistic that this will happen any time soon, not until Japan comes to terms with World War II.
Because of its single child policy to bring the population under control, China is facing a demographic challenge in a few decades when there will be fewer able bodied workforce to support an increasing population of retirees. Japan has a similar but more immediate problem. Japan’s population is already getting older and is the first developed nation to be shrinking. I am not a professional economist or a demographer and have no expertise in this subject area but I do have a remedy that might help reverse the trend. This remedy will be very difficult because it would require a drastic change in Japan’s national character. Here’s what I mean.
For centuries, Japan’s culture is insular, what I would call an island mentality. Only some people living on the islands qualify as Japanese—not the Ainu, for instance, and not ethnic Koreans who have been here for many generations. Even a Japanese national, say a trading company executive who has been posted overseas for a few years, when he returns, his family is often treated as gaijins (å¤äŗŗ) by neighbors and schoolmates. In Japan, it seems to be very easy to be gaijins and very difficult to be accepted as Nihonjin. Yet at this juncture in history, Japan’s economy is in need of new blood, new people that can bring new ideas and new vigor. Japan needs to open up and welcome other nationalities to live and work in Japan, needs to create an environment that make these foreigners feel welcome and not feel like gaijins. China actively recruits overseas Chinese to return to China and has programs that invite foreign experts of any ethnicity to teach and work in China. The U.S. and especially Silicon Valley does not have any organized program, just an appealing, multi-ethnic and diverse environment where anybody from anywhere in the world could come and feel at home. In my humble opinion, it would be in Japan’s interest to review whether a systemic change in national attitude is possible and would be in the best interest of Japan. In just the recent memory, Japan transformed from a country that makes shoddy products to one known for the Deming Prize and famous all over the world for high quality, high precision products. Perhaps it’s time for another dramatic transformation.
Before concluding my talk, I have been asked to specifically comment on possible impact of the three trajectories on the tri-lateral economic relationships. To do so, we should first consider where China is heading in the coming decades. The anticipation is that China will:
• Develop a greater consumer oriented economy
• Concentrate on higher valued manufacturing
• Reduce pollution and restore the damaged environment
• Place special emphasis on increasing availability of clean water
• Encourage more inland investments
• Increase regulatory transparency in banking and in securities market
• Improve the enforcement of intellectual property rights
• Improve efficient use of energy in cars, power plants, and others and develop alternative energy and coal gasification
One does not have to be a professional economist to see that each of the above represents opportunities for western technology and businesses and profitable participation while helping China accomplish its objectives. However, compared to the U.S., Japan enjoys certain comparative advantages that are difficult to overlook.
Japan is closer to China than America by about 10 hours in flight time. Common similarities in culture and language are leverage-able for Japan companies in China. I personally believe that many of consumer products developed for the Japanese market enjoy inside track in getting acceptance in China’s consumer markets.
There is a form of “reverse” outsourcing that Japanese companies may have not considered. Japanese companies are already outsourcing some IT related work to China but have they considered outsourcing call center work to young Japanese living in China? Some American companies are already hiring your Americans, Brits and Aussies living in Shanghai or Beijing to handle customer service calls. The advantage of this arrangement is that the expat in China get paid wages considered generous by local standards but still no where near an expat package of compensation. The irate customer gets to complain to someone that sounds right next door and not far away from India. The employer gets a good deal.
In my view, the biggest comparative advantage Japan has over American competition in China is Japan’s lack of a political agenda in dealing with China. Japan does not share America’s invasive zeal to judge how other countries honor human rights. Ordinary business transactions are not subjected to restrictive export control in such a way that it no longer becomes a transaction of equals but between adversaries.
Lastly, Japan is host to a large number of students from China. These students represent a significant resource to the future development of Japan if only Japan can figure out a way to recruit and keep them and let them know that they will be welcome to stay, and not as gaijins.
Since all of you in this audience are professional economists, I am sure you are aware that globalization leads to open markets. In trade, there is a buyer and a seller and the transaction has to be a fair deal for both. In other words, it has to be a win-win deal and such win-win arrangements have no impact and are not impacted by trade surpluses or deficits. There is nothing that says that each country must maintain a balanced trade with each bi-lateral trading partner. In fact, it is downright impossible to do so.
Ladies and Gentlemen, I apologize for prattling on like this. I touch on just some of the challenges of the three troubling trajectories but alas, I don’t have any sure fire solutions to offer. I do feel that these trajectories will keep China, Japan and the U.S. fully occupied for years to come without having to create artificial confrontations. Again I thank you for this opportunity to speak and I look forward to your questions and exchanging ideas with you. Thank you very much.
Ladies and gentlemen,
I am honored to be invited to speak before you at the world renowned Kyoto University and it is a distinct personal pleasure to be here. I have been to Kyoto a number of times but have always treasured my first visit. It was in October 1975, just a little over 32 years ago. I was on business for SRI International and my then colleague and now dear friend, Takaoka-san, took time out to show me Kyoto. He was then the executive director of SRI’s office in Asia. He was obviously proud of Kyoto and proud to be an alumnus of Kyoto U. And his pride made my visit that much more memorable.
I really enjoy traveling around the world. Each time and each place affords so many opportunities to learn about history, culture and the diversity of the people that populate our world. For example, my wife and I just spend ten days in Sicily, our very first visit there. I learned from this trip that Sicily was probably one of the earliest beneficiaries of ethnic diversity. You see, Sicily has rich soil constantly added by active volcanoes, lots of sun shine and a warm climate—a California of the Mediterranean. Many people came to settle there, Phoenicians, Greeks, Romans, Byzantines, Moors, Normans and now young Chinese selling souvenirs at tourist attractions. Each brought their culture and values to enrich Sicily and added to the island’s rich heritage.
I will be coming back to Sicily later in my talk. But I am here today to talk about China, Japan and the U.S. Except for elementary school education in China, I was educated in the U.S. and grew up in America. I have been visiting China regularly on business consulting assignments since 1978. I write commentaries about the sometimes troubled U.S. China bilateral relations. I think I know the two countries pretty well. I have been to Japan less frequently and can not claim to be an expert on Japan. So forgive me, if my presentation today appears unbalanced.
Nonetheless, I would like to take this opportunity to present some personal views that may sound blunt and direct. I hope you will forgive me if some of my statements sound untactful. My American upbringing is urging me to “tell it like it is,” and I would be remiss to pass up this chance to share some very serious concerns with this distinguished audience by obscuring my remarks in polite but ambiguous language. I hope you’ll find my remarks provocative but not offensive.
Some might argue whether China, Japan and the U.S. are the three major powers in the world, but there can be no doubt that they are the most important nations around Asia Pacific. Each shares many common interests but also has important differences in values and priorities. Each faces some ominous dark clouds in the horizon that I would like to discuss with you. The peace and stability of the Asia Pacific region depends on the three countries getting along with each other and staying in good health.
First, let’s talk about China. When I first went to China on business trips, late ‘70s to early ‘80s, just trying to place a phone call to make an appointment was a frustrating experience. There were so few telephone lines in Beijing in those days that I would get the busy signal even before I finished dialing the number. Today there are 500 million cellphone users in China and no bottlenecks at the switch boards.
In 1985, one of my clients, a maker of automotive components, celebrated the formation of a JV in China. That same year, Germany’s VW JV in Shanghai started production. At the time China’s total yearly production of motor vehicles was less half of million, most of them trucks and buses. Only 5000 passenger sedans were produced that year. In 2006, 21 years later, China’s vehicle production exceeded 7 million of which about 4.5 million are passenger cars. So vehicle production has increased more than 14 fold over this period of time while passenger cars grew by a phenomenal 900 times. China is now the third largest auto producing country in the world, after Japan and the U.S.
Today, everybody knows that China’s economy has been doubling every 7 years for nearly the last three decades. For a long time, skeptics found it hard to believe that this kind of unprecedented growth was possible and doubted the official statistics. They would point out that 28 out of 29 reporting provinces report their annual GDP growth as higher than the national average—clearly a mathematical impossibility. It was discovered later that the central government’s calculation for the national average was too low and less precise than the regional reports.
How did China accomplish such phenomenal growth? The full explanation is much more complicated than I can present today but I would like to outline a few highlights that I think were key developments.
In the early 1980’s, China removed the commune system in the rural sector. Farmers were essentially free to plant what they want and to pursue other livelihoods. Many, especially those living south of the Yangtze River became wealthy and even had time and energy to start small businesses. This was the beginning of the township and village enterprises which played an important role in China’s early economic reform.
Shortly after, China began a small experimental step and established a handful of special economic zones, most notably Shenzhen right next to Hong Kong. Hong Kong business took almost immediate advantage and moved their factories from Hong Kong to next door to maintain their competitive cost advantages. The whooshing sound that Ross Perot predicted for the U.S when North America Free Trade Agreement was signed, actually took place in Hong Kong, leaving many multi-storied factory buildings empty.
Following the Hong Kong businesses were business people from Taiwan and Southeast Asia, virtually all of them ethnic Chinese, who began to locate their manufacturing inside China. During this time, there was still much internal debate in Beijing between those wishing to remain with the planned economic model and those wishing to pry the economy wide open. One of the senior leaders was Chen Yun（éäŗ）who famously coined the term, “bird cage” economics （éøē¬¼ē»ęµ）. The nation’s economy, Chen said, must be kept in the cage. Sometime the cage can be loose and other times tight but the economy must never be allowed to fly away.
In 1992, Deng Xiaoping decided to break the debate in favor of the free market proponents. He made the now famous tour of Shenzhen and declared that “to get rich is glorious.” And thus, China opened its doors wide and began to attract foreign direct investments at a rapidly increasing rate, first $30 billion at year, then $40 billion, $50 and now over $60 billion annually. Today, China has become the most open of market economies in the world and the most attractive magnet for foreign direct investment.
In terms of economic policy, China’s approach from Zhao Ziyang to Zhu Rongji to Wen Jiabao has been cautious, step by step and trial and error. “Crossing the stream by groping the stones,” another of Deng’s saying, describes the approach. The policy makers saw what happened to Soviet Union when they quickly adopted the western capitalism without the controls and thus imploded. Beijing looked to Singapore as their template for development and gradually loosened their control as the economy expanded.
In the early 1980’s China approached the World Bank for development loans. Unlike many 3rd world countries, China did not just want the money but also wanted to work with World Bank on the terms and conditions for those loans. Those terms and conditions, Beijing saw as a necessary learning process to establishing rules for internal control and to instilling financial discipline. To transition from a totally planned economy to a market economy, China needed outside guidance on rules, financial process and implementation of controls and they recognized the need and were willing to learn from outside sources. An interesting historical footnote is that the person that led the Chinese team in working with the World Bank was Zhu Rongji.
Subsequently, Zhu Rongji as premier dragged China into WTO over considerable internal opposition. He believed the discipline imposed on WTO treaty nations would be good for China and raise its competitiveness. By having to meet world competition, China would raise the quality of Chinese manufacturing and force inefficient factories out of business. The transition would be painful, as some 30 million or more for the workforce became under employed or unemployed. But give China credit, they have been willing to undergo short term pain for the long term benefits.
Today, China has become or will soon become the world’s third largest economy, amassed a foreign exchange reserve well over $1 trillion dollars, raised hundreds of millions out of the poverty line, and has become skillful in the exercise of soft power and making its presence felt in such places as Africa, South America and of course, the rest of Asia. Unfortunately, this is not the whole picture, but before discussing the dark side of China’s rise, I would like to summarize briefly what I think China has done right.
When China began its reform in 1978, the country had been cut off from the rest of the world for nearly 30 years. I believe their go-slow, trial and error approach to policy changes turned out to be the right approach. One aspect where the Beijing government did not go slow was recognizing early the importance of infrastructure investments. Not only the World Bank financing went toward infrastructure but Beijing even went into deficit spending to improve port facilities, increase power plants, double tracking of rails and construction of a network of superhighways. No other country, certainly not India, has made such a commitment to economic growth.
China is blessed with over 60 million ethnic Chinese living outside of the mainland including Taiwan. Many of these overseas Chinese, even if they are born outside of China, never lost their sense of identity and cultural ties to their motherland. Both the governments of Taiwan and Beijing go out of their way to encourage this sense of affiliation and kinship to their ancestral home. In turn, overseas Chinese including those living in Hong Kong were the first to invest in China. At the beginning of China’s reform before Deng’s southern tour of 1992, overseas Chinese investments were the major source of FDI. Taiwan investments, whether officially approved by their government or not, played a major role not only in job creation but in introducing to the mainland the methodology and approach needed to make consistently good quality products. (Some of you may be thinking, what about the recent rash of faulty products coming from China? Unfortunately, the propensity to take short cuts （äøęęæē，äøęåƹē）is part of the Chinese character. I have a partial solution to this problem which we can discuss during the Q&A if you the audience is interested.)
For the last ten years, FDI has been coming from all over the world, Japan, S. Korea, the U.S. and Europe. Before then, it was mostly from overseas Chinese. No other country has this kind of diasporas to draw on with the possible exception of Israel. It was Beijing’s deliberate policy to risk letting a few Western flies in order to open its door wide open for foreign investment. Again, no other country has been as open or as successful.
Unfortunately, China followed the Western model of economic development without modification and failed to learn the price paid by all the predecessor nations that developed in that manner. Namely, it was economic growth without any regard to environmental consequences. Factories pollute, the society bears the cost and the common people paid the price in sickness and shortened life expectancy. Because of the size of China and the rapid rate of economic growth, the undesirable side effects are unfortunately magnified. The current generation of leaders is beginning to understand the grave consequences but have not found an effective way to deal with this problem. The more China’s economy expands, the darker is the air, dirtier the land and more toxic become the rivers and stream. The desertification of China has increased by 60% in 12 years. In 1994, 17.6% of China was desert. Now it is 27.5%. For those of us fortunate enough to enjoy fresh air, blue skies, clean water and green parks, this is a very depressing picture.
The reason this has become such a difficult problem for Beijing is their need to continue to expand their economy and create jobs to serve a huge population. The central government has made a deliberate policy to greatly increase college enrollment, an investment in human capital, but now they are faced with the need to find jobs that match with their training and aspirations, along with a range of new jobs over the entire economic spectrum. This drive to maintain economic growth is almost out of control. Local officials are still driven by how quickly their GDP is growing. Beijing has been trying to measure a “green” GDP by subtracting the environment damage and cost of remediation from the reported GDP, but so far they have not been able to find a way of calculating the down side of rampant economic growth and have not been able to convince the local officials to pay equal attention to environmental protection.
Today, any visitor to China, and one does not have to be an environmental scientist, can see the enormity of this problem and challenge. There is a real opportunity for Western technology to go into China and help restore the balance. Whether it’s the power plants or the motor vehicles, China is wasting a lot of energy and throwing off too many pollutants. China is already extremely water poor with only one quarter of the world average per capita and this problem will get worse. These are just a couple of areas where foreign technology can make a difference. Helping China remediate their environmental degradation not only can be profitable but is in our self interest. After all, the consequence of pollution respects no national boundaries.
Part of China’s problem is, of course, that it is not yet a rule based country. Too much latitude and inconsistency can take place when it is dependent on who has the authority. There is too much room for corrupt practices. China’s President Hu Jintao has again proclaimed a systematic crackdown on corruption at the recent People’s Congress. It remains to be seen how successful he will be. I think China is much too big for any central authority to be able to enforce anti-corrupt practices uniformly and effectively.
I do see help coming along in the form of the Internet and the cell phone. China recognized both as important communications tools and encouraged their growth while trying to control its use. I believe the flow of information will always outpace the authority’s attempt to monitor and restrict flow of information. Instead of control, I wish Beijing would find a way to channel the webpages, blogs, emails and sms in such a way as to bring more transparency to the country and allow the general population to shine the spotlight on the corrupt officials and wrong doers. Even if the central government does not encourage such practices, I think the use of these devices will inevitably increase, people’s voices will grow louder and the public will benefit.
Unlike the prevailing American sentiment, I do not believe a democratic form of government is necessarily the solution for China, certainly not the form of democracy that is being practiced in the United States today. In America, democracy is measured by the dollar sign. The likely success of a political candidate depends on the amount of money backing his/her candidacy. The first thing a candidate has to do, even running for the local dog catcher, is to raise money. Should the candidate be successful, the first thing after being elected is to raise more money, to ensure that as an incumbent, the candidate will not face a serious challenge for re-election.
In America, money has trumped all other aspects of the democratic process. The candidates themselves have to have a large war chest for TV ads but they are technically limited by the amount they can raise. Therefore, special interest groups compensate by raising unlimited amounts of money mostly for attack ads against candidates they do not like or issues they are against. These attack ads are unencumbered by facts and truths but deal with innuendos and outright lies. They can get away with lies with impunity, because they hide behind anonymous groups and storefront organizations.
In this environment, it is possible for a petty scam artist to make a lot of money for himself by posing as a big political donor. There is a case going on in America right now, a Norman Hsu who discovered that by giving investors’ money to cash hungry candidates in lieu of making legitimate investments, he became instantly respectable and have no trouble raising more money from others. There will always be con-artists but America’s current climate provides them the arena to make it big, albeit illegally. In short, the American democracy has drifted so far from the original ideals that the founding fathers would not recognize the country they founded.
The state of U.S. China bilateral relations is like a roller coaster riding on the rails of American domestic politics. Periodically, China becomes the convenient whipping boy for aspiring politicians who should know better but cannot resist the temptation to put the blame of American domestic problems on China. Trade deficit is just one example. In 1997, China accounted for 27% of America’s trade deficit while rest of East Asia, including Japan, accounted for another 47% for a total of 74%, almost ¾ of the overall U.S. deficit. In 2006, China accounted for 28% while rest of East Asia accounted for only 17% for a total of only 45%. A reasonable and objective observer would say that much of the manufacturing from East Asia has moved to China and that the ballooning trade deficit is due to fiscal policies of Washington and not because of any alleged predatory practices. However, the American propensity to spend beyond their earnings, the weak dollar, the barriers to export and other domestic causes are too difficult for politicians to tackle and it is just much easier to go on the podium and blame China for everything that is wrong.
For Washington (and for that matter for Tokyo) to feel threatened by China’s military expenditure is even more ludicrous. Former Secretary of Defense Rumsfeld made a fool of himself, when he, figuratively speaking, stood the deck of the American carrier off China’s coast line and accused China of aggressive intentions by daring to develop a navy with blue water capability. It will be years before China’s military firepower can match Japan’s technology and even longer to America. China has too much to do in their domestic agenda to entertain a confrontation with the U.S. However, one can understand China’s desire to continue their domestic agenda unmolested by foreign interference. Best assurance is to make sure they have a credible retaliatory strike capability. I would call it the porcupine defense.
I am absolutely convinced that the September 11 attack on the World Trade Center changed the course of world history. Just April of that year, the world was transfixed by the spy plane incident where a Chinese jet collided with an American air reconnaissance plane off Hainan Island. Thanks to the neoconservatives who had taken over Washington, China and the U.S. were on a collision course. After 9-11, Washington found a real enemy and China became a tenuous ally in the fight against terrorism instead of being the adversary of choice.
I don’t believe bin Laden in his wildest dream could have anticipated the success of 9-11 in unraveling America. Instead of finishing off the military task in Afghanistan, the Bush Administration allowed bin Laden to get away, charged into a war in Iraq and blundered the aftermath in the most appallingly incompetent manner. Thanks to Guantanamo and Abu Ghraib, the U.S. has lost all moral high grounds when it comes to human rights issues. The Bush Administration even invented a new terminology, “enemy combatant” in order to circumvent the Geneva Conventions—not being prisoners of war, the reasoning goes, means it was OK to deprive them of human rights and dignity. America’s message has become “do as I say, and not as I do.” American prestige world wide is at an all time low and Washington is finding out that even the world’s greatest military power cannot solve the world’s problems unilaterally and simply by relying on guns and bombs. Unless the next administration consists of capable, clear-eyed, non-ideologs willing to undo the damage of Iraq, I am afraid history will identify the Bush response to 9-11, not 9-11 itself but Bush response, to be the slippery slope of America’s decline. Of all the trajectories, this is the most troubling to me.
While visiting the city of Syracuse on Sicily, I learned an interesting history lesson. Syracuse was a powerful city state during the Greco period. In 413 BC, the invading Athenian navy was annihilated by Syracuse defenders which led to the decline of Athens and a relative peaceful period for Syracuse. For a brief while, Syracuse experimented with a form of democracy but then the people from Carthage came to invade Sicily. The people of Syracuse quickly elected Dionysius as their tyrant to lead them in the battle against the Carthaginians. Then as now, in times of war, people find comfort in relying on an authoritarian leader. I believe Bush’s advisors understood the psychology which is why he declared war on terror. Only difference is that Dionysius was a brilliant and effective leader.
Despite the gloomy future I see for America because of the self-inflicted injury by the Bush Administration, there are some inherent strengths that America possess that others can only envy. Thanks to a university system that continues to offer quality education, America remains the most desired destination for the best and brightest from all over the world. Right now, we are undergoing some back lash against immigrants, but by and large, America has had its welcome mat out for the best minds of the world. This is very important to America’s future because America’s school system below the college level is failing. Too many of the children born in America are not properly trained to face a future of high technology and globalization, instead they are getting an equal dose of pseudo sciences such as creationism and intelligent design along with biology and evolution.
Silicon Valley remains a beacon of strength for America. Silicon Valley continues to be the center of innovation because it continues to attract the world’s most entrepreneurial and talented people. As you may know, the two founders of Google are from Russia. One of the two founders of Yahoo is born in Taiwan. One of the original founders of Sun Microsystems who has become a high profile venture capitalist is from India. A Chinese who grew up in Vietnam then Hong Kong founded Lam Research a major semiconductor equipment company. A Chinese from Beijing who immigrated to South America, came to the U.S. for education founded Qume, a major printer company in its days. Silicon Valley is unlike any other parts of the United States. About 2% of the U.S. population resides in Silicon Valley and yet every year, around 30% of the all the venture capital is invested there. Why? Because this is where anybody with a bright idea has a chance to form a team and get financing, where failure in starting a venture is tolerated and counted as valuable experience. This tolerance for failure encourages people to take risks and think out of the box because they know that if they fail, it would not be the end of the world.
Can you see how my remarks so far is leading to what I am about to say about Japan? Historically, China and Japan have had a complicated relationship. For a long time, China was the teacher and Japan the student. Then in the 19th century, China became the student as the country began to send many of their brightest minds to Japan for further education and to learn how Japan was able to catch up to the Western powers so quickly. Many of these students such as Chiang Kai-shek became leaders of the revolution that overthrew the Manchu dynasty and led China into the republic form of government.
Then when economic reform began during the Deng Xiaoping era, Japan again became an important partner for China, not only for the loans on friendly terms but the opportunity to learn from Japan’s management style, particularly the just-in-time and continuous improvement manufacturing processes. Japanese trading companies were among the earliest to establish offices in China, not just in Beijing or Shanghai but quickly spread their presence to lower tiered cities. Matsushita established a manufacturing joint venture in Beijing even before China began the special economic zones. Nissan began a long relationship with Dongfeng Motors, at the time China’s largest automotive operation, and eventually formed a 50/50 joint venture. These are just some of the examples of the close economic and business cooperation between China and Japan and Japanese presence in China was generally earlier than the Americans or Western Europeans.
However, tensions between the two countries, and for that matter with rest of Asia, will persist until Japan rid itself of national amnesia concerning what happened in World War II. People of Japan have forgotten about the role of Imperial troops as brutal aggressors and only Hiroshima to remind them of being victims of the war. But other people especially in Asia have not forgotten about the war and will not sympathize with Japan’s self image. I believe it is in Japan’s national interest to face history forthrightly. Only then can other people forgive and begin to forget. Only then can future generations of Japanese travel around world and not be puzzled by the undertone of resentment. Japan has been the most generous nation in dispensing of foreign aid around the world, even more generous than the U.S., not counting American aid in weapons and arms. Surely Japan deserves to be a leading nation in the world and take a seat on the Security Council but I am very pessimistic that this will happen any time soon, not until Japan comes to terms with World War II.
Because of its single child policy to bring the population under control, China is facing a demographic challenge in a few decades when there will be fewer able bodied workforce to support an increasing population of retirees. Japan has a similar but more immediate problem. Japan’s population is already getting older and is the first developed nation to be shrinking. I am not a professional economist or a demographer and have no expertise in this subject area but I do have a remedy that might help reverse the trend. This remedy will be very difficult because it would require a drastic change in Japan’s national character. Here’s what I mean.
For centuries, Japan’s culture is insular, what I would call an island mentality. Only some people living on the islands qualify as Japanese—not the Ainu, for instance, and not ethnic Koreans who have been here for many generations. Even a Japanese national, say a trading company executive who has been posted overseas for a few years, when he returns, his family is often treated as gaijins (å¤äŗŗ) by neighbors and schoolmates. In Japan, it seems to be very easy to be gaijins and very difficult to be accepted as Nihonjin. Yet at this juncture in history, Japan’s economy is in need of new blood, new people that can bring new ideas and new vigor. Japan needs to open up and welcome other nationalities to live and work in Japan, needs to create an environment that make these foreigners feel welcome and not feel like gaijins. China actively recruits overseas Chinese to return to China and has programs that invite foreign experts of any ethnicity to teach and work in China. The U.S. and especially Silicon Valley does not have any organized program, just an appealing, multi-ethnic and diverse environment where anybody from anywhere in the world could come and feel at home. In my humble opinion, it would be in Japan’s interest to review whether a systemic change in national attitude is possible and would be in the best interest of Japan. In just the recent memory, Japan transformed from a country that makes shoddy products to one known for the Deming Prize and famous all over the world for high quality, high precision products. Perhaps it’s time for another dramatic transformation.
Before concluding my talk, I have been asked to specifically comment on possible impact of the three trajectories on the tri-lateral economic relationships. To do so, we should first consider where China is heading in the coming decades. The anticipation is that China will:
• Develop a greater consumer oriented economy
• Concentrate on higher valued manufacturing
• Reduce pollution and restore the damaged environment
• Place special emphasis on increasing availability of clean water
• Encourage more inland investments
• Increase regulatory transparency in banking and in securities market
• Improve the enforcement of intellectual property rights
• Improve efficient use of energy in cars, power plants, and others and develop alternative energy and coal gasification
One does not have to be a professional economist to see that each of the above represents opportunities for western technology and businesses and profitable participation while helping China accomplish its objectives. However, compared to the U.S., Japan enjoys certain comparative advantages that are difficult to overlook.
Japan is closer to China than America by about 10 hours in flight time. Common similarities in culture and language are leverage-able for Japan companies in China. I personally believe that many of consumer products developed for the Japanese market enjoy inside track in getting acceptance in China’s consumer markets.
There is a form of “reverse” outsourcing that Japanese companies may have not considered. Japanese companies are already outsourcing some IT related work to China but have they considered outsourcing call center work to young Japanese living in China? Some American companies are already hiring your Americans, Brits and Aussies living in Shanghai or Beijing to handle customer service calls. The advantage of this arrangement is that the expat in China get paid wages considered generous by local standards but still no where near an expat package of compensation. The irate customer gets to complain to someone that sounds right next door and not far away from India. The employer gets a good deal.
In my view, the biggest comparative advantage Japan has over American competition in China is Japan’s lack of a political agenda in dealing with China. Japan does not share America’s invasive zeal to judge how other countries honor human rights. Ordinary business transactions are not subjected to restrictive export control in such a way that it no longer becomes a transaction of equals but between adversaries.
Lastly, Japan is host to a large number of students from China. These students represent a significant resource to the future development of Japan if only Japan can figure out a way to recruit and keep them and let them know that they will be welcome to stay, and not as gaijins.
Since all of you in this audience are professional economists, I am sure you are aware that globalization leads to open markets. In trade, there is a buyer and a seller and the transaction has to be a fair deal for both. In other words, it has to be a win-win deal and such win-win arrangements have no impact and are not impacted by trade surpluses or deficits. There is nothing that says that each country must maintain a balanced trade with each bi-lateral trading partner. In fact, it is downright impossible to do so.
Ladies and Gentlemen, I apologize for prattling on like this. I touch on just some of the challenges of the three troubling trajectories but alas, I don’t have any sure fire solutions to offer. I do feel that these trajectories will keep China, Japan and the U.S. fully occupied for years to come without having to create artificial confrontations. Again I thank you for this opportunity to speak and I look forward to your questions and exchanging ideas with you. Thank you very much.
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