Handel Jones is the founder, owner, and CEO of International Business Strategies, Inc., a market and strategy consulting and analysis company whose client list includes IBM, Nokia, Samsung, Sony, Toshiba, TSMC, andChina Resources. He has been involved with Chinese governments and state-owned and private businesses for more than 30 years, and he is one of the leading experts in directing international business investment in Chinaand Chinese corporate investment/expansion overseas. He lives in Los Gatos, California.

ChinAmerica

THE UNEASY PARTNERSHIP THAT WILL CHANGE THE WORLD

By HANDEL JONES

The McGraw-Hill Companies, Inc.

Copyright © 2010 Handel Jones
All rights reserved.
ISBN: 978-0-07-174242-9

Contents

ForewordAcknowledgmentsIntroductionPART I BEATING AMERICA WEALTH BATTLE1 THE FRONT LINES OF THE CHINAMERICA WEALTH BATTLE2 HOW CEOS REPLACED GENERALSPART II UNITED STATES: THE WEAKENING GIANT3 THE DECLINING U.S. AUTOMOBILE AND STEEL INDUSTRIES4 U.S. COMPUTER INDUSTRY—A WINNER TO DATE5 THE ROLE OF GOVERNMENT IN U.S. INDUSTRYPART III CHINA: THE GROWING GIANT6 WHAT IS CHINA TODAY?7 CHINESE CULTURE8 CHINESE GOVERNMENT POLICIES9 CHINESE ECONOMIC PHILOSOPHIES10 CHINA’S FUTURE LOOKS BRIGHTPART IV WHAT HAPPENS NEXT IN CHINA AND THE UNITED STATES11 TAIWAN AND ITS SYNERGY WITH CHINA12 A RESTRUCTURING PLAN FOR THE UNITED STATESEndnotesIndex

Excerpt

CHAPTER 1

THE FRONT LINES OF THE CHINAMERICA WEALTH BATTLE

As the sun goes down in the United States, the day starts in China.

Figuratively speaking, the financial sun has been rising in China for severalyears, and it is starting to set on the United States. How long the sun shineson China, and how long the United States will remain in twilight, depends notonly on China but also on the actions of the United States.

The industrialization of China since the 1980s has been nothing short ofastounding. In a historically short amount of time, China has built a huge baseof educated employees working in a vast network of factories producing a broadarray of consumer and industrial products, primarily for export. In addition,the surge in production has provided hundreds of millions of Chinese withtelevisions, cell phones, and other touchstones of a thriving middle class.

The frenetic growth of Chinese manufacturing and the rise of the middle classare leading to a conflict with other nations, especially the United States. Thepollution pouring from Chinese factory smokestacks and effluent pipes is asource of tension worldwide. But it is also the visible symbol of a moreprofound confrontation: the demand for increasingly scarce and strategic naturalresources.

China is absorbing large quantities of increasingly expensive copper, oil, ironore, wood, and other commodities from around the world. The huge surge in demandfor raw materials has inflated the prices of these commodities for the entiredeveloped world. So not only has the cost of wire and cable jumped but so toohas the price of steel, cement, and other materials. Housing and schoolconstruction costs in Boston, Birmingham, and Boise as well as in Beijingskyrocketed during the economic boom times before the economic crash ofSeptember 2008.

Since most developed countries have been importing copper wire, steel, woodfurniture, and other finished goods from Chinese factories that were absorbingall of these raw materials, trade imbalances have become more skewed. The floodof clothes, televisions, laptop computers, cell phones, automobiles, and othermanufactured goods from China to the rest of the world has triggered a massiveflow of dollars, pounds, francs, lira, yen, rubles, and other currencies in theopposite direction. While the United States has been importing an increasinglylarge amount of finished goods from China and other parts of Asia for decades,the surge in commodities prices has led to an even larger trade deficit. Thismassive deficit is the source of another long-term conflict with China.

In fact, a substantial amount of the world’s wealth has moved to China. As ofSeptember 2009, the Chinese government held foreign exchange reserves of almost$2.3 trillion, roughly a quarter of the foreign currency reserves of the entireworld. How much is $2.3 trillion? According to the reserve rankings by theInternational Monetary Fund, it is more than the combined foreign exchangeholdings of Japan, Russia, and the entire European community. Here’s another wayof understanding the financial power in China’s treasury: $2.3 trillion is morethan five times the amount of foreign exchange reserves that Saudi Arabia hasaccumulated from exporting oil as of May 2009. Or consider this comparison: TheUnited States had $83 billion in foreign exchange reserves in September 2009.

Published estimates have indicated that roughly 70 percent of the foreigncurrency reserves held by China are in U.S. dollars or their equivalents. Nowonder several U.S. late-night talk show hosts chortled in November 2009 thatPresident Barack Obama’s visit to China was arranged so that he could “visit ourmoney.” The tension over the shift of American wealth to China is growingquickly.

In fact, while all nations compete to increase the wealth of their population,China and the United States appear to be headed toward a particularlycontentious conflict. The Chinese realize that wealth is created by the amountof goods produced and sold to others, not by the amount of goods consumed. TheChinese understand that the growth of the wealth of nations is based on having apositive trade balance, along with an efficient infrastructure and the fairdistribution of the resulting wealth among the population. A positive tradebalance occurs when the value of exports exceeds imports. A positive tradebalance also is a measure of competitiveness against other countries, and wealthis built by having superior competitiveness.

Beginning in the late 1970s, the Chinese people were forced to sacrifice in theshort term to accumulate wealth in the long term. They focused most of theirefforts on manufacturing goods for export. That attitude continues to this day.

Contrast that approach to building wealth with the behavior of the majority ofthe U.S. population in the twenty-first century. An entitlement mentalityprevails among most of the middle-and upper-class populations. If people havebeen wealthy for a long time, they develop an attitude of entitlement—theyindulge in a high standard of living without worrying about the consequences ofliving beyond their means. Instead of building personal and national wealth,many Americans are focused only on consuming, and they are hampering the rest ofthe country’s population’s quest for a better life.

The conflicting motivations between China and the United States are leading to awar over wealth. Indeed, some would say that a war has already begun: there havebeen several trade sanctions enacted by the U.S. Congress, and there is agrowing number of complaints that Chinese companies have been selling goods inthe United States at prices that are less than their cost of manufacture. Thistechnique to capture foreign markets is called dumping. The Chineseretaliated against the sanctions in October 2009 with new registrationrequirements for companies that want to sell products to the Chinese government.These trade restraints must not be allowed to escalate into provocativeactions—neither side will survive armed conflict or the economicequivalent, trade protectionism in the form of tariffs or other barriers.

The tariff warnings and dumping complaints reflect what happens when a nationloses economic power—it feels threatened. A nation that perceives itselfto be losing wealth will feel insecure in its relationships with other nations.Meanwhile, a nation that perceives itself to be gaining wealth and thereforeeconomic power will want to exercise that power in its relationships with othernations. Strong economic power usually leads a country to want to expand itspower by controlling additional resources, or manipulating weaker competitors sothat its own economic and political supremacy continues. The declining fortunesof the United States and the continued increases in the wealth of China couldultimately destabilize the current political structure of the planet.

There has to be another path to defuse the tensions and avoid conflict thatwould damage both sides. This book is about how China and America can develop amutually beneficial relationship, a modus vivendi. A partnership I callChinAmerica would benefit both countries, helping them “unwind their mutualsuicide pact,” as highly respected international expert Fareed Zakaria describedthe situation in the 2009 preface to his book The Post-American World.The ChinAmerica partnership will help the Chinese and American governments andpopulations achieve their goals without gravely damaging each other.

The crucial foundation of a successful partnership between China and America isa better understanding of what led to the current dichotomy in the fortunes ofChina and the United States. ChinAmerica explores the behaviors anddecisions made by American leaders and the population over the past few decadesthat led to the decline of America as the unchallenged leading industrial giant,and to the current economic crossroads. In addition, ChinAmericaexplains how 2,000 years of wars and political change strongly influencedChina’s economic behavior.

ChinAmerica is more than a summary of the past though. In Chapter5, I describe the behavioral and governmental policy changes that must beeffected for the ChinAmerica partnership to succeed. If executed, my “turnaroundplan” will help China and America achieve equilibrium in their relationship, andthat balance will be based on mutual respect and dependence. The China marketwould be a large opportunity for U.S. companies if China would be more open toAmerican imports of automobiles, construction equipment, and electronicsdevices. In addition, an invigorated U.S. market would prove lucrative forAmerican as well as Chinese companies to sell more goods.

If the appropriate actions are not taken, it is likely that Chinese corporationswill gain increasing percentages of global markets, as well as their domesticmarkets, for a wide variety of manufactured goods. If that happens, U.S.citizens and the U.S. government will suffer. Indeed, the United States’economic and political strength will decline precipitously. And if the economicstrength of the United States continues to decline, China will have a smallerexport market.

Some would say the economic strength of the United States has already declined,due to the unprecedented levels of its buying imports from China and thegovernment’s skyrocketing deficit spending. Indeed, imports from China had beengrowing for decades, but as the U.S. economy recovered from the dot-com bust of2001, those import levels were turbocharged, as Figure 1.1 shows.

In addition to the trade imbalance with China, the United States also isimporting large amounts of oil and manufactured goods from other countries. Allthose automobiles from Japan, South Korea, and Germany, wine from France, Chile,and Australia, and designer watches from everywhere cost money too. In 2008, theU.S. trade deficit was almost $700 billion, the total of more than 20 years ofnegative trade balances. The large trade deficits between the United States andChina are a key indicator that American trade and manufacturing policies arefailures.

Although, the trade deficit is diminishing America’s wealth and political power,it is not the only deficit that plagues the United States. The U.S. governmenthas been spending more than it takes in as taxes since before 2000. The fiscaldeficits of the past decade were incurred in part to support the wars in Iraqand Afghanistan and to make up for huge tax cuts.

The burgeoning fiscal deficit of the U.S. government also made the trade deficitworse. This spending spree by the government, and additional cash in thepocketbooks of the wealthiest Americans, triggered a tidal wave of consumptionin the early years of the twenty-first century. The middle and lower classesalso joined in the fun, courtesy of overeager and underregulated mortgagebrokers, credit card companies, and other providers of easy money. Access tofunds from home equity loans and no-interest mortgage loan refinancings launchedthe flood of spending.

The economic meltdown on Wall Street in September 2008 made a bad fiscal deficitsituation much worse. The administration of President George W. Bush borrowed$700 billion to prop up AIG, Bank of America, Wells Fargo, and a host of otherrescued banks and other organizations holding worthless mortgages. After thestock market crash wiped out a substantial portion of the net worth of mostAmericans, the Obama administration organized a $585 billion stimulus program torestart the economy with jobs and rebuild America’s deterioratinginfrastructure, again financed by the U.S. Treasury’s borrowing more money. TheObama administration announced in October 2009 that the fiscal year deficit wasin excess of $1.4 trillion, up 212 percent from fiscal year 2008.

The U.S. government’s policies to increase consumption without stimulatingdomestic manufacturing increased the trade imbalance as well. For example, manyforeign companies, such as Toyota and Hyundai, benefited from the Cash forClunkers program funded by the stimulus package.

Another troubling ramification of the twin deficits is their impact on the valueof U.S. currency. The deficits weakened the value of the dollar, although thenegative impact of the deficits on the value of the dollar and the purchasingpower of the United States has been moderated by the willingness of foreigncountries to hold dollar reserves. Since the dollar is the leading globalcurrency, these dollars buy goods from other countries. This means that it isvitally important for the United States to ensure that the dollar remains theleading global currency and to avoid any dramatic weakening of the value of thedollar. Without this effort to maintain the primacy of the dollar, there will below levels of incentive for countries such as China, Japan, and others to bewilling to hold dollars.

If other countries, such as China or Japan, were to decide to dispose of theirdollar reserves, the dollar could weaken rapidly, and the buying power of theUnited States would decline rapidly. In 2009 the Chinese appeared to be loatheto sell their dollars because they knew that the surplus of dollars on thecurrency markets would depress their value even more. However, the precariousposition of the dollar leaves the United States vulnerable—an example ofhow economic weakness can lead to political weakness.

Building economic strength to maintain and extend political strength is not new.Kings, queens, emperors, and dictators throughout the history of Europe and Asiawere focused on these objectives for hundreds of years before the New World wasdiscovered and settled. To understand the why and how of ChinAmerica, it isimportant to grasp that corporations are now viewed by government leaders as thekey tools to building the wealth of their nation. In Chapter 2, I willexplain how economic power from corporations became the prerequisite forpolitical hegemony.

CHAPTER 2

HOW CEOS REPLACED GENERALS

In the past, the wealth of nations depended mostly on military prowess. Whileinternal threats always loomed large—usually societal unrest such as theAmerican and French revolutions—the most common and potent threats werefrom external military forces. As invading armies took control of territory,they plundered the riches of their victims and enslaved the citizens.

Today’s external threats are corporations that invade and obtain a substantialshare of a market outside of their home country, reducing the wealth-generatingpotential of the defeated territory. Corporations are the armies of the latetwentieth and the early twenty-first centuries, attacking vulnerable externalmarkets while protecting their markets within their home turf as well.

Just as it was and is important for nations to have strong armies, it iscritical for corporations to be strong within the present economic environment.These days it is corporations that conquer territories and markets—thinkabout how the armies of Toyota, Honda, and Nissan conquered the U.S. automobilemarket and helped bring about the bankruptcy of GM and Chrysler. Or how Sony,Toshiba, Panasonic, and Sharp essentially wiped out the U.S. televisionindustry. They are two industries that were essentially invented in the UnitedStates but conquered by overseas corporate armies. CEOs have become the newgenerals, leading the troops to save the country and grow wealth.

Corporations build wealth by creating products and services that can beexported, providing employment, generating a return for the stockholders whoprovided the capital for the corporation, and by paying taxes to a governmentthat provides infrastructure and security. Corporations that succeed in theseroles also develop key technologies, products, and services that increase thehealth, well-being, and standard of living of their populations, as well asbuild wealth and security.

Let’s examine these roles in more detail, highlighting the countries that havebeen supporting their corporations in their pursuit of national wealth.

Providing Employment

Don’t forget that there are direct and indirect benefits of having largecorporations that employ many workers. The direct benefits include the abilityof workers to have salaries, buy products, and pay taxes. The indirect benefitsinclude a stable society, in which there is the opportunity for upward mobilityin terms of responsibilities, status, and standards of living.

In many industries, the supporting infrastructures can provide four to fivetimes the employment that is needed for the core industry. An example is thenetwork of component suppliers and professional services providers that supportthe automotive industry. GM, Ford, Chrysler, and other automakers do not makethe seats, tires, window glass, engine control electronics, and other parts of acar but instead buy them from other companies. This overall industry ecosystemprovides a large and diverse employment base.

A big and thriving corporation will need a wide variety of skill sets tomaintain its operations and find growth opportunities. Corporations employmanagers, engineers, technicians, and assembly workers, and they offeradditional job opportunities as employees learn and improve their efficiency.Corporations also provide employment for new graduates, which creates themotivation for citizens to improve their education level. The Finnish cell phonegiant Nokia exemplifies this approach, providing excellent employmentopportunities for graduates in Finland as well as in other countries in Europe.

Political and business leaders in China, Taiwan, Japan, Germany, and othercountries have long recognized the importance of corporations in generatingexports. Unfortunately, U.S. political leaders have been slow to recognize thedire need for American companies to be strong enough to increase their exports.U.S. government funding to encourage and support exports of manufactured goodswoefully lags behind the efforts of European or Asian governments. In addition,many American CEOs have been slow to focus on the export opportunities becausethe American domestic market has been among the largest in the world. Thatsituation has changed now because of the recent growth of the Chinese market andcontraction of the U.S. market. This change has made the shift to an exportmentality a business imperative.

American government officials all but ignore the following important roles ofcorporations: generating exports, generating wealth for shareholders and otherstakeholders, generating tax revenues, and creating technologies.

(Continues…)
(Continues…)Excerpted from ChinAmerica by HANDEL JONES. Copyright © 2010 by Handel Jones. Excerpted by permission of The McGraw-Hill Companies, Inc..
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