Surprises Out of China

William Krehm

When the transnationals first set a questing toe into the Chinese enigma over two decades ago, they expected to find a woolly lamb. Instead they have come up with an elephant-sized tiger. Let The Wall Street Journal (10/10, "Surge in Exports from China Hits Global Industry" by Karby Legget and Peter Wonacott) tell the story:

"When Philips Electronics NV began prospecting for opportunities in China in the early 1980s, the Dutch company adopted the hot strategy of the time: produce and sell locally.

"Back then, China was thought a land of unlimited demand. But the same low wages that foreign companies loved for keeping costs down also reduced the purchasing power of Chinese consumers. What’s more, Chinese knockoffs of foreign goods made competition tougher. So many foreign-based manufacturers, with plants in place and funds committed, looked for markets abroad.

"Philips and a swarm of other foreign manufacturers soon learned that using China as an export base proved more profitable and easier, than selling locally. Philips now operates 23 factories in China and exports nearly two-thirds of the roughly $5 billion in goods these plants produce."

China as World’s Factory Floor

"Today there are few things in the global market that aren’t made in China. The export drive of foreign companies’ stand-alone plants, their joint ventures and China’s thousands of home-grown operations have put China at the center of a broad reordering of how goods are supplied to the global economy.

"The country has become the world’s factory floor, with output so massive and wide-ranging that it exerts deflationary pressure world-wide on everything from textiles to TVs, mobile phones to mushrooms.

"‘China’s rise as a manufacturing base is going to have the same kind of impact on the world that the industrialization of the US had, perhaps even bigger,’ says Andy Xie, an economist with Morgan Stanley in Hong Kong.’

"The list of transnationals that find China a base from which to conquer world markets is becoming comprehensive: General Electric Co., Toshiba Corp. of Japan, Siemens AG of Germany, Samsung Electronics of South Korea, and personal-computer maker Acer Inc. of Taiwan. GM is exporting family wagons from its $1.5m joint-venture factory in Shanghai to the Philippines."

American auto companies, desperate to cut costs to meet foreign competition, are shifting their purchases of auto parts massively to China.

"China’s entry into the World Trade Organization last year accelerated the trend. By forcing down trade tariffs, that is drawing more investors into China, and leaving industry after industry groaning with overcapacity. And a new generation of nimble Chinese companies is beginning to focus on overseas sales.

"Over the past 20 years, for large US retailers such as Target Corp. and Wal-Mart Stores Inc., China has become a huge spigot of supply."

Obviously the Washington consensus got things mixed up. Rather than solving, it intensified the lack of markets.

"China is [now] the world’s fourth largest industrial base, in terms of goods produced, behind only the US, Japan and Germany. China makes more than 50% of the cameras sold worldwide, 30% of the air-conditioners and TVs, 25% of the washing machines, and nearly 20% of the refrigerators. A private Chinese company now accounts for 40% of all microwave ovens sold in Europe. Since May America’s monthly imports from China have consistently outstripped those from Japan." That is a growing factor in Japan’s unending bout with deflation. From cheap goods China is moving into sophisticated export items like computers and DVD players.

"Matsutake mushrooms, prized for their delicate aroma, used to be considered such a luxury that they appeared in Japan only in minuscule quantities. But matsutake mushrooms grown in China under contract with Japanese companies for export cost a tenth of what Japanese mushrooms do. They account for almost two-thirds of that item sold in Tokyo’s biggest wholesale markets.

"Chinese high-tech sales to the US are expanding beyond any other category, 47% in the first seven months of 2002 over the previous year. Washington has not begun to come to terms with the buzz-saw into which it backed with its Globalization and Deregulation.

"Foreign technology has powered productivity gains across the country, and a nationwide entrepreneurial zeal has sprouted from the shambles of central planning."

The transnationals’ utopian quest of an overseas country of unlimited purchasing power combined with the lowest wages, has blown up in their faces. There is no such fool’s paradise. Instead, it has opened a subcontinent with mediocre purchasing power and a diabolic know-how for exploiting labour. Confucius and Karl Marx have collaborated in springing a rattling surprise.

The world-wide effect of the resulting deflation is just beginning to be felt – in the US, TV-set prices have declined since 1998 by an average 9% annually; tool prices by 1%; sports equipment by 3%.

It should be remembered that the central banks of the world have trained themselves to recognize only inflation – deflation was stricken from their vocabulary decades ago. Sinking prices will increase the effective burden on the world economy of a record debt load. It seems infinitely easier for Chinese to absorb modern technology than for those who run the Western economy to relearn the elements of economic theory so brilliantly suppressed decades ago.

Globalization and Deregulation (D&G) was designed to serve the interests of a lone superpower. It is hardly equipped to handle the emergence of a rival superpower in trade. That will be far more so if the US becomes bogged down in a series of military adventures across the globe. In the case of Vietnam it profited from the presence of a rival superpower to restrain its follies. Heavily indebted now as then, the consequences to it of a world-wide deflation today will be even more burdensome. It has scrapped the knowledge that made it possible to finance its WWII at 2 to 3%. Going to war while leaving that bit of history buried may be George W.’s greatest mistake.

If there is no other way out, there would be not the slightest difficulty in proving that China is no democracy, nor short of weaponry of destruction. Military adventures could develop unsuspected allures.

This can be avoided by replacing that imperative with more local goals and leaving more space for other than strictly market values. The world can be healed by healing ourselves.

William Krehm

— from Economic Reform, December 2002