China and America face off on trade and finance

Many Americans have a conflicting — and often contradictory — image of China. Replacing Japan as America's leading economic rival, China has moved from Mao Zedong's backward agricultural country, consisting mostly of poor farmers, into the world's largest factory for most labor—intensive products. While promoting social stability and maintaining a tight grip on power at home, it is no secret Beijing wants to replace Washington as the dominant force in East Asia in the decades to come.

While the Communist leaders can often impose their will with little regard to domestic public opinion, Washington is torn by numerous special interests that view China's rise as either a great threat or tremendous opportunity. Following five or so years of relatively slow job growth, American labor unions and their political allies in Washington are demanding the Bush Administration impose higher tariffs on a range of Chinese—made products. Such protectionist policies will only hurt American consumers, create more mistrust in Beijing, and make life more difficult for the increasing number of American firms trying to sell their goods to an ever expanding market.

Despite all the wondrous headlines proclaiming China's entry into the World Trade Organization, one must have sympathy for a Western businessman in the Middle Kingdom. The key to success is not better quality products or superior after—sales service, but guanxi (personal connections) with the right government official and willingness to wink and pay a handsome bribe to get the results one seeks.

Americans are forbidden by law to pay bribes overseas or at home. While many American managers struggle with cultural conflict and are victims of copycat products, can they count the political support of their own elected leaders in Washington? With growing opposition by some to the principles of free trade and open markets, the tide is moving against them.

China is often governed by the will of a few strong men (and even fewer women), and not by laws or globally accepted business practices. Most of my university students, the future business leaders of Shanghai, see absolutely nothing wrong with buying fake products. Every foreign tourist trying to enjoy the sights and sounds of the historical Bund along the Huangpu River, is constantly interrupted by migrants trying to pronounce "Rolex?"

It is not only famous foreign brands that have their brainwork stolen and products reverse—engineered, well—known local rivals like Haier and LiNing are facing the same headaches. But many of my students fail to realize how intellectual property violations impact their employment opportunities.

While China has more university graduates in engineering than America, Motorola or Sony will never transfer their best research and development jobs if they believe their ideas or production processes will be copied by a local rival. Many Western CEOs are desperately trying to prevent these fakes from being smuggled into their key markets and destroying their hard—earned reputation for quality. Predictably, this will lead future Chinese researchers to complain that the best research positions are closed to them by the "racism" of the Western and Japanese businesses protecting their own technologies.

International economic competition should encourage a national call to arms to put our own economic house in order. Addicted to our Mastercards and Visas, too many Americans have depended too long on foreign capital to finance our over—indulgent spending habits and unsustainable fiscal recklessness. Only interested in their own self—preservation, our elected representatives have failed time and again to stand up to their constituents and say no. While Chinese President Hu Jintao has the flexibility to take aggressive actions, our Congress is often more concerned about attracting more campaign contributions.

Like the Japanese in the late 1980s, the Chinese are sending more investment across the Pacific. Because they want to be closer to the American consumer and avoid being stigmatized as an outsider, the leading Chinese firms are slowly starting to open production facilities in the U.S. In 2000, the home appliance manufacturer Haier (pronounced Higher) opened a $40 million industrial park in a financially poor region of South Carolina.

Back in China, many other manufacturing executives are closely studying Haier before deciding whether or not to make their own moves.

New opportunities are not only being created for American workers, but for shareholders as well. A few weeks ago, Starbucks CEO Howard Shultz announced that by 2008 the company hopes to have more cafes in China than in the United States. Similar stories can be told for McDonalds, KFC, Coke, or Motorola. There are now 94 KFCs in the city of Shanghai alone, and the number is increasing every month. And on a sunny Sunday afternoon, they are often jam—packed with people, young and old, enjoying sandwiches and sundaes.

Even when cheap Chinese goods are imported, there are benefits to the American economy. As most American consumers realize, most of the products they purchase at Wal—Mart are made in southern China by low—skilled laborers working long hours. In fact, of Wal—Mart's 6,000 suppliers, 5,000 are Chinese.

When we buy these cheap imports, American consumers save billions of dollars each year. A Morgan Stanley report claims American consumers have saved $600 billion in the past decade via cheap Chinese imports.

And American manufacturers have saved even more buying components and materials.

The benefits do not stop there. After American consumers pay for these imports, much of the capital gets recycled back in the form of investments into government Treasury bonds. This foreign capital in turn helps keep interest rates low, so American consumers can continue to enjoy cheap financing for cars, homes, and college educations. As long as the Chinese have confidence in their American investments, this positive cycle will continue into the foreseeable future.

All of these economic benefits mean little to a textile worker in South Carolina or an assembly line worker in Ohio who has lost his job and is struggling to pay the bills. As millions of American families have learned in the past two decades, we live in an age where there is no social contract guaranteeing a stable job for life.

Americans have overcome many economic challenges in the past half—century. Remember the late 1980s, when many Americans thought Japan, Inc. was going to take over the world?

The biggest adjustment on the horizon is the widely expected revaluation of the Chinese currency, the yuan, which could happen at any time. After the fixed exchange rate system is history, the yuan should start to appreciate against the greenback, maybe 10—15% in the short—term. This could make Chinese goods a little bit more expensive, and help struggling American manufacturers gain some lost market share. At the same time, the profits made in China by many American multinationals will be worth more to investors on Wall Street.

But most importantly, the billions of dollars in Treasury bonds that Beijing holds will suddenly become worth fewer yuan. That is a price Beijing knows that it must pay for continued access to the American market. A stronger yuan will enable China to buy more American goods, and will make it harder to sell their own goods here.

Managing a hybrid centrally—controlled, but also market—driven economy is tricky, and there is no certainty that China's economic path will not have some serious bumps. Because Beijing's rulers fear instability, their reactions may be exaggerated. Nobody can predict the future, but without doubt the next few years are going to be very interesting times in China.

Brian Schwaz teaches in Shanghai.

Many Americans have a conflicting — and often contradictory — image of China. Replacing Japan as America's leading economic rival, China has moved from Mao Zedong's backward agricultural country, consisting mostly of poor farmers, into the world's largest factory for most labor—intensive products. While promoting social stability and maintaining a tight grip on power at home, it is no secret Beijing wants to replace Washington as the dominant force in East Asia in the decades to come.

While the Communist leaders can often impose their will with little regard to domestic public opinion, Washington is torn by numerous special interests that view China's rise as either a great threat or tremendous opportunity. Following five or so years of relatively slow job growth, American labor unions and their political allies in Washington are demanding the Bush Administration impose higher tariffs on a range of Chinese—made products. Such protectionist policies will only hurt American consumers, create more mistrust in Beijing, and make life more difficult for the increasing number of American firms trying to sell their goods to an ever expanding market.

Despite all the wondrous headlines proclaiming China's entry into the World Trade Organization, one must have sympathy for a Western businessman in the Middle Kingdom. The key to success is not better quality products or superior after—sales service, but guanxi (personal connections) with the right government official and willingness to wink and pay a handsome bribe to get the results one seeks.

Americans are forbidden by law to pay bribes overseas or at home. While many American managers struggle with cultural conflict and are victims of copycat products, can they count the political support of their own elected leaders in Washington? With growing opposition by some to the principles of free trade and open markets, the tide is moving against them.

China is often governed by the will of a few strong men (and even fewer women), and not by laws or globally accepted business practices. Most of my university students, the future business leaders of Shanghai, see absolutely nothing wrong with buying fake products. Every foreign tourist trying to enjoy the sights and sounds of the historical Bund along the Huangpu River, is constantly interrupted by migrants trying to pronounce "Rolex?"

It is not only famous foreign brands that have their brainwork stolen and products reverse—engineered, well—known local rivals like Haier and LiNing are facing the same headaches. But many of my students fail to realize how intellectual property violations impact their employment opportunities.

While China has more university graduates in engineering than America, Motorola or Sony will never transfer their best research and development jobs if they believe their ideas or production processes will be copied by a local rival. Many Western CEOs are desperately trying to prevent these fakes from being smuggled into their key markets and destroying their hard—earned reputation for quality. Predictably, this will lead future Chinese researchers to complain that the best research positions are closed to them by the "racism" of the Western and Japanese businesses protecting their own technologies.

International economic competition should encourage a national call to arms to put our own economic house in order. Addicted to our Mastercards and Visas, too many Americans have depended too long on foreign capital to finance our over—indulgent spending habits and unsustainable fiscal recklessness. Only interested in their own self—preservation, our elected representatives have failed time and again to stand up to their constituents and say no. While Chinese President Hu Jintao has the flexibility to take aggressive actions, our Congress is often more concerned about attracting more campaign contributions.

Like the Japanese in the late 1980s, the Chinese are sending more investment across the Pacific. Because they want to be closer to the American consumer and avoid being stigmatized as an outsider, the leading Chinese firms are slowly starting to open production facilities in the U.S. In 2000, the home appliance manufacturer Haier (pronounced Higher) opened a $40 million industrial park in a financially poor region of South Carolina.

Back in China, many other manufacturing executives are closely studying Haier before deciding whether or not to make their own moves.

New opportunities are not only being created for American workers, but for shareholders as well. A few weeks ago, Starbucks CEO Howard Shultz announced that by 2008 the company hopes to have more cafes in China than in the United States. Similar stories can be told for McDonalds, KFC, Coke, or Motorola. There are now 94 KFCs in the city of Shanghai alone, and the number is increasing every month. And on a sunny Sunday afternoon, they are often jam—packed with people, young and old, enjoying sandwiches and sundaes.

Even when cheap Chinese goods are imported, there are benefits to the American economy. As most American consumers realize, most of the products they purchase at Wal—Mart are made in southern China by low—skilled laborers working long hours. In fact, of Wal—Mart's 6,000 suppliers, 5,000 are Chinese.

When we buy these cheap imports, American consumers save billions of dollars each year. A Morgan Stanley report claims American consumers have saved $600 billion in the past decade via cheap Chinese imports.

And American manufacturers have saved even more buying components and materials.

The benefits do not stop there. After American consumers pay for these imports, much of the capital gets recycled back in the form of investments into government Treasury bonds. This foreign capital in turn helps keep interest rates low, so American consumers can continue to enjoy cheap financing for cars, homes, and college educations. As long as the Chinese have confidence in their American investments, this positive cycle will continue into the foreseeable future.

All of these economic benefits mean little to a textile worker in South Carolina or an assembly line worker in Ohio who has lost his job and is struggling to pay the bills. As millions of American families have learned in the past two decades, we live in an age where there is no social contract guaranteeing a stable job for life.

Americans have overcome many economic challenges in the past half—century. Remember the late 1980s, when many Americans thought Japan, Inc. was going to take over the world?

The biggest adjustment on the horizon is the widely expected revaluation of the Chinese currency, the yuan, which could happen at any time. After the fixed exchange rate system is history, the yuan should start to appreciate against the greenback, maybe 10—15% in the short—term. This could make Chinese goods a little bit more expensive, and help struggling American manufacturers gain some lost market share. At the same time, the profits made in China by many American multinationals will be worth more to investors on Wall Street.

But most importantly, the billions of dollars in Treasury bonds that Beijing holds will suddenly become worth fewer yuan. That is a price Beijing knows that it must pay for continued access to the American market. A stronger yuan will enable China to buy more American goods, and will make it harder to sell their own goods here.

Managing a hybrid centrally—controlled, but also market—driven economy is tricky, and there is no certainty that China's economic path will not have some serious bumps. Because Beijing's rulers fear instability, their reactions may be exaggerated. Nobody can predict the future, but without doubt the next few years are going to be very interesting times in China.

Brian Schwaz teaches in Shanghai.