The China Syndrome

America’s technological lead is melting down as its innovations are increasingly transferred to China as the cost of doing business.

China’s rise in the global economy began as a desire to lure American manufacturing to its shores with the promise of cheap labor, then shifted to demands for substantial American investment as a precondition to entry, and has finally morphed into demands that companies transfer their core intellectual property to Chinese manufacturers as the cost of doing business in China.

America tolerated the transfer of low-wage low-skill manufacturing to China in the 1990s reasoning that capital would be freed up for application to higher level manufacturing, and ignored objections from those who warned that the disappearance of low-skill manufacturing would displace an economic group with few options to recover. American manufacturers rushed into China to take advantage of its cheap labor with little understanding of the long term implications of issues such as transportation, quality control, and Chinese relationships.

As the implications have become clearer, some manufacturers have concluded that the lure of cheap labor was overshadowed by costs arising from shoddy manufacturing and steeper transportation fees, and are quietly moving their operations back to America in a reverse of the great China outflow. This exodus has been exacerbated by demands for higher wages from Chinese laborers and increased regulations on Chinese manufacturing that dulls the edge on the cheap labor argument.

Another factor thrown into the mix is the rise of counterfeit parts coming from China as Chinese contract manufacturers produce batch overruns for sale on the side and a Chinese electronics recycling subculture strips computer chips from used equipment for relabeling as new or military grade parts. Counterfeit parts corruption adds to business uncertainty and makes China even more unattractive to American manufacturers increasingly convinced that China is not worth the risk solely for cheap labor, but unable to ignore its vast consumer market.

On its path to global economic powerhouse, China has reached the point where it can demand the transfer of technology from companies as the price of entry to its considerable market. Not content with industrial espionage efforts to gain critical technology, China has found it is now able to simply demand access to companies’ core intellectual property and get it. Access to intellectual property is critical in the development of Chinese industry able to compete on the world stage.

Much of this technology has dual use capabilities for application to China’s increasingly more sophisticated military which is moving away from reliance on sheer numbers to the types of force multiplying technologies employed by America’s military. While China continues to improve its industrial base to be more competitive in the global market, it also realizes that it must improve its military capabilities to better protect its economic development and wealth creation. China has made significant improvements in its military technological base to the point of negating America’s stealth fighter advantage with development of its own stealth fighter.

Russia learned the hard way not to trust the Chinese as the technology it transferred to China to secure sales of its Su-27 fighter jet enabled China to develop a competitive knockoff it is using to undersell Russia in the world market. The Russians are now warning us to be careful in dealing with China when it comes to technology transfers. It seems there is no honor among former communists.

Incredibly, American companies are still willing to consider technology transfer deals with China even after all of the industrial espionage episodes, the knockoffs from production overruns, the demands for investment in China, and the poor quality of products manifested in Chinese drywall, baby food, pet food, milk, and toothpaste scandals. The lure of profits tends to blind these companies to the realities on the ground in China.

During these tough economic times, Americans rightly worry about their place in the world and realize that our ability to innovate is the key to our prosperity. Facing the challenges of cheap labor, high unemployment, massive government spending, the threat of a weakening dollar, and regional instability in Korea, the Middle East, Europe, and Africa, we hardly need to add the willful transfer of our competitive advantages to our chief competitor in the global market.

America has exported its jobs, its wealth, and is now contemplating the export of its competitive advantages, yet we are still led to believe that exports will pull our economy out of the basement and lead us to economic salvation. Our attempts to bully China into devaluing its currency to help our economy have mostly fallen on deaf ears as China’s stable yuan has allowed it to amass wealth at our expense. In an ironic twist, America has now become too big for China to allow it to fail due to the massive amount of US debt held by China.

China’s ambition to expand from a regional power to become a world power is possible only through economic growth and wealth creation. The fact that our leaders do not realize this should be inexcusable to American voters. The progressive left insists on pushing America into socialism under the guise of social justice while the communists are embracing capitalism in the hopes of becoming a world power.

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