China, Inc.

The current perceived economic threat posed by China, Inc. parallels that of another Asian economic powerhouse from the 1980s known as Japan, Inc.

Those of us old enough to have been there well remember the sour mood of Americans in the late 1970s under the inept presidency of Jimmy Carter. Stagflation, that combination of stagnant wages and rising prices which set America on an economic death spiral from which there seemed no escape, together with interest rates north of 20%, the Iranian Hostage crisis, rising gasoline prices from the second OPEC oil shock, and an ascendant Soviet Union which had invaded Afghanistan and appeared to be expanding while American military power was still reeling from the Vietnam War left America in a general malaise causing us to wonder if her best days were behind her.

Little did we know that America was poised to begin a decade of economic and military expansion which would see her prominence completely regained around the globe. Our first inkling of this came in the form of the 1980 Winter Olympics where a ragtag team of unknown American hockey players trounced the mighty Soviet hockey team favored to win the Gold Medal. The Miracle on Ice caused Americans to erupt in elation over the unexpected fact that our unknown team beat the world’s best in a sport which the Soviets dominated and we merely played at. On the political front, conservative Republican Ronald Reagan was promoting a radical economic theory known as supply side economics which his detractors sneeringly referred to as either trickle-down economics or voodoo economics. However, there was a sunny optimism about Reagan which Americans found appealing when contrasted to the dour malaise of Jimmy Carter.

America went on to elect this sunny optimist who had previously served two terms as California governor. Reagan managed to push his economic plan through a Congress controlled by skeptical Democrats who nonetheless had nothing better to offer and who wished to quickly put the disastrous Carter years behind them. They did manage to hobble the effectiveness of Reagan’s tax cuts by phasing them in over a three year period which saw the country sink ever deeper into economic morass and caused Americans to seriously doubt their choice of the sunny optimist. However, Reagan continued to cheerfully promote his economic plan and his appearances left Americans feeling good about his presidency. As Reagan had predicted, when the final phase in year of his tax cuts had elapsed, the American economy took off like a rocket as investors were merely waiting for the best tax deal to take effect before committing their money for investment.

Along the way, the three major American automobile companies teetered on the brink of insolvency with Chrysler being forced to come hat-in-hand to the government and beg for a package of loan guarantees to stave off bankruptcy. Chrysler Chairman Lee Iacocca convinced Congress to back his company and promptly introduced the K cars to get Chrysler back on track. American car companies were facing stiff competition from Japanese car companies whose products had gone from being laughable oddities appealing to college professors to mainstream fuel efficient cars noted for their quality and attention to detail. Americans voted with their wallets and chose the fuel efficient quality of the Japanese cars over the junk promoted by American car companies. Gas prices were high and money was tight during this time, and the lure of fuel efficient vehicles which could be counted on to last several years held great appeal to Americans who could no longer afford the luxury of buying American.

An alignment of car companies and labor unions began promoting a Buy American campaign in the futile hope of appealing to American patriotism in lieu of undertaking the hard work necessary to make American manufacturing compete with Japanese manufacturing in quality and attention to detail. Americans were encouraged to take their frustrations out on Japanese cars at county fairs with a sledgehammer, but it was all to no avail. Americans continued to buy Japanese cars over American cars, and the American car companies finally had to get work competing with the Japanese on their level. The price of entry into the American car market had been set by the Japanese and that price was fuel efficiency, quality, and attention to detail.

In the years after World War II, America presided over a defeated Japan whose industry had been thoroughly wrecked by American bombers. Our bitter enemies were forced to abandon militarism and encouraged to rebuild their industry producing cheap items. Made in Japan was tantamount to a trademark of cheap junk to Americans during this time. Japan even resorted to naming one of their cities USA so they could stamp on the words Made in USA in an attempt to fool Americans into buying their manufactured products. As Americans were laughing at Japan’s pathetic attempts to rebuild its manufacturing base after the war, visionary Japanese business leaders were importing American knowledge in the form of industrial thinkers such as W. Edwards Deming whose industrial feedback ideas were rejected by American manufacturers only to be embraced by open minded Japanese manufacturers desperate to rebuild their industry. These Japanese manufacturing visionaries learned what American manufacturers had forgotten and were no longer interested in hearing, and turned these ideas against American manufacturers to their great benefit.

During the 1980s, American manufacturers resorted to traveling to Japan to learn the secrets of the Japanese economic miracle only to learn to their astonishment that these ideas had been developed in America but rejected by American business leaders. When Ford officials asked Toyota executives how they had developed the model for their factories where raw materials entered at one end and finished automobiles exited the other, astonished Toyota executives replied that they had learned all of this from studying Ford’s own River Rouge plant! American manufacturers set about rediscovering the knowledge all around them and incorporating it into their operations. American workers were empowered much like their Japanese counterparts, robots were introduced to improve quality control, efficiencies were realized throughout manufacturing operations, and American manufacturing rebounded tremendously to become competitive with Japanese manufacturing. American productivity soared to become the best in the world once again. American manufacturing and productivity improvements led to reversed fortunes for American companies and soaring profits for stockholders.

Simultaneously, Japan’s wealth had increased tremendously and allowed it to embark upon a buying spree of landmark American properties in the late 1980s such as Rockefeller Center and Pebble Beach Golf Course. Americans were frightened that the Japanese wealth would allow it to buy up significant portions of America leaving our former enemy in control of America’s future. Unknown to most Americans was the fact that Japan’s economic miracle had been largely financed upon a real estate bubble which saw Japanese land priced by the square foot and speculation running rampant. Another structural weakness was the Japanese keiretsu system of interlocking companies whereby companies were linked together through joint stock ownership in a system designed to protect the group as a whole. This arrangement was initially perceived and promoted as a strength in explanations of the Japanese economic system, but the interlocking of these companies proved to hasten the demise of the whole system once the real estate bubble burst in 1990 and Japan’s economy began to unravel.

The vaunted Japanese economic miracle so feared by Americans came crashing down in the early 1990s as Japan’s real estate bubble burst. Loans made on the value of Japanese real estate holdings began to be recalled as the value of these real estate holdings plunged. Unable to repay these loans, Japanese companies began to fail, dragging other members of their keiretsu down with them as their financial predicaments didn’t allow them the capacity to assist their more overleveraged peers. The Japanese government’s response to this financial crisis was to direct the banks to cover up the bad loans and keep them on the books until recovery could be accomplished and the loans repaid. This has resulted in what are known as the lost years as Japan’s economy has stagnated over the past twenty five years much like America’s did in the 1970s.

Having regained their manufacturing prowess with rediscovered knowledge and retooled plants staffed by robots and incorporating all manner of new efficiencies, American companies set about the task of reducing costs by transferring American manufacturing to plants in Mexico with its lower labor costs. Business leaders reasoned that cheaper Mexican labor combined with American plant leadership could sustain the quality that Americans had come to expect. As Mexican wages rose in response to the influx of American companies seeking to relocate just south of the border and trouble from Mexico’s notorious drug cartels threatened the stability of American operations, business leaders began moving their operations further offshore to Asian countries such as the Philippines and Malaysia.

China, which had embarked upon economic reforms under Deng Xiaoping to stave off starvation and elevate China’s relevancy in the world, seized upon the opportunity presented by American companies seeking cheap Asian labor and willing to relocate their manufacturing operations to their shores. Low end manufacturing first made its way over to China, and the success of these initial operations led to an opening of the floodgates as American companies sought out Chinese partners to produce goods of increasing complexity with cheap labor that allowed them to realize even greater profits. American political leaders aided this offshoring of American manufacturing to the detriment of American workers who were encouraged to transfer into the much hyped services economy being promoted in America. Service jobs were about the only thing left for Americans to do as they proved to be difficult to move offshore, although lower end service jobs such as call centers were successfully exported to India.

China shrewdly exploited the desire for American companies to relocate their manufacturing operations to take advantage of cheap Chinese labor by forcing concessions on intellectual property and manufacturing technology which they used to bolster their own domestic manufacturing operations. As more and more American companies poured into China, product quality began to suffer. Initially, the much lower prices for Chinese manufactured goods offset the loss on product quality, but a series of high profile missteps by Chinese companies exporting drywall made of inferior materials which caused American houses to become uninhabitable because of black mold, along with Chinese manufacturers of dog food, toothpaste, and even baby food which poisoned their consumers led Americans to seriously question the value of purchasing Chinese manufactured goods. Chinese government officials cracked down upon the perpetrators of these outrageous incidents with executions and prison sentences to restore some sense of order to their operations.

Much like Japan, China’s economic miracle is also built upon a shaky financial foundation that is now showing signs of coming apart at the seams. The Chinese government has been unwilling and unable to allow China’s economy to suffer any setbacks of even the slightest magnitude. Millions of Chinese have migrated from the provinces into urban areas to work in the factories producing goods for the American market. Displacement of these millions of workers is seen as a threat to the government as unrest could quickly spiral out of control in a country used to exerting complete control over the lives of its citizens and still not comfortable with the economic freedoms cautiously granted and responsible for its newfound wealth. To counteract slowing economic periods, the Chinese government set about constructing vast uninhabited cities ostensibly for future economic growth to keep employment robust and its economy expanding. After all, unemployed Chinese become hungry Chinese, and eventually millions of these hungry Chinese may decide that revolting against the government isn’t such a bad idea. Better to keep them employed building unneeded cities than running the streets.

China’s wealth has allowed it to challenge the dominance of the American dollar as the world’s reserve currency and embark upon a military expansion designed to promote its dominance over the China Sea at the expense of other Asian countries wary of the Chinese dragon rearing its ugly head. America is left in the precarious political situation of countering Chinese military expansion to soothe the nerves of its political allies in the region while doing business with China that enriches it and makes its military expansion possible in the first place.

Sun Tzu counseled in The Art of War to avoid war at all costs because it was a tremendous drain of national blood and treasure. He also counseled that one should exploit the weaknesses of one’s adversary while presenting one’s strengths to that adversary. President Obama has obviously never read The Art of War, but Donald Trump certainly has and promotes a strategy for dealing with China that Sun Tzu would approve.

China has invested heavily in its military to improve its technological capability and place it close to its peers around the world. This investment has come in various forms such as military and industrial espionage which has allowed it to steal the technology developed by American defense contractors and avoid the trillions in development costs associated with our military superiority. China’s military is presented as a strength to the rest of the world through its aggressive enlargement of atolls and rocky outcroppings in the China Sea to become military facilities capable of threatening other sovereign nations in the region. This strength requires an appropriate American response as America took on the role of regional protectorate in the wake of World War II. President Obama seeks to counter China’s military strength with a show of American military strength by sailing an aircraft carrier through the disputed region in a show of American force. This is not a wise strategy according to Sun Tzu.

Donald Trump recognizes that China’s true weakness lies in its economy propped up by American companies seeking access to cheap Chinese labor. Trump advocates a strategy whereby American domestic policy would be tweaked to encourage the return of American manufacturing back onshore, thus depriving China of needed wealth, employment, and access to American markets. In a strategy worthy of Sun Tzu, China would be crippled economically and forced to contend with its own people angry over being unemployed and would therefore be unable to afford the luxury of concentrating on regional military hegemony as its economy collapsed from the sudden withdrawal of American business interests. The reinvigorated American economy which would be realized upon a real expansion of American employment would generate additional revenues sufficient to repay American Treasury Notes held by China.

Just as Japan, Inc. proved to be a paper tiger feared by Americans for its fortunate application of American knowledge to its anemic manufacturing which temporarily allowed it to surge to the forefront of wealthy nations only to come crashing down by the collapse of a speculative bubble, China, Inc. has followed a similar trajectory in its rise from economic obscurity to the pinnacle of wealth and prosperity undergirded by a shaky financial foundation already causing problems for its economic viability. There was a time when we Americans feared Japan even more than the current generation is concerned with China, but we have the benefit of having seen Japan crash back to earth and the certain knowledge that China is headed for a similar fate. We were wise enough to learn from Japan and turn its collapse into our benefit, and it appears to us that Donald Trump is the only leader capable of repeating that outcome with China’s eventual collapse.

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