This week I read analysis suggesting how a canny Democrat contender for the presidency in 2008 would use “protectionism against China” as a platform for winning by forbidding all import/export with China until they agreed to make those exchanges equal on both sides.
That position, it was reasoned, would made America look strong and not left behind and tugging on China’s coattails like a child left behind.

ChinaChinaChinaChina


The strength behind the protectionist argument is a reaction to the
reality China will one day soon surpass the United States as the world’s leading economic power.

China

If you can’t beat them fairly in the marketplace, remove them from the game!

China

Do other countries tremble in fear of China or is it only the United States that senses impending Chinese dominance?
Is there any way to stop China from dominating the world?
What role will the United States play in policing the world if China becomes the prime power in controlling the global economy?

25 Comments

  1. China, the European Union and India are known as the next emerging superpower in the world; http://en.wikipedia.org/wiki/Superpower – whether that will come true or not, time will tell. I don’t think “policing” is a good idea regardless of the country and its economic and social situation – people should think together, work together and be successful together.
    [David, thanks a lot for this intriguing article, I will be gone for most of the day from now on – I have group meetings scheduled – I will talk more once I come back.]

  2. Hi Katha!
    Thank you for the excellent link and analysis. I think you’re right. The world is coming together in common interests by geography. The United States is in a tough geographic position without many friends. Our political policy of late has been to bludgeon those who oppose us instead of finding ways to work together for mutual benefit.
    The article I read suggested a Democrat could win the presidency with a “Lock Out China Now” policy because Americans without jobs would vote for that candidate feeling more manufacturing jobs would be created here instead of being sent to China.
    Also, forcing Wal-Mart and other major American companies to buy goods mainly from the U.S. distributors would do wonders in bolstering our national bottom line.
    Good luck at your meetings today and I hope you do well!

  3. Yes, it is true whatever you have mentioned about “winning vote…” – but what will happen in the long run? China and India are notoriously marked as a gold-mine for outsourcing, the reason mostly known was “cheap labor” which was also mentioned in the link you provided. But there is another response to this criticism in Wall Street Journal — http://en.wikipedia.org/wiki/Outsourcing — that says “anything that increases economic efficiency–whether by outsourcing or a hundred other things–is likely to cost somebody’s job.” We should be farsighted enough to think for a long term mutual benefit.

  4. Katha —
    Your international take on this matter is invaluable.
    How can American companies compete with foreign labor where mandatory healthcare and pensions are not required? If you can build a doll in China for .33 cents but to make that same doll in America costs $1.25 how can America compete with labor that sits below the cost of manufacturing an item?

  5. Hi David,
    We need to engage China, rather than try to stick our heads in the sand and ignore or cut them off. We need to compete with China or else we will suffer the fate of those who held onto the past with only wishful thinking. Our economy must adapt to the modern realities.
    Gone are the days of backbreaking unskilled labor jobs in the steel mills and factories. Machines do much of the labor that those with high school educations did in the 1940s through 1960s. We need highly skilled workers to run our automation.
    We must train our students to be able to think and adapt to our swiftly changing realities. If the future is going to be based on intellectual property and pursuits, we need to start educating our people to compete with those in China, Indian and other emerging world economies.
    We have nothing to fear from China if we are willing to compete economically and are willing to invest in our future workers’ education. If we put our head in the sand and hope that things won’t change, we risk the fate of the buggy whip manufacturers (or in modern day times — General Motors).
    I say let’s engage and make China an economic partner!

  6. Chris —
    I’m all for engaging China — but does China need to engage us in the future? Right now we are ripe for picking by China, but in 25 years will China need us less than we require them?
    On Meet the Press today Ted Kennedy said we need to have every American 8-year old and their parents sign a contract with the government saying if you stay clean, and in school and contribute to society, the government will give you a free college education at the university of your choice.
    Kennedy said we have no option but to formally educate — not homeschool — our children in order to compete in the world.
    375,000 engineers graduated last year from Chinese universities and in India the number of engineers put into the workforce was 325,000.
    The United States, in pale and damaging comparison, only graduated 75,000 students with engineering degrees. We are falling behind the rest of the world in technical innovation and mathematical competence and that is going to create a sorry state of affairs where the rest of the world leads while America follows to catch up.

  7. Hey clem!
    There are many Americans who believe as you believe: China is a sleeping danger that is awakening into an economic monster that will devour the rest of the world. They have a lot of untapped potential that if used effectively, will crush all comers.

  8. that’s why we got to fight now not when it’s too late to stop them so we can force them now to play fair and give at least an even exhange because they won’t do it later

  9. David-
    The degrees you mentioned are at the undergraduate level I assume? I think the US still trains more PhDs than anywhere else, but China and India are beginning to compete effectively in that arena as well. In engineering I believe about half of the PhDsIn terms of numbers and raw economic power it is undoubtable that India and China will surpass the US. However, the basis of the US economy and those o China and India are markedly different. Protectionists cry that battle cry of “outsourcig”, but the US econmy is actually leaner and stronger when stripped of the bulk of service level and labor level positions. Our economy is driven by combiation of fiscal and intellectual capital. An entreuprenurial spirit and a drive to succeed is at the core of our society. Outsourcing is actually beneficial because it allows our economy to do what it does best, come up with new, useful things for people to consume. This is particularly true in the IT sector. At this point, China and India are sources of cheap labor. Education does not in itself guaranteee ecoomic prowress. I am interested in seeig whether China and India will be able to change from being a source of labor to competing at our core game in creating ideas, goods and services. Will the next Goolge or Amazon come from China or India? Will they be able to begin attracting the intellectual capital that the US currently enoys?

  10. Hi Jonathan —
    Yes, those are undergrad numbers and they were provided by Senator Kennedy. I may not have repeated the numbers exactly but they should be within 10,000 of what he said for India and China and I’m pretty certain the U.S. number is correct.
    I wonder how much of a decline there has been in foreign student enrollment in PhD programs in America since 9/11.
    I understand your argument about a future economy and I agree with its long-term precepts but what do we do with the non-elite minds in America in the meantime and in the far future?
    There are some bodies born to labor and not higher thinking — and those are the people who are getting hurt by manual labor outsourcing. They used to be able to earn a competitive wage based on their hard work and not their minds but that is no longer the case and they are contributing a large mass of bodies and families to the minimum-wage working poor.
    Those are people who won’t be creating the next Google or Amazon but their backs are strong and their hands are nimble and they want to work and earn a better status in life than their parents — what do we do with them in an intellectual economy of ideas and patents?

  11. Hi David,
    America will always have the competitive advantage because we have the freedoms and political system that encourage entrepreneurial and economic development. The strength of our system shows in our immigrants who come from other nations in order to be successful here. Where else in the world can someone take a good idea and make it a successful business?
    Maybe we haven’t heard about individual Chinese business leaders or companies because of our news media, but there isn’t any real standout Chinese corporation that I’m familiar with, unlike the industrial giants in Europe and America. I don’t know what company produces all of the Chinese products that are for sale in Wal Mart and other places. There aren’t any Chinese electronics or automobile companies that I’m familiar with at this time, except for Lenovo.
    The only other Chinese company I can think of is COSCO — the China Overseas Shipping Company. I see their shipping containers on the trains that roll through my region.
    America is still focused on innovation.
    That’s our advantage and strength.
    I don’t see cutting edge techonology being developed in China. Manufacuring occurs overseas and in countries such as Mexico, but I don’t see anything innovative being created there.
    China will always need the United States because we have the money.
    If China decides to ignore us, they risk losing the ability to make the money they crave. Who buys most of the products made in Japan? America. If the Chinese lose our market, there aren’t many other places in the world that have the disposable income to purchase their items.
    I do support the idea of universal college education for all Americans. Even the lower level jobs require critical thinking abilities, so having people exposed to higher education will do our nation well.
    I also think that we should encourage immigration policies that welcome the best and the brightest to America.
    America will always continue to be successful if we continue to foster the American dream and provide the playing field that allows people to realize their goals.

  12. There was some decline in foreign PhD. admits due to the increased difficulties in obtaining F-1 student visas. I think that foreing post-docs have felt the pinch more so than graduate students. Many universities are now reluctant to sponsor H1 visas because of the sheer bureaucratic nightmare it entails. A post-doc in my lab was unable to leave the US for over a year as she had transfered from UCSF to UC Berekley and the bureaucracy took that amount of time to churn through all the requisitie paperwork.
    Even an intellectual economy, there are still plenty of service level positions. I think the problem is that Americans like their manufacturing jobs, they don’t want to work at Starbucks or some other chain that is plastered across the country. The separation fro the higher education have’s and have nots is widening at an ever quickening pace. 50 years ago you could work hard and get somewhere even without a college education or better. Im not sure that is very true anymore.
    The transition from agriculture to heavy industry was a difficult one as well. Each major shift in core economic output leaves some people feeling pinched as the transition ocurs. I tend to agree with Kennedy, either we embrace education as a society or we will be left by the wayside. Im not sure how much I buy the natural ability argumet. There are certainly natural differences in abilities, however there is a much more apparent variation in the value plaeced on education and the availability and accesss to such an education across socioeconomic boundaries.

  13. Chris —
    Here is an excellent Frontline report on Wal-Mart and China:
    http://www.pbs.org/wgbh/pages/frontline/shows/walmart/secrets/wmchina.html
    Wal-Mart basically manufactures in China by co-branding the process and that is the chill of what I fear will happen more and more. American companies doing business in China will teach them our entrepreneurial ways and then the Chinese will abandon us because once they learn the tricks they don’t need a co-partner to manage the trade:

    The development of Wal-Mart’s house brands proved to be a watershed. Consumer surveys had established that Americans cared less and less about buying national brands: Low price trumped brand loyalty. In the period following Sam Walton’s death, when Wal-Mart’s sales slowed and its stock price began to stagnate, this consumer trend freed the company to ramp up the production of its house brands through unbranded suppliers in China, who now had privileged access to Wal-Mart’s 3,500 stores across America. The result was that Wal-Mart became its own de facto manufacturer, developing and designing products according to the taste of its customers, as analyzed by Wal-Mart’s supercomputer. Profits soared.
    Privately, long-time U.S. suppliers expressed dismay. “They invaded our core business model,” said one apparel maker, requesting that his name be withheld. “Wal-Mart seems intent on managing the total product life cycle.” If the competitive pressures of Wal-Mart’s store brands continue, he said he would close his American factories, abandon his own brand, and try to solicit Wal-Mart’s private label business in China. “We call it ‘the race to the bottom,'” he asserted. “It’s sad because I see that productivity increases [in America] are still possible through automation. There’s room for improved efficiency. But it’s impossible [to stay here] with retailers going for cheap Chinese labor.” …
    …Some retail analysts said that Wal-Mart’s dwindling number of vendors will continue to abandon their factories in the American Midwest, as well as transfer production from their factories in Mexico and Taiwan to China. As this happens, massive Chinese conglomerates, such as the television manufacturer TCL, will dominate more and more of the market. And Wal-Mart will increasingly be forced to contend with muscle-flexing by its Chinese partners.
    And so, there’s a new wrinkle in the global game: China may not settle for second fiddle. Chinese manufacturers want to become equal partners with Wal-Mart, playing a role in product development, not just filling assembly orders. They, too, are becoming creative with the use of point-of-sale analysis to respond instantly to the demands of consumers and develop products they want.
    “We are seeing an emerging shift in product development,” said Tom Travis, a trade lawyer at Miami’s Sandler, Travis & Rosenberg, who counts Wal-Mart among his clients. Chinese manufacturers “are assuming much more of the functions, creating and designing … the product.”
    This could lead to what up until now, many would have considered an unthinkable scenario in which the manufacturing dominance of China subverts Wal-Mart’s control of the supply chain.

    I really think we’re in trouble.

  14. Jonathan —
    I am hearing the same thing. There is a tremendous decline in the graduate student matriculation rate from the Middle East post-9/11 because the students cannot get in and their universities are hassled by immigration and Homeland security checks that are never-ending.
    In New Jersey the schools are paying the extra fees levied against the students in order to get them to not only come back, but to apply in the first place. Graduate school applications from Middle Eastern countries have dropped by more than 60% in the tri-state New York metro area since 9/11.
    You are right Americans do not want to work at Starbucks or McDonald’s because they cannot raise a family on those wages. They want job security and high wages and that means Unionization. Starbucks goes after any union planning heavy and hard to knock it down whenever that word is raised in a local Starbucks store.
    We still have the problem that no matter how hard they try some people are just not very book smart but that doesn’t mean they are dumb or unable to comprehend things. Does that mean we warehouse them on Welfare them for the rest of their lives? These are intelligent, cogent, hard-working people who want to earn a Middle Class wage but who are only offered minimum wage work.
    Do we raise the minimum wage to $25 an hour to help these people take Starbucks jobs?
    Do we just abandon them as being out-of-date and out-of-step with technology from the day they are born?
    It is a difficult task to include everyone always but isn’t that a hallmark of a free and democratic system of governance?
    If the primary role of the government to provide for the public welfare, then how do we provide for a public that are basically uneducated but physically able to work?

  15. Minimum wages should be abandoned in favor of ‘living wages’. Corporations view Starbucks/Wal Mart type jobs as dispensibe, when in reality they form a basic service base that everything else draws upon. The working poor is a tragic facet of our society, it presents a political nightmare and is therefore frequently ignored. Nobody has the courage to stand up to the type of corporate culture that views the working poor as dispensible line items in their workfore budget. These are people’s livelihoods, I agree that we can’t just ignore them. The type of security and ability to support a familiy that was characteristic of American manufacturing has somehow been lost in translation to the ‘new economy’. Wages would not be as much of a problem if there were a solid base of basic services provided for by the state. Socialized healthcare and education would alleviate some of the burden place on the meager salaries of the working poor. Yes, inclusion should be a hallmark of a free and democratic society, but inclusion usually translates to socialist systems which are viewed an intolerable anathema in our society. We see no problem using large portions of our tax revenue to fight ill-sighted and pointless wars, yet balk at the slightest hint of socialism.

  16. Your comment is quite thrilling, Jonathan, because you have compressed and redacted the core issues so eloquently.
    No we need to try to find methods to set into action to resolve these societal ills before it is too late. The United States no longer seems to have a worldwide vision for its people whereas up-and-comers like China and India have definite long-range goals for all of its citizenry in the world.
    I agree that taking care of everyone and providing for the public welfare and giving government subsidy of those who may not be as bright or as talented as the mainstream is labeled “Socialist” and that strata of society becomes negatively marked as going against the nature of Democracy where only the strong survive and if you can’t pay your way to play you get left behind.
    Leaving people behind to suffer on their own is a dangerous policy – as we saw in brief tableau in New Orleans – that can quite easily grow larger and eventually turn a nation against itself in a civil war that will remove the view of the nation from the future and back into the past to determine where we went so wrong.

  17. Hi David,
    Sorry for the misspeak, you have to register to read the regular articles in McKinsey Quarterly which is free; but if you want to read premium articles then you have to pay. I was under the impression that registration/membership was not needed to read the regular articles.
    The article speaks about various ways to compete with China, especially for the middle-income countries. The article says, “Rather than fixating on jobs lost to China, these countries should remember a fact of economic life: no place can remain the world’s low-cost producer forever—even China will lose that title one day.” Instead of trying to defend low-wage assembly jobs, it says, countries should focus on creating jobs that add higher value. The article suggested the countries should concentrate on three things: encouraging the transition to higher-value-added activities within existing industries, exploiting their comparative advantage, and pushing forward with reforms that create more competition, entrepreneurship, and flexibility – which I think echoes with your point – more critical thinking and education – universally.