July 6, 2005

An old joke talks about two hunters who can hear the lion prowling outside the light of their camp fire.  One quickly changes to track shoes.  The other says, “you cannot outrun a lion.”  The newly shod fellow replies, “no, but I can outrun you.”


Unless something changes very rapidly, the United States will run a $150 billion trade deficit with China this year.  As startling as it seems, Japan’s trade deficit is only a tenth of that amount while their sales to China are nearing three times ours.  Why can we not outsell Japan in China?


Those who believe the differences are cultural do not know anything about Chinese history in the past century or so.  The U.S. sent gunboats up the Yellow River before the Boxer rebellion, just as many other Europeans did. 


However, the other Western powers took the monetary ransom demanded from the Empress Dowager and built foreign concessions in China where Chinese law was not allowed.  The U.S. sent its share to the provinces to build schools for the missionaries who were trying to convert but also aid the village people. 


Chongqing has a museum honoring U.S. General Joseph Stillwell and his aviators.  At the same time Chinese demonstrators are complaining that Japanese history books are overlooking Japanese atrocities at Nanking and elsewhere. 


Everything else being equal, the Chinese would rather deal with Americans than Japanese.  So why do the Japanese have the track shoes while the U.S. is being devoured by Chinese exports?


To some extent, the Japanese are doing in China what the U.S. has done so successfully so many other places around the world.  They are building partnerships with Chinese entrepreneurs.  


If you control the financial capital or brand, you control the flow of capital expenditures, most of which are not built in China. 


While the U.S. is complaining about unfair trade and inappropriate currency values, the Japanese (along with the next largest international investor in China, the Taiwanese) are building factories in China and buying their materials and equipment from Japanese suppliers.  Indeed, the Asians are constructing trading relationships that rival the European Union (although an Asian common currency is only partially valid, as many countries seek currency balance relative to the dollar.)


The U.S. could be a player in that trading partnership.  However, our industry has become timid in competing in China.  We believe that because the Chinese can produce good consumer products more cheaply than the U.S. can, China might also produce our capital goods more cheaply as well. 


What is being missed is the size of the Chinese economy.  Capital expenditures in China are a quarter of the capital created in the U.S. each year.  China simply does not have the capacity to make our shirts, build our electronics, construct our planes, and build our power turbines at the same time.  They must choose how to use their limited resources. 


When they have spent the surpluses earned by selling goods to the U.S., China has bought the road machinery of South Korea, the electronics of Taiwan, the factory equipment of Japan.  From the U.S. the Chinese are buying higher education and beginning to purchase the expertise of industries such as appliance maker Maytag and now the bid for Unocal.


If we do not sell the products of our expertise to China, China will buy or learn the expertise from us. 

At this point, with China remaining a much smaller economy than the U.S., our companies have a great opportunity to replace Japan as the major direct investor in China.  


However, this opportunity will not remain indefinitely.  As China’s economy continues to grow, its ability to finance its own capital expenditures will also increase.  If the Chinese economy has not become interrelated with U.S. technology and service skills before China no longer needs us, the American era truly will end in this century. 


mbar.jpg (9380 bytes)