Fortune: Can America Compete

[Outofin]

The newest issue of Fortune magzine is right by my side. On its cover, a strong Chinese man is bullying skinny Uncle Sam. The article inside questions whether American workers could compete with Chinese and Indians in the age of globalization. When it tries to give solutions, as we've always been hearing, "education". At last, the author admits even education couldn't save Americans because they're just expensive. It says "Economic crises rarely reveal their solutions, but the solutions usually come along." How terrific! So I wasted my time reading it. It simply tells me that no one knows what should be done and let's just wait and see.

From another perspective, I don't understand why they're so concerned. They think China's economy is strong but Chinese couldn't even imagine that is true. As Chinese government, correctly, says that China will remain a developing country for a half century. Chinese are still making shoes for making some tiny profits.

I have to say, Americans are very alert. 10 years ago, when I read foreign media, I wondered why they focused on the backwardness of China and didn't praise for our achievements a bit. Now I understand, that was not because they refuse to see it, that was just because we were simply not good enough. Now we're still not good enough but they already starts to think about what the changes mean. Being alert is a virtue. Americans could learn from reality and face the chanlledges (or even exaggerate it in the case of the article). The should be one of the reasons they succeed.

[gato]

Here's the cover picture Outofin is referring to. The words in the bubble say "I'd smash your face -- only you're so skinny, you might just dry up and blow away."

http://www.fortune.com/fortune/articles/0,15114,1081269,00.html

They are just using people's fears to sell magazines. China's per capita income is still only $1000 per year to the US's $30,000. They are not even competing in same league right now. China's competitors are Mexico, Malaysia, Indonesia, and other Third World countries at the low end of the market. The US's are Germany, Britain, Japan, France, South Korea, etc, etc.

[wushijiao]

They are just using people's fears to sell magazines. China's per capita income is still only $1000 per year to the US's $30,000. They are not even competing in same league right now. China's competitors are Mexico, Malaysia, Indonesia, and other Third World countries at the low end of the market. The US's are Germany, Britain, Japan, France, South Korea, etc, etc.

This also denies what every hardcore capitalist should know: one country finally getting its economic act together doesn't mean other countries will have to suffer. China's rise is a problem for the US, of course. But it doesn't have to be negative. There isn't a limited supply of money. The US can and should figure out a way to benefit from China's rise.

As Dubya might say (on a global scale), the problem isn't how we divide the pie, it's how to make the pie higher.

[beirne]

A little bit of cultural background for those of you who didn't grow up in the 60's and 70's reading American comic books. The cover is a takeoff on the old Charles Atlas adds. The skinny kid gets picked on with the exact words used in the Fortune cover. He then sends in for a Dynamic Tension course from a muscleman named Charles Atlas, does the exercises, which turn out to be isometrics, and later goes back to beat up the bully on the beach and get the girl. See http://www.charlesatlas.com/classicads5.htm for a blurry version of the original.

The important thing, though, is what the US will do instead of Dynamic Tension. China is a real economic competitor for the US, as we are reminded whenever we go shopping and see how much is made there. China doesn't need to be a fully developed country to compete with the US. In fact, its being underdeveloped is what makes it such a strong competitor because it has such a strong advantage in wages.

Unfortunately I don't know the answer either. Another shortcoming with the education solution is that China doesn't need to train as large of a percentage of its population to be scientists and the like to match the number of scientists in the US. This means that in some ways China can catch up with the US on technology sooner than some may expect.

My guess is that eventually the US will end up something like the UK, a faded power. This assumes that there isn't anything major to disrupt China's growth like more serious class struggle, displeasure with the government, or a war over resources.

[gato]

The important thing, though, is what the US will do instead of Dynamic Tension. China is a real economic competitor for the US, as we are reminded whenever we go shopping and see how much is made there. China doesn't need to be a fully developed country to compete with the US. In fact, its being underdeveloped is what makes it such a strong competitor because it has such a strong advantage in wages.

Well, those same low-cost goods you buy at Wal-Mart would be made in Malaysia or Mexico if China were still Maoist. Would we then be asking how can the US compete with Malaysia and Mexico? Most of what China exports are labor-intensive products that probably wouldn't be made in the US in any case. We consumers also benefit when we can buy cheaper goods. If I sold you gasoline for $1 a gallon, you'd be happy, though Saudi Arabia might object.

Further, US is a big economy that still overwhelmingly buy from itself. Imports only make up about 12% of the US economy ($1.4 trillion vs. a GDP of $12 trillion), so the threat from international competition is somewhat exaggerated.

China trains a lot of engineers, but its political and social system contrains people's creativity, which is critical in a modern economy. Creativity is more often punished than rewarded, and so people conform and do things the way everyone else does it. If it doesn't change this culture -- as South Korea, Taiwan, and Japan have done to some extent -- many of its best people will continue to work in the West or for Western-owned companies in China.

At the moment, the US faces much bigger economic challenges than China in the form of rising health care cost (see this article about Canada's health-care advantage) and low standards in its education system. These problems hinders its competitiveness against the other advanced economies like Germany, Japan, and increasingly Korea. These threats, I think, are much more serious than China is.

The US has gathered some political courage to tackle the education problem in recent years, but has allowed the health care problem to fester. For instance, analysts now joke that General Motors is a company that sells car to pay for the health care of its employees, both present and retired.

See this article:

http://nytimes.com/2005/06/30/business/30auto.html

In 2004, retirees accounted for about 70 percent of G.M.'s total health care bill, or $3.6 billion of its $5.2 billion health care costs.

[beirne]

Well, those same low-cost goods you buy at Wal-Mart would be made in Malaysia or Mexico if China were still Maoist. Would we then be asking how can the US compete with Malaysia and Mexico? Most of what China exports are labor-intensive products that probably wouldn't be made in the US in any case. We consumers also benefit when we can buy cheaper goods. If I sold you gasoline for $1 a gallon, you'd be happy, though Saudi Arabia might object.

It is true that a lot of products would be made in other low-wage countries. The work went to China, though, because its wages are even lower than places like Malaysia and Mexico. This wage difference accelerates the departure of jobs from the U.S. by making offshoring even more attractive.

I do understand that the concentration of imports from China makes it a convenient target. The concern, though, is that the situation will just get worse as China has what amounts to a limitless supply of labor. It is also awkward having so many products that America buys coming from an uneasy ally. Now I'm sure the Chinese here will say "You mean someone you can't control", and that would be correct. The US will have to adjust in a lot of ways to deal with the growth of China.

Cheaper consumer goods are good, but not if people don't have the money to buy them. The unemployment rate is still tolerable in the US but it is unclear what will happen in the long run.

Further, US is a big economy that still overwhelmingly buy from itself. Imports only make up about 12% of the US economy ($1.4 trillion vs. a GDP of $12 trillion), so the threat from international competition is somewhat exaggerated.

Maybe. It depends on whether that percentage is going up or down, which I don't know offhand.

China trains a lot of engineers, but its political and social system contrains people's creativity, which is critical in a modern economy. Creativity is more often punished than rewarded, and so people conform and do things the way everyone else does it. If it doesn't change this culture -- as South Korea, Taiwan, and Japan have done to some extent -- many of its best people will continue to work in the West or for Western-owned companies in China.

We used to say how the Japanese were uncreative conformists but they are coming out with new types of products.

At the moment, the US faces much bigger economic challenges than China in the form of rising health care cost (see this article about Canada's health-care advantage) and low standards in its education system. These problems hinders its competitiveness against the other advanced economies like Germany, Japan, and increasingly Korea. These threats, I think, are much more serious than China is.

Agreed.

The US has gathered some political courage to tackle the education problem in recent years, but has allowed the health care problem to fester. For instance, analysts now joke that General Motors is a company that sells car to pay for the health care of its employees, both present and retired.

Also agreed. While I think that the rise of China brings challenges to the US it we shouldn't only respond by trying to react to it. We need to deal with our own issues if we want a serious solution to our problems.

[gato]

I do understand that the concentration of imports from China makes it a convenient target. The concern, though, is that the situation will just get worse as China has what amounts to a limitless supply of labor.

I forgot to add that as the Chinese become wealthier, they'll start buying more products from abroad, too. It's not just a one-way road. Right now the biggest US exports to China are planes, movies, industrial machinery, microchips, agricultural products, and raw material. There will be more in the future, but it will have to compete with other countries who are also trying to sell to the Chinese.

[bhchao]

China trains a lot of engineers, but its political and social system contrains people's creativity, which is critical in a modern economy. Creativity is more often punished than rewarded, and so people conform and do things the way everyone else does it. If it doesn't change this culture -- as South Korea, Taiwan, and Japan have done to some extent -- many of its best people will continue to work in the West or for Western-owned companies in China.

Well the next generation of "the best and the brightest" in China is not going to have an easy time getting visas to the US. Ever since 9/11 (which I referred to in the Broadband in South Korea thread), the number of students from Taiwan and mainland China in the US has declined from a record high in the mid-1990's.

It's kind of like a Catch-22 situation in both China and the US. The US needs students who are proficient in science, engineering, and information technology; but the current political climate and immigration policy makes this difficult to attain. Unless we see an environment in China that fosters innovation or R&D in the likes of South Korea and Taiwan, future generations of "the best and the brightest" in China will be stuck due to the current situation in the US.

[beirne]

I forgot to add that as the Chinese become wealthier, they'll start buying more products from abroad, too. It's not just a one-way road. Right now the biggest US exports to China are planes, movies, industrial machinery, microchips, agricultural products, and raw material. There will be more in the future, but it will have to compete with other countries who are also trying to sell to the Chinese.

Maybe. It depends on what there is left to buy from the US.

As for current exports, I looked at the US TradeStats Express page. The only manufactured or high-tech product where the US is running a surplus with China is aircraft and parts. The rest are food, metals, chemicals, and other raw materials. Most of these serve to support Chinese manufacturing, putting the US at the low end of the economic process.

[Outofin]

As for current exports, I looked at the US TradeStats Express page. The only manufactured or high-tech product where the US is running a surplus with China is aircraft and parts. The rest are food, metals, chemicals, and other raw materials. Most of these serve to support Chinese manufacturing, putting the US at the low end of the economic process.

I've also noticed that. If you check some trade stat, the trade between China and the US makes the US look like a developing country. China only imports raw materials and high-end machinaries that it couldn't produce by itself (yet). This is what drives global economy: the world sells raw materials to China, China makes goods out of them, then sells them to the US. In this sense, the US is still at the highest end.

[gato]

Another thing to be aware of is that it's often the non-Chinese owners that make the bulk of profits from goods manufactured in China. For example, a Western apparel maker might buy t-shirts from a Chinese factory at $1 a piece and then sell them in the US for $20-30 each. That's the situation with many Wal-Mart type goods. Some state-owned manufacturers also operate according to political rather than business logic and barely make any profit at all on what they sell. See the story about Apex for one example:

http://www.iht.com/articles/2005/01/18/business/apex.html

China's biggest exporter of television sets announced major losses yesterday stemming, in part, from declining sales in the US and an unfolding financial scandal involving its biggest American customer.

The exporter, Sichuan Changhong Electric, announced earlier that it would be reporting its first-ever loss, up to nearly $US500 million, because of unpaid accounts with Apex Digital, a company in California.

A Changhong spokesman, Liu Haizhong, said that Apex Digital owed it $US468 million ($602 million). The spokesman did not specify what period the amount covered.

In an interview last year, Ji denied that his company owed Changhong any money, citing an arrangement whereby Apex took a 10 per cent cut from sales of Changhong-made sets but never owned them or directly took money from retailers.

In addition, Changhong's boss, Niu Runfeng, took personal charge of dealings with Apex, ignoring normal safeguards in an ambitious attempt to expand sales in America, according to Chinese press reports on Monday.

It is far from clear whether the latest claims of financial abuses have any relation to dumping, but analysts said they may revive the accusations that Chinese exporters of television sets have made reckless deals to increase overseas sales.

[beirne]

Another thing to be aware of is that it's often the non-Chinese owners that make the bulk of profits from goods manufactured in China. For example, a Western apparel maker might buy t-shirts from a Chinese factory at $1 a piece and then sell them in the US for $20-30 each. That's the situation with many Wal-Mart type goods. Some state-owned manufacturers also operate according to political rather than business logic and barely make any profit at all on what they sell.

This is true but this doesn't make up for the lost American jobs or the trade deficit.

[Outofin]

For example, a Western apparel maker might buy t-shirts from a Chinese factory at $1 a piece and then sell them in the US for $20-30 each.

This is the part I don't understand. Chinese make $1 because of competition. They have no way to sell it high. There's high profit, there is competition. Why American businessmen don't compete to pull the $20-some price down.

[bhchao]

The US benefits from increased trade with China in a way that it helps keep inflation down in the US.

During the Clinton years, the American economy grew at an unprecedented pace for 8 straight years without any serious inflation. This is because of imports of cheap-priced products caused by trade with China and other East Asian countries. These low priced foreign goods are forcing American manufacturers to cut costs in order to compete with those goods, resulting in a lower final price to the consumer.

So American consumers should not heed the advice of US manufacturers who cry "Buy American" since doing so would not help increase cost efficiency, and will bring inflationary pressures.

[gato]

This is true but this doesn't make up for the lost American jobs or the trade deficit.

My point was that despite the outsourcing, the money often ends up in American hands. The US, as a whole, is not getting poorer, as evidence by the consistent annual increases in national income. The problem is distribution of income. It's the capitalists (i.e. shareholders) who win, and the blue collar workers who lose -- at least in the short run.

[beirne]

This is the part I don't understand. Chinese make $1 because of competition. They have no way to sell it high. There's high profit, there is competition. Why American businessmen don't compete to pull the $20-some price down.

I once asked I guy I had met from Ralph Lauren about that. His answer as to why they aren't making money hand over fist was that the $1 shirt costs $9 by the time it then got to the shore. Then there are the domestic transportation and distribution costs, including someone from the company actually going to the stores to put the clothes on racks. That last part still makes no sense to me.

The competition is there, which is why Wal-Mart is the largest retailer by far and Sears got bought by K-Mart. Wal-Mart often doesn't sell top-of-the-line stuff, though. People are still willing to pay more for name brands and that keeps the $20 price up.

So American consumers should not heed the advice of US manufacturers who cry "Buy American" since doing so would not help increase cost efficiency, and will bring inflationary pressures.

I think there is a middle ground on this. I give American-made products extra consideration and will buy them over a foreign product if the price difference isn't too great or the quality difference appears to be worth the extra expense. Even I have my price, though, and won't pay any amount to buy American.

[Outofin]

It seems to me that gato and beirne are talking about two different things. gato is talking about business. Unemployment is never a business topic. Profit is.

I forgot where I read it. An article asked, when Americans are demanding for their jobs, is it fair to take jobs from those Chinese workers? Okay, now I remember. It was from Time. I was amazed by the idealism and internationalism. Fairness is not what governments fight for with each other.

What do we learn from it?

You don't get what you think you're worth. Work hard and you'll get what you deserve, hopefully.

[gato]

Surely, even governments abide by some version of morality. At least some do, some of the time. People are the same way. Everybody believes in one version of morality or another, and act accordingly some of the time.

[bhchao]

I agree with the viewpoint that the US is losing its technological edge to countries like South Korea and India. If there was an upward trend from home-grown students in the US in technical proficient areas, there would be an inflow of highly skilled human capital into the workforce. When I majored in computer information systems in college during the mid-1990's, the majority of the students in my department were Asian, a lot being immigrants from Taiwan, mainland China, Hong Kong, and Southeast Asia. (over 50%). The CIS department had the highest proportion of Asian students in the School of Business.

Even the School of Engineering had a large percentage of Asian students from abroad.

Perhaps if there was an upward trend instead of a downward trend of American students majoring in engineering, science, or IT today, Fortune wouldn't post an article like this. But you can't force someone to specialize in a field that they're not interested in. The only way to compensate for the shortfall is hire foreign workers (which will be difficult) or outsourcing.

So people who point to the rising China threat (militarily I can understand, but economically no) should worry more about solving problems at home rather than focus on a perceived foreign threat.

Here is a relevant article written in the New York Times today.

http://www.nytimes.com/2005/07/31/business/yourmoney/31every.html?

Don't Worry About China. Learn from It

--Ben Stein

--July 31, 2005

"ONE disadvantage of being 60 is that you have to get up in the middle of the night, often more than once. But a big advantage of advancing age is that you get to recognize news media silliness when it happens.

This comes to mind in terms of the economic relationship between the United States and China. Partly because a company affiliated with the Chinese government has made a bid to buy Unocal, a large American oil company, there is a lot of talk in the news media about how powerful China has become and how weak and pitiful the United States has become. There is talk of Chinese dominance over the world economy, and, from what I can gather, a general fear that soon we will be in peonage to the Chinese.

It all reminds me a lot of how the news media and the Central Intelligence Agency went berserk after the launching of Sputnik in 1957, and it was forecast that the Soviet Union would soon be the world's technological and economic hegemon. That talk was based on a number of faulty assumptions and a good deal of hysteria. Obviously, it did not happen.

In the case of China, the confusion is slightly similar, but with some important differences - and one immense fact that the news media regularly overlooks about personal responsibility.

First, let's look at the data. But the problem is that the data are extremely confusing when it comes to reporting the real size of China's economy. On the one hand, if you take what is reported about the output of China, you get a range of estimates, but generally the gross domestic product of China in the year 2004 is estimated to be substantially less than $2 trillion. That would roughly make it one-sixth the size of the United States economy. Yet China has nearly five times the population of the United States. That means the per capita G.D.P. of China is about one-thirtieth the per capita G.D.P. of the United States, estimated to be about $40,000 at present, in rough terms.

Obviously, this puts Chinese per capita G.D.P. far behind that of any major industrial country. But some economists, especially at the C.I.A. (which loves to puff up estimates of the power of other countries, as we have learned at great cost), say that we should count only "purchasing power parity" G.D.P. That means we would adjust Chinese G.D.P. and per capita G.D.P. drastically higher to account for the lower prices that the Chinese pay for things like food and medical care. (It is a mystery to me how these economists account for the fact that tens of millions of Americans have a house on a quarter-acre of land with three bedrooms and air-conditioning, a type of property that is simply not available except to maybe the richest 10,000 families in China. Maybe that should ratchet up our purchasing power parity G.D.P., but I don't think it does.)

Consider the most optimistic C.I.A. data about China in 2004. It says China has a purchasing power parity G.D.P. of (very) approximately $8 trillion, compared with roughly $12 trillion for the United States. Again, this is for a nation with nearly five times our population. Even when using this most astoundingly optimistic estimate - I would almost say a preposterous estimate - China has a per capita G.D.P. of about $6,000, or about 15 percent of America's and well below that of any nation in Western Europe, or of Japan, Israel, Taiwan and many other countries.

In other words, the United States is vastly richer than China by any measure. This is not to boast, but it's also not to be afraid of imminent world-pauper status.

It is true that China is industrializing at a fantastic pace. It is estimated that China has been growing at roughly 9 to 10 percent annually for several years, while the United States has been growing about 3 percent annually. Torrid growth, however, never goes on forever, in companies or in nations. (At least it never has so far.)

But suppose that these trends continued for 25 more years. Chinese per capita G.D.P. would be about $65,000 in 2040, and American per capita G.D.P. would be about $84,000. Again, this assumes that we use the most optimistic possible estimates of current Chinese G.D.P.

If we used the more conservative, non-C.I.A. estimates of where Chinese per capita G.D.P. is now, in 25 years it would be about $17,500- and this assumes the continuation of China's recent sizzling growth rates. That would put China's per capita income in 2030 at roughly one-sixth of our level.

In other words, it will be a long time before Chinese per capita G.D.P. matches ours. And for that to happen, it will take a previously unheard-of growth rate for an unheard-of length of time. This is a big series of ifs, especially for a country with a rapidly aging labor force and an inherent contradiction between dictatorship and free markets.

But suppose that it does happen. Suppose that China becomes a larger economic power than the United States. Suppose, in our great-great-grandchildren's day, that the average Chinese citizen is about as rich as the average American. How would it hurt us? Why would we be worse off? If the Chinese were richer, they could buy more from us and employ more of our workers. They could buy more of our stocks. They could tour our beautiful nation more.

The fact that our neighbors are worse off does not make us richer, and the fact that they are better off does not make us poorer.

But another factor is even more important: personal responsibility. Americans who want to make sure they stay well off accomplish nothing by worrying about China. But we can certainly learn something from China. Individuals and nations become rich by investing in human capital - getting a good education, learning good work habits, saving and investing prudently and living healthy lives. Any young Americans who want to keep up with the Chinese can get a good education, work hard, save as much as possible, invest prudently - and they will be just fine now, in 25 years and in 50 years.

The moral here is simple: learning from our friends, the Chinese, means something. Fearing and envying them means nothing. "

[gato]

Ambitious Americans who think about these things want to be managers of engineers rather than engineers themselves. Someone I knew was already thinking along these lines back in high school. I wonder what he is doing now.

China's and India's growth will put a lot more pressure on natural resources around the world. I see that as the biggest problem.