The way politicians and pundits see China today reminds me of that little warning etched in the rear view mirror, "Objects may appear closer than they are." Peering through our rear view, China looms like it's tailgating us -- strengths magnified, weaknesses minimized, and economic fundamentals distorted.
So whether it's Mitt Romney telling us the China-Bogeyman story or Steven Rattner telling us the China-Savior story, they're looking through a distorted rear view mirror by using standard economic statistics to support their arguments. But these economic statistics fall apart in China.
China's Gross Domestic Product, for example, is a meaningless statistic. In China's informal economy, keeping separate accounting books is standard operating procedure for local companies. The books they show the taxman are different from the ones they show their investors, for example. So growth numbers from individual companies are often deflated. While growth numbers at the provincial level are often inflated. Provincial governors want to show the feds how sizzling hot their economy is to attract more domestic and foreign capital. In other words, when China looks like it's about to ram us "as the world's second largest economy," that supposition is mostly based on GDP numbers that are utterly unreliable.
Chinese trade volumes are meaningless numbers, too. According to The Economist, for every iPad we import, China contributes just $10 worth of value. Yet we value it according to its total production cost of $275, hopelessly distorting the picture of China's true participation in our balance of trade. It is estimated that if China's actual value-add in trade were calculated, our bilateral trade deficit would be cut in half.
So the whole "Rising China" schtick is based on misleading statistics. To calibrate a truer perspective on the strength of China's economy, we need to fix our gaze onto the continuing Made in China safety scandals, most of which are reported in the Chinese media but not here. These safety scandals are more than just isolated incidents. There are literally thousands of food safety scandals a year now. These safety issues are symptoms of grave problems at the heart of China's manufacturing capability.
The truth is that the foundation of China's economic might -- its manufacturing sector -- is riddled with risk. But in order to see this, you've got to do more than visit a couple factories and talk to some Chinese businesspeople (what passes for special knowledge these days.) You must walk the line where raw materials are formed into products. You must see for yourself how food and drugs are processed, step-by-step, from inputs to outputs. And ideally, you must try to wring safe products out of this system yourself.
What you'd see would surprise you. You'd realize that everything made in China is relatively risky. And that the great manufacturing juggernaut looks that way only if you are gazing through a distorted rear view mirror.
To understand why, let's consider how products in China are actually produced. First, the chains of companies that must collaborate to make things are abnormally long. So what might take three firms to produce something in America -- from raw materials to goods fabrication to distribution -- often will require three times as many companies in China or even more.
These gangly value chains imbue risk into products because the companies in the chain often focus on a single operation, like painting toys or scraping pig intestines for blood thinner enzyme. Because each firm tends to lack the ability to police its own product safety, and because the chain is so opaque that other companies along the line can't discern whether the inputs they receive are safe, each company in the long chain adds considerable safety risk.
In addition, the fact that companies in China's value chain are often state-owned compounds the problem. We tend to see Chinese state-owned firms as having enhanced competitive advantages over American firms because of the special treatment they receive from the Chinese government, such as subsidies, loan forgiveness, and bargain pricing on raw materials. However, Chinese state-owned firms tend to be the riskiest of all because they are shielded from the market forces that would normally force them to improve or perish.
So, the heavyweights of Chinese manufacturing -- the large infrastructure makers, the shipbuilders, the high-speed rail producers -- are often nothing more than Potemkin villages. They may flaunt their state-of-the-art equipment, but good hardware means nothing without good software. These companies lack the corporate DNA to make safe products. Their management is a scrum, with no overriding corporate governance or clear lines of reporting -- both of which are essential to making safe, reliable products -- and they lack basic quality control and procurement systems. Unsurprisingly, they usually fail simple quality and process audits by international customers. It's no wonder leading engineering and construction firms often prohibit Chinese-made infrastructure on major projects.
If shopping for Asian-made infrastructure, they'd rather turn to Japan or Korea. Remember in the 80's when America obsessed over a "Rising Japan"? We assiduously copied Japanese management style, from scientific quality control systems to the habit of standing in meetings to make them briefer. I have yet to encounter an American company that wants to copy Chinese management style.
Yet a long, opaque chain of sub-par companies is only part of the problem. Zooming up, we see a dysfunctional regulatory regime. Policing China's civilian nuclear power industry, for example, are 27 ministries and 14 public sector institutions. Because regulatory functions are spread across so many regulating bodies, the system itself undermines safety and accountability. And executing ministers obviously won't solve the problem.
So turning our attention back to today's China rhetoric, we come to understand that the noises from the China-Bogeyman crowd and the China-Savior crowd miss the point. China will do just fine in the near term. Its urban household and government coffers are flush with savings. Fortress China will hold, no matter if its economy slows. But its population will continue to need food, energy, transportation, housing, and medicine. Given China's ongoing struggle to produce these items safely, Chinese consumers will keep turning to the U.S. to supply them. That's why our exports to China keep rising year after year, in nearly every congressional district -- often by triple or even quadruple digits.
Looking beyond the balance sheet, though, we need to realize that the fundamentals of China's economy are weak. That in the longer term, China will need to address the systemic risks that riddle its manufacturing capability. And that these problems won't go away quickly or easily. After all, it took America nearly a century to undergo an Industrial Revolution, when our gangly, risky supply chains had to be integrated and rationalized. It could take the Chinese even longer, given the degree of complexity they face -- not the least of which is a system corrupt to its putrefied core.
In the meantime, we need to stop seeing China through a distorting rear view mirror. It informs bad policy and feeds into the fashionable, but false, narrative of American decline. China isn't our bogeyman and it isn't our savior. It's a giant, underserved market that desperately needs safe goods and efficient services -- both of which America is perfectly poised to provide.
Follow Jeremy Haft on Twitter: www.twitter.com/@JerHaftChina
Becky, manufacturing is even more critical than that. It is also essential for fostering manufacturing process innovation, product innovation and labor force training. That is why Germany's manufacturing sector has been able to remain competitive with China joining the WTO while the US has shrunk by about 50% since then.
From Mr. Haft's description of his 'day job', it seems reasonable to believe that his ability to broker US business investments by Chinese investors might be jeopardized if China balks at attempts by US political leaders to level the trade-playing field between US and China, such as equalized tariffs and ending China's managed peg of its currency to the US dollar. Because apart from threatening to stop buying US government debt with its enormous currency reserves, China could use internal political pressure given the power of its one-party system to make it costlier for Mr. Haft's intended Chinese business investors to invest in US businesses. And that wouldn't be good for Mr. Haft's 'day job'.
The makers of statistics, and their sources, have political and economic incentives to massage their numbers, as described in this article.
Very few listen to the numbers themselves, what story they have to tell.
Today China has come a long way and in many instances advanced beyond the old industrial countries such as in a high speed train network, manned space exploration, a huge middle class approaching almost 1/2 billion people. Gigantic and very modern mega cities, the world's biggest automotive market (more GM vehicles made and sold there than in the US, likewise VW). The biggest solar power effort in the world.
True many things still need to be done, there are still more than 700 million people living in rural poverty, huge environmental problems despite improvements, and of course the political situation - though much better than in 1980 - needs to be freer.
A fact is that the USA gave the Chinese people much assistance in their epic battle against Japanese occupation and atrocities, the Chinese still remember, but the US has not made any capital out of this. Who remembers that Colonel Doolittle landed in China after his historic bombing raid on Tokyo in 1942, he and his crews were saved by the Chinese and taken through the Japanese lines to safety?
China is not the enemy, but if treated as such it could well become one.
China's Gross Domestic Product is a meaningless statistic because in China's informal economy, the books they show the taxman are often deflated. Accordingly, when China looks like it's the world's "second largest economy," that is mostly based on officially-reported GDP numbers that are unreliable (because they are under-reported).
So, we should not be concerned about alarmingly high official GDP numbers because those numbers are incorrect - we can rest assured that...
um, ... the TRUE GDP is likely even MORE alarmingly high?
The balance of your article sets forth they idea that China isn't a dangerous superpower, and is, in fact, a giant, under-served market that desperately needs safe goods and efficient services that more advanced and better-regulated manufacturing sources like America can provide.
But in fact, we really don't see any significant Chinese demand for our better-produced, safer - and higher priced - products and services.
In sum, I agree that in the longer term, China will ultimately need to address many of the problems with it's manufacturing capability (but I disagree that it will necessarily take the Chinese longer to do this than it took America to undergo the industrial revolution - EVERYTHING happens faster, as time progresses), but I think you've essentially failed to support your arguments that China isn't becoming a significant economic power ("superpower"?) and that China actually needs American manufactured goods and services.
China's Gross Domestic Product is a meaningless statistic because the official numbers - those in "the books they show the taxman" - are lower than the actual numbers. So growth numbers from China look like it's the world's second largest economy, but that supposition is mostly based on GDP numbers that are unreliable.
Because, you say, those frighteningly high official GDP numbers are not accurate - but they are actually UNDER-REPORTED?!?!?!
Maybe it's just me but, you seem to have undermined your own argument that we shouldn't be concerned about China's apparently-high GDP.
The rest of your premise, that China is a giant, under-served market that desperately needs safe goods and efficient services from America begs the question that the Chinese market wants better, safer, products from better-regulated manufacturing sources, like America.
But in fact, we don't actually see much of ANY Chinese interest in our safer - and much higher priced - products and services that is the assumptive basis for your argument.
In sum, you're trying to tell us that China is nothing to worry about and indeed, it is a fertile market for superior American products - but you didn't do a very good job of supporting your thesis.
So in fact, we have no idea what their real GDP is.
A Trade Deficit is created when the USA importing, transportation, distributing and retail sales companies pay companies and individuals in foreign countries like Brazil, Russia, India, China, Pakistan, and other industrialized foreign nations with US dollars to manufacture the things that these US businesses import, distribute, and then sell to the US consumers in currency amounts greater that foreigners buy from us.
Manufacturers of vehicles, appliances, and equipment are now made in the USA mostly by assembling imported foreign manufactured parts.
The US manufacturers paid foreign companies in foreign nations with US currency to manufacture a large portion of the parts and assemblies that are imported for final assembly of the finished product in the USA, and then that product is then sold to US consumers as "Made in the USA".
If only the nameplate is attached in the USA to an imported product, is that product really "Made in the USA"?
The average consumer (maybe all US consumers) will always pay less for a foreign made product than pay more for a more expensive American made product if he has a choice.
We must re-industrialize now, at any cost, and stop borrowing US dollars back from wealth creating foreigners in industrialized nations in order to pay for the things that we consume and also to pay for US government expenses that are in excess of US tax revenues.
The first Central bank granted that acess by the US government and Treasury.
http://www.washingtonian.com/articles/homes/luxury-homes-may-2010/
At Apple's factories in Shenzhen, China, factory bosses string nets between buildings to prevent those nasty face dives (1).
Since 2001, the U.S. has lost more than 50,000 manufacturing jobs per month (2). Manufacturing jobs are critical, since for each lost manufacturing job, 3-4 "support" jobs are lost. When an auto worker loses his job, he is much less likely to buy a house.
For most of us, globalism is leading to a global standard of living.
But if one sits atop the economy, instead of existing in the economy, one can thrive. The number of mega-yachts has increased by more than 400% in the last 15 years (3).
Money gained from international investments is laundered through offshore accounts in countries like the Cayman Islands. In the British Virgin Islands, less than 30,000 people call it home, but more than 457,000 "corporations" (including several Georgetown College Professors) maintain addresses to hide money from governments (4).
References:
1. http://abcnews.go.com/Nightline/exclusive-nightline-inside-apple-factories-china/story?id=15738732
2. http://www.crossroad.to/articles2/2012/economic-collapse/2-china-destroying-america.htm
3. http://www.msnbc.msn.com/id/25804188/ns/travel-luxury_travel/t/where-big-boys-go-berth/
4. http://www.economist.com/node/21552197