The New China: Opportunity or Threat?

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Clyde Prestowitz's 'Three Billion New Capitalists'

Cover of Clyde Prestowitz's Three Billion New Capitalists: The Great Shift of Wealth and Power to the East hide caption

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China is already among the world's biggest economies, and it's growing fast. It's a leader in technology and innovation — not just manufacturing. It's among America's major creditors, and, some say, an emerging strategic rival. It's one of the world's biggest exporters and, potentially, the world's biggest market.

But it also has serious problems, with human rights, workers rights, political expression, inequality, environmental issues and more. Whether you see an awakening China as an opportunity or a threat, there's no doubt it will be a major player in the 21st century.

From Chinese companies' bids to take over U.S. firms such as Unocal and Maytag to Beijing's decision to scrap its currency's peg to the U.S. dollar, Neal Conan and guests discuss developments in — and the future of — the new China. This is the first in an ongoing series on China today.

Guests:

Bill Powell, Shanghai correspondent for Time magazine

Clyde Prestowitz, author of Three Billion New Capitalists: The Great Shift of Wealth and Power to the East

From the Prologue to Three Billion New Capitalists: The Great Shift of Wealth and Power to the East

The United States is on the comfortable road to ruin — Martin Wolf

It is January 25, 2005, and as I sit down to write this prologue, I see today's New York Times on the table next to my computer with a headline saying:

DOLLAR'S STEEP SLIDE ADDING TO TENSIONS U.S. FACES ABROAD

Under the Times is yesterday's Financial Times. Its front page lead headline reads:

CENTRAL BANKS SHUN U.S. ASSETS

On page two of the FT is another headline:

DOLLAR AT THE MERCY OF SMALL GROUP OF CENTRAL BANKS

Under the FT is yesterday's Wall Street Journal. The lead headline on page A2 reads:

CHINA ON PATH TO OVERTAKE U.S. ECONOMY

At the bottom of the same page, another headline:

BIG SILICON VALLEY FIRMS THRIVE, BUT JOBS ARE FEW

Then, toward the bottom of the stack, today's FT:

STRATEGIC DIALOGUE POINTS TO THAW IN BEIJING-NEW DELHI RELATIONS

The text begins: "This is a quiet watershed in global diplomacy. If you look at the decades ahead and at the economic rise of China and India then this will be one of the world's most critical relationships."

Last but not least, the Washington Post, with another arresting headline on the front page of the business section:

LOCKHEED TEAM WINS REDESIGN OF MARINE ONE

Marine One is the presidential helicopter, and a Lockheed/European consortium has beaten Sikorsky's all American bid to build a new squadron of choppers for ferrying the President. The deal may be the first step toward renewal of the Pentagon's entire helicopter force. Although Lockheed is the American face on the deal, the key elements of the choppers will be largely designed and built by Italy's Augusta Westland. A key factor in this decision is that U.S. chopper technology seems to be lagging while the European Union's is surging in response to the same kinds of government subsidies that have helped make the Airbus the world leader in commercial jetliners.

I am struck by two things. First, all these headlines come from just two days' worth of big newspapers that are widely read in American policy and journalistic circles. Second, no one is talking about what these headlines mean. Each by itself suggests a significant trend with enormous potential consequences, but none of the papers editorializes on even one of those trends, let alone connects the dots. If you read the newspapers and watch the TV news and talk shows, you probably think that the most important events for the United States during the first weeks of 2005 were the elections in Iraq, the appointment of Condoleeza Rice as Secretary of State, and President Bush's inaugural address. But the real news is the serious flaw at the heart of the global economy, the uncertainty surrounding the dollar, the loss of U.S. financial sovereignty, the decline of U.S. technological leadership, and the rise of China, India, and the European Union. These developments add up to a shift of the global balance of influence away from the United States.

Granted, these subjects aren't visually dramatic and stirring like Iraq, Rice, and the inaugural, but they are more important, both strategically for the United States and the rest of the world and for you personally. As the headlines attest, important people in China, India, Japan, and Europe are getting worried and paying a lot of attention to these issues. So while your eyes may glaze over at mention of the trade deficit or competitiveness, you ought to be a bit alarmed that in the United States even the people whose job it is to pay attention — the policymakers, academic economists, media analysts, and bureaucrats charged with keeping America's economy running so that it will be morning in America for your children as it was for you — aren't.

It should concern you even more that while key American business leaders say they "want to be part of China's strategy" of economic development, America doesn't have a strategy. The economic views now dominant in the United States hold the very consideration of such a strategy to be contrary to America's interests. That American rates of saving are near zero and are accompanied by huge federal budget deficits is not a problem, goes the thinking, because both stimulate economic growth. That the deficits have to be financed by ever more borrowing from abroad, and that this strategy is mortgaging large U.S. assets to foreign lenders, it is argued, should be of no concern because the foreigners will always put their money here since America will always yield the best returns. And if tax holidays, bureaucratic pressure, and managed exchange rates are luring U.S. factories to foreign shores, not to worry. These are gifts to U.S. producers and consumers. Sure, some workers will lose their jobs, but that will only free them up to do more productive work somewhere else.

Or so it is argued. But the economic thinking that allows American leaders to take these positions and the worldview this thinking supports are badly out of touch with reality. Whether it recognizes the fact or not, the United States has a de facto economic strategy, and right now it is to send the country's most important industries overseas.

Consider 9/11. The terrorists who attacked the World Trade Center and the Pentagon left many clues about their intent, and suspicious developments were not lacking. The problem was a failure of imagination by the U.S. government and the public at many levels. No one connected the dots because no one was prepared to realize that new and powerful forces were coming into play. No one imagined that the United States could be vulnerable. No one could put their feet into the shoes of the Jihadists and think like them. Are America and the world in for another kind of 9/11 disaster — an economic one? Of course, it wouldn't kill people, not directly, but it would create great hardship around the world.

Let me tell you where I see the dots leading. We know the U.S. trade (current account) deficits — about $650 billion in 2004 — are filling the coffers of the world's central banks with dollars, so many dollars, in fact, that several key central bankers are saying they have too many and that the United States may not be able, or may not intend, to make good on its international financial obligations. These bankers see that, even if the dollar devalues dramatically, America may no longer have the capacity to raise its exports sufficiently to balance the trade accounts. For the first time since the end of World War II there is a possible alternative to the dollar as the world's money, the euro. For the first time in memory, countries are reducing their dollar holdings. Russia is shifting its monetary reserves from 70 percent dollars and 30 percent euros to the reverse. The OPEC countries have reduced their dollar holdings from 67 percent of reserves to about 50 percent. Other big dollar holders, like Japan and China, are nervous.

The nightmare scenario — an economic 9/11 — is a sudden, massive sell-off of dollars; a world financial panic whose trigger might be as minor, relatively speaking, as the assassination of a second-rate archduke in a third-rate European city. A collapse of the dollar and its consequent abandonment as the world's reserve currency would create a deep recession in the United States. Gas and fuel prices would soar, anything imported would suddenly become much more expensive, interest rates would jump, as would unemployment. The "stagflation" of the 1970s — slow growth and high unemployment combined with double-digit inflation and double-digit interest rates — would look like a walk in the park. And since the United States is at present the world's only major net importer, all of the exporters that depend on it for their economic stability would suffer severely as well. It's the thought of these consequences that makes the big dollar holders so nervous, and makes them, for now, hold on to their excess dollars.

Another reason for their nervousness is that the preferred solution of rapidly rising U.S. exports in response to a falling dollar may not be feasible. For one thing, U.S. exports and imports do not always move in tandem with the dollar. More important, however, are the current limits on U.S. manufacturing and service providing capacity for exports. Manufacturing, the biggest part of U.S. trade, now accounts for just 12.7 percent of American GDP — less than health care. Current manufactured exports are about $620 billion while exports of services amount to about $340 billion. To cut the roughly $650 billion trade deficit even in half only by exporting would require more than a 30 percent increase in exports of both manufactures and services. But many of these industries are already running at 80 or 85 percent of capacity. This suggests that when the adjustment comes, it almost surely will be largely through reduced consumption, which very likely means a recession if not worse.

The really significant news is that even if the world can avoid the nightmare scenario, we are all in for a bumpy ride. The forces now altering the global economic future are too strong to be turned back. Since the fall of the Berlin Wall in 1989, three billion new capitalists have joined the world's economy, and we have barely begun to feel their impact. The virtually endless supply of labor, much of it skilled, in China and India, combined with the negation of time and distance by the Internet and global air delivery, will create a new and challenging competitive environment for countries, companies, and individuals. Those who can do things no one else can do will prosper, but those without special skills will face long hours and low pay. The dwindling role of the dollar in international finance will mean a decline in living standards for Americans (for the simple reason that this country won't be able to run chronic trade deficits if other nations don't have to accept dollars as payment). And no industry will be safe from competition. Services, research and development, and basic research, in which the West now leads the world, could all follow manufacturing to Asia.

Whether slowly or quickly, the forces now bringing wealth and power to the East will also bring crisis and painful adjustment to the West. But although the East will regain its historic place as the center of the world, it will also face huge challenges in providing clean air, clean water, and disease control for its huge populations. These are challenges and crises that cannot be avoided, but they can be managed — if we wake up.

Copyright 2005 by Clyde Prestowitz. Reprinted courtesy of Basic Books.

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The Great Shift of Wealth and Power to the East

by Clyde Prestowitz

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