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WHAT THE U.S. CAN LEARN FROM CHINAAn Open-Minded Guide to Treating Our Greatest Competitor as Our Greatest Teacher
By ANN LEE
Berrett-Koehler Publishers, Inc.Copyright © 2012 Ann Lee
All right reserved.
Chapter OneThe China Miracle
Success usually comes to those who are too busy to be looking for it. —HENRY DAVID THOREAU
CHINA'S STEADY AND SPECTACULAR RISE in the last twenty years has perplexed many experts in Western circles. It has generated much intellectual debate as well as a wide range of emotions among Western academics, policymakers, politicians, and the public at large as people struggle to understand the manifold causes for the shift in international, economic, and political power.
Once isolated from the world and threatened by the West, China learned to change its fortunes dramatically in these last three decades. China burst onto the world stage a little while after the diplomatic breakthrough between it and the United States in 1972. Particularly in the last decade, since its accession to the World Trade Organization, China astounded observers around the world with its speed of urbanization, its modernization, its reduction of the number of people in poverty, and the sheer volume of foreign-exchange reserves it holds. China has accomplished much just in the last 15 years including the following:
118 megacities with over 1 million people each
Over 6 million college students graduating per year
Over 420 million Internet users
Over 800 million cell phone users
High-tech exports reaching 20 percent of the total global market
Auto sales reaching 18 million units a year, making China the world's largest auto market
Largest number of Initial Public Offering (IPO) issuers in the world, making up 46 percent of global IPO value
Though China is still considered an emerging market economy (EME), most experts would put it in a separate category from developed and developing nations because of its unique set of features. It can be described as simultaneously rich and poor, advanced and backward. With 56 ethnic groups and an even greater number of dialects, most experts agree that China is so vast, complex, and dynamic that discussing it as one entity gets tricky.
Nonetheless, I intend to select and explain a few key concepts about China's development that I believe have broader applications for the benefit of the United States and the world. By highlighting these specific practices and principles used by the Chinese that contributed much to their recent successes, I hope to export their model for economic accomplishment and gradual civil society reforms so that other countries can modify their systems of governance to match China's effectiveness. This is not to say that China's model is perfect or that it should be duplicated in every way. The suggestion, rather, is to set aside societal conditioning that could blind us from learning from a worthy competitor.
While certain personalities and other singular factors have no doubt influenced history, the overriding reasons for China's success lie in institutionalized values and methods that have worked for generations. Their way of governance has elicited the willing participation of over a billion people even post–Tiananmen Square, despite what some Western media would have us believe. The Communists, though not seen as infallible by the Chinese, at least have been credited with freeing China from a century of foreign imperialism, a period in their history that they view as dark, shameful, and never to be repeated. To the extent that the Chinese can feel proud of their nation's accomplishments and confident that the government can steer their progress, they prefer the current government to alternatives.
Surely, some of the ways China competes now in global trade are not dissimilar to the mercantilist tendencies of the United States before World War I. The United States also used to compete with the Europeans by undercutting Europe's prices. Like the Chinese today, the United States collected a large current account surplus in the process.
America's once-polluted cities and poor labor conditions, as evidenced by the Triangle Shirtwaist Factory Fire of 1911, also have contemporary parallels in China. The poor working conditions in some of China's big cities have lead some to believe—particularly Americans who currently live in China—that China is simply following America's trajectory in history. China's modern development undeniably will exhibit some of the same characteristics of early 20th-century America. China, for instance, has even started to redistribute income with minimum wage laws and transfer payments through higher taxes. But misunderstanding or overlooking some of the differences between U.S. development and China's development can cause Americans to miss opportunities to learn from the Chinese. Historical study can offer only a partial guide for developing future policy initiatives. Understanding China's strategies and appreciating the implications of those differences, on the other hand, can lay the groundwork for potentially more advanced civilizations than what exists today.
While I have no doubt that some will disagree with sections of my analyses and/or conclusions for how they might be applicable to the United States, their very disagreements will hopefully propagate more reasonable opinions and ideas because in-depth discussions can beget real progress. There will always be critics who will remain unconvinced no matter what facts, figures, or reasons are presented. One such critic is my own father, who has admitted to me that he will be biased against China's leadership no matter what evidence I cite because the Chinese Communist Party (CCP) ruined his family, stole their wealth, and condemned them to a life of hardship and misery when it came to power under Mao Tse Tung. However, my intention in writing this book is not to stir emotional outbursts but to arouse reasonable debate and out-of-the-box thinking. The book, I hope, will promote more deliberative discussion about the appropriate role of governments, the extent of their powers, the conditions and circumstances of when those powers should be granted, and which elements are worth keeping and which ones should be tossed. Worlds are beginning to collide, so we will be forced to think about these issues sooner or later.
Global problems will require new global leadership to address with courage the serious issues of unsustainable natural-resource depletion and pollution that have been allowed to fester for decades. Business as usual could eventually lead to a worldwide crisis that surpasses everyone's worst fears. The fundamental thesis of this book is that all nations can and need to work together to avoid an eventual Malthusian crisis, a catastrophe in which the planet can no longer support the human population, as predicted by Thomas Malthus. The key to cooperating may be found in some examples of China's governance. China is not a totalitarian regime like Russia during the Cold War. Unlike those in most authoritarian regimes, China's leaders have earned their authority through a lifetime of meritocratic service that is far from arbitrary. Their system of earned authority actually resonates strongly with Western values, is surprisingly popular with its population, and may even be used to strengthen today's democratic institutions.
A country must choose its allies and enemies carefully. Like the Roman Empire whose seeds of its own destruction resulted from its miscalculated relationship with the Germanic world due to its perceived Persian threats, the United States risks destroying itself if it attempts to fight imagined enemies like China and bestows misplaced trust in dubious allies such as the Pakistan government or Afghanistan's president Hamid Karzai who are arguably more corrupt, bigger violators of human rights, and potentially more dangerous than China. By diverting precious time, energy, and talent toward fighting endless wars rather than funneling them for more constructive uses, the United States may unwittingly create its own downfall. Overextended military aggression abroad and unrestrained military buildup at the expense of other investments can ultimately backfire. Fighting for a larger share of a shrinking pie could yield far less than working cooperatively with nations like China to grow the pie so that all parties can enjoy bigger pieces. The United States needs the wisdom not to let hubris get in the way and the courage to root out its own corrupting elements. Both of these will be discussed in detail in the following chapters. Borrowing some of China's best practices may help the United States close the gap between our current reality and our professed democratic ideal.
Skeptics simply say that Americans should ignore China because they've heard the same hysteria before when Japan was on the rise in the 1980s. The fear that the Japanese were going to take over the world was laid to rest after the Plaza Accord. In this agreement, the developed nations requested that Japan more than double the value of its currency in relation to the U.S. dollar between 1985 and 1987. When the Japanese exports all doubled in price in a timeframe spanning less than two years, naturally the country was unable to export the same volume to the world. Japanese companies suffered severe financial losses. Layoffs and massive reductions in labor wages followed for the next two decades, now referred to as Japan's Lost Decades. Even if some argue that Japan's problems were homegrown, the timing of this agreement no doubt precipitated and exacerbated the subsequent fall. Foreign exchange plays an integral role in all cross-border commerce. In the case of Japan, where the lion's share of its economy was dependent on exports, the forced appreciation of its exchange rate caused many of its businesses to become less profitable. When loans to these less profitable businesses soured, Japan's banking sector was thus harmed, causing a dramatic fall in its stock market as a domino effect.
Certainly it is within the realm of possibility that the United States will attempt to do the same thing to China to neutralize it as a potential economic threat. The Financial Times reported on February 8, 2011, that the United States had attempted to enlist Brazil in a united front against China's pegged currency policy ahead of a G-20 meeting. This move is just one of the ways that the United States attempted to hobble China's economic growth. It follows years of Western media and policymakers calling China a manipulator of currency in attempts to pressure China to appreciate its currency, the yuan, faster or to loosen its peg so that the yuan would free float. "Deregulation of China's currency" is merely another way of saying "Let the foreign exchange traders have the power to manipulate the value of the currency to their ends."
Many differences between Japan and China, however, lessen the likelihood the United States will pursue this route, starting with the fact that China has welcomed significant direct investment from the United States and other countries while Japan was a more closed society. Japan's exports were largely high-end electronic products, designed and produced entirely by Japanese companies. Japan did not experience a flood of foreign direct investment. Its success came as Dr. W. Edwards Deming helped Japanese companies become the most competitive in the world with his theories of Total Quality Management (later modified and elaborated upon by other management experts so that now these ideas are collectively referred to as Six Sigma by manufacturing concerns). Dr. Deming had first approached American manufacturing companies with his theories of benchmarking and other ideas for improving production quality, but he was rejected by all of them because he was considered too radical by top American executives back in the 1940s and 50s. As it turned out, Dr. Deming discovered that the Japanese openly embraced his ideas, so he worked with them instead and helped them rebuild their manufacturing capabilities after World War II to become the best in the world.
Fast-forward to China, and we see a different story. Unlike Japan, China threw open its doors to the world and received significant foreign investment from every corner of the earth. China offered the dual allure of a giant consumer market and a seemingly infinite supply of cheap labor, attractions that foreign companies found irresistible despite the innumerable risks of doing business in a Communist country. Additionally, the explosion of Internet services, which didn't exist during Japan's rise, made it possible to coordinate off-shoring and outsourcing with greater ease and at lower cost. With costs of communication and shipping coming down, multinational companies and entrepreneurs from around the world were able to rely on the Chinese to turn their ideas and dreams into reality.
So unlike Japan, exports out of China are not Chinese exports per se but instead belong to American companies, German companies, Dutch companies, and a long list of others who have vertically integrated China into their supply-chain processes. The goods leaving China and arriving in the United States mostly originated from American businesses and are sold to American consumers; the Chinese merely assisted in putting the products together and account for no more than a quarter of the value added. In 2009 Behzad Kianian and Kei-Mu Yi at the Federal Reserve Bank of Philadelphia reported that of the $644 billion the U.S. consumer spent on goods made in China in 2007, roughly $322 billion was attributed to wholesale markup, retail markup, domestic shipping, and profit margin for U.S. companies. Of the remaining balance, an estimated $161 billion was attributed to imported inputs, and only $161 billion went to the Chinese for assembly or other labor intensive work.
The evidence is clear; the aisles of a typical store in America are filled with U.S. branded products made in China but virtually no Chinese brands. These American brands range from well-known companies like Nike and Apple to the millions of small, unknown business owners running businesses out of their own homes. Just because the goods crossed national borders doesn't mean that the Chinese owned them or made the lion's share of profits. Rather, when foreign companies chose to assemble their widgets in China rather than in their home markets, they were making a decision on what would make their business operations most profitable.
Perception rather than reality is dictating U.S. policy when it comes to jobs. It's not necessarily the case that China took jobs away from American workers. Those jobs may have never existed in the first place if China hadn't provided the inexpensive labor. The wages in developed countries are much higher, a factor that could have deterred entrepreneurs from even launching a business. But with China in the picture, more companies were willing to take the risk because the profit potential was more attractive. China's cheap labor and manufacturing capabilities enticed Western entrepreneurs to pursue projects that in turn required support at home in other areas, for example, sales, marketing, branding, retailing, accounting, legal services, and finance. Thus China indirectly contributed to the United States moving up the food chain toward what is now referred to as a knowledge economy. In contrast to an industrial economy, the critical drivers of job creation and economic growth in a knowledge economy are entrepreneurial ideas, intellectual property, and the reliance on expertise such as research and development (R&D) professionals.
Since the profitability and even viability of many U.S. companies both large and small are directly tied to the cost of their operations in China, it is not in their interest to see the Chinese currency appreciate rapidly. A rapid rise would immediately impact the profits of U.S. companies since they cannot quickly move their operations to Vietnam or India where production costs are low, but the physical infrastructures are significantly poorer than in China. In addition, a rise in the value of Chinese currency would decrease the relative value of the dollar, reducing American consumer spending power and resulting in a loss of sales for American businesses.
Excerpted from WHAT THE U.S. CAN LEARN FROM CHINA by ANN LEE Copyright © 2012 by Ann Lee. Excerpted by permission of Berrett-Koehler Publishers, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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