China Makes, The World Takes

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When I was living in Japan through its boom of the late ’80s, I argued in this magazine that its behavior illustrated some great historic truths that economic models cannot easily include. Sometimes societies pursue goals other than the one economists consider rational: the greatest possible growth of consumer well-being. This has been true of America mainly during wartime, but also when it has pursued martial-toned projects thought to be in the nation’s interest: building interstate highways, sending men into space, perhaps someday developing alternative energy supplies. In a more consistent way, over decades, this has been true of Japan.

For anyone who has taken Ec 101, the natural response would be: That’s their problem! They’re making high-quality products for everyone else, so what’s not to like? But in the past decade, a growing number of respectable economists have argued that the situation is not that simple. If one nation deliberately promotes high-tech and high-value industries, it can end up with more of those industries, and more of the high-wage jobs that go with them, than it would have otherwise. This is not economically “rational”—European countries have paid heavily for each job they have created through Airbus. But Boeing sells fewer airplanes and employs fewer engineers than it presumably would without competition from Airbus. The United States does not have to emulate Europe’s approach, or Japan’s. But it needs to be aware of them, and of the possible consequences. (With different emphases, Paul Samuelson of MIT, Alan Blinder and William Baumol of Princeton, and Ralph Gomory, head of the Alfred P. Sloan Foundation, have advanced this argument.)

China’s behavior, and that of its companies, is easier to match with standard economic theories than Japan’s. So far, deals like those struck at the Sheraton Four Points have been mainly good for all parties. Chinese families have new opportunities in life. American customers have wider choices. American investors have better returns. But, of course, there are complications.

First is the social effect visible around the world, which in homage to China’s Communist past we can call “intensifying the contradictions.” Global trade involves one great contradiction: The lower the barriers to the flow of money, products, and ideas, the less it matters where people live. But because most people cannot move from one country to another, it will always matter where people live. In a world of frictionless, completely globalized trade, people on average would all be richer—but every society would include a wider range of class, comfort, and well-being than it now does. Those with the most marketable global talents would be richer, because they could sell to the largest possible market. Everyone else would be poorer, because of competition from a billions-strong labor pool. With no trade barriers, there would be no reason why the average person in, say, Holland would be better off than the average one in India. Each society would contain a cross section of the world’s whole income distribution—yet its people would have to live within the same national borders.

We’re nowhere near that point. But the increasing integration of the American and Chinese economies pushes both countries toward it. This is more or less all good for China, but not all good for America. It means economic benefits mainly for those who have already succeeded, a harder path up for those who are already at a disadvantage, and further strain on the already weakened sense of fellow feeling and shared opportunity that allows a society as diverse and unequal as America’s to cohere.

A further problem is that China’s business and governmental leaders are all too aware of how the smiley curve affects them. Yes, it’s better to have jobs that pay $1,000 a year than none at all. But it would be better still to have jobs that pay many times as much and are at more desirable positions along the curve. If the United States were in China’s position, it would be doing everything possible to bring more high-value work within its borders—and that, of course, is what China is trying to do. Everywhere you turn you see an illustration.

Just a few: In the far north of China, Intel has just agreed to build a major chip-fabrication plant, with high-end engineering and design jobs, not just seats on the assembly line. In Beijing, both Microsoft and Google have opened genuine research centers, not just offices to serve the local market. Down in Shenzhen, Liam Casey’s company is creating industrial-design centers, where products will be conceived, not just snapped together. What was recently a factory zone in Shanghai is being gentrified; local authorities are pushing factories to relocate 10 miles away, so their buildings can be turned into white-collar engineering and design centers.

At the moment, most jobs I’ve seen the young women in the factories perform have not been “taken” from America, because in America these assembly-type tasks would be done by machines. But the Chinese goal is, of course, to build toward something more lucrative.

Many people I have spoken with say that the climb will be slow for Chinese industries, because they have so far to go in bringing their design, management, and branding efforts up to world standards. “Think about it—global companies are full of CEOs and executives from India, but very few Chinese,” Dominic Barton, the chairman of Mc­Kinsey’s Asia Pacific practice, told me. The main reason, he said, is China’s limited pool of executives with adequate foreign-language skills and experience working abroad. Andy Switky, the managing director–Asia Pacific for the famed California design firm IDEO, described a frequent Chinese outlook toward quality control as “happy with crappy.” This makes it hard for them to move beyond the local, low-value market. “Even now in China, most people don’t have an iPod or a notebook computer,” the manager of a Taiwanese-owned audio-device factory told me. “So it’s harder for them to think up improvements, or even tell a good one from a bad one.” These and other factors may slow China’s progress. But that’s a feeble basis for American hopes.

The measures Americans most often discuss for dealing with China are not much better as a long-term basis for hope. Yes, the RMB is now undervalued against the dollar. Yes, that makes Chinese exports cheaper than they would otherwise be. And yes, the RMB’s value should rise—and it will. But at no conceivable level would it bring those Shenzhen jobs back to Ohio. At best it would make U.S. exports, from locomotives and high-tech medical equipment to wine and software, more attractive. Such commercial victories are important, but they are unlikely to be advanced by threats of retaliatory tariffs if China does not speed the RMB’s climb. Also, the faster the dollar falls against the RMB, the faster Chinese authorities might move their assets out of dollars to stronger currencies.

This year the U.S. government imposed special tariffs, called countervailing duties, on imports of glossy paper from China. This is the kind of paper used to print magazines and catalogs, and Chinese exports of it to the United States rose tenfold from 2004 to 2006. The U.S. government said the duties were necessary to offset the export subsidies Chinese manufacturers receive via low-cost loans, tax breaks, and other benefits. Under WTO rules, export subsidies of all sorts are prohibited; U.S. officials, academics, and trade groups have prepared lists of de facto subsidies that cut the price of Chinese goods to U.S. consumers by 25 percent, 40 percent, and even more. (The Chinese—like the Europeans, Australians, and others—are quick to retort that the United States subsidizes many products too, especially exports from large-scale farms.)

This is obviously significant. But think again of those Ethernet connectors that retail for $29.95 and cost only $2 to make. Removing all imaginable subsidies might push the manufacturing cost to $3. Suppose it went to $4. That would have a big effect on decisions made by corporations that outsource to China—Can they raise the retail price? Must they just accept a lower margin? Should they build the next factory in Vietnam?—but it would not make anyone bring production back to the United States.

Government policy and favoritism may play a big role in China’s huge road-building and land-development policies, but they seem to be secondary factors in the outsourcing boom. For instance, when I asked Mr. China which officials I should try to interview in the local Shenzhen government to understand how they worked with companies, he said he didn’t know. He’d never met any.

American complaints about the RMB, about subsidies, and about other Chinese practices have this in common: They assume that the solution to long-term tensions in the trading relationship lies in changes on China’s side. I think that assumption is naive. If the United States is unhappy with the effects of its interaction with China, that’s America’s problem, not China’s. To i­magine that the United States can stop China from pursuing its own economic ambitions through nagging, threats, or enticement is to fool ourselves. If a country does not like the terms of its business dealings with the world, it needs to change its own policies, not expect the world to change. China has done just that, to its own benefit—and, up until now, to America’s.

Are we uncomfortable with the America that is being shaped by global economic forces? The inequality? The sense of entitlement for some? Of stifled opportunity for others? The widespread fear that today’s trends—borrowing, consuming, looking inward, using up infrastructure—will make it hard to stay ahead tomorrow, particularly in regard to China? If so, those trends themselves, and the American choices behind them, are what Americans can address. They’re not China’s problem, and they’re not the fault of anyone in Shenzhen.