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Timely and Important -,
This review is from: Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It (Hardcover)
Recent economic travails have triggered intensive questioning of the financial system created by the United States and warped by Wall Street. That has led many to reconsider America's place in the world and wonder whether this is indeed the twilight of American power. At the same time, both China and the U.S., after years of seeking closer integration, have begun to question that wisdom. Author Karabell, however, argues that their fusion has advanced too far for either to extricate itself without severe harm. Over the past two decades, China and the U.S. have become one integrated hyper-economy - 'Chimerica.'
To bolster his point about how the U.S. and China economies are intertwined, Karabell contends that without Chinese reserves bolstering U.S. Treasury bonds in the past 18 months, it would have been far more challenging for the United States government to rescue a crumbling financial system. And without American consumers having bought Chinese goods over the past years, China would never have accumulated the reserves that allowed it to spend hundreds of billions of dollars to support the economy during the worst of the financial implosion. (On the other hand, without the low American interest rates afforded by Chinese funds, the U.S. may not have had a housing bubble.)
China began with a trade economy limited to 5% of GDP in the 1970s - it was isolated, and self-sufficient as best possible - like North Korea today. The process of turning outward began about 20 years ago. First came about ten years of experiments with private enterprise in special enterprise zones. By the late 1990s, "State-Owned Enterprises" (SOEs) were allowed to lay off workers, select banks could pursue delinquent firms for repayment, and many restrictions on size and scope of private companies were lifted. As many as 50 million lost their jobs. At about the same time the government also lifted its once-stringent restrictions on internal travel and migration. Its urban population went from 25% in 1990 to nearly 40% at the end of the millennium - nearly 200 million moved.
This then led to people requesting they be allowed title to own homes, and the sell-off of many state assets. Infrastructure needs jumped. SOE managers became increasingly held to performance standards, given wider latitude, and rewarded or punished for results. China's leaders also learned from watching Russia's early 1990s problems after dictation from the U.S. and World Bank, and decided that China needed to go slower, in stages. (Eg. lower tariffs slowly, not all at once.)
A major early boost to China-U.S. trade was President Clinton's decision to stop making trade contingent on its human rights situation. Reasons: 1)The Chinese weren't budging. 2)The instability hampered businesspeople in both countries. (We really need to stop insisting we know what's best for everyone - it's arrogant and ignorant, even self-defeating. We need to recognize that, as Karabell points out, what China did in the 1990s took the states of western Europe more than a century and the U.S. more than five decades.)
Karabell then tells how KFC and then Avon fared in China. KFC now has about 2,000 locations, representing less than 7% of Yum's branches globally but 25% of profits. Its three-story 700 seat flagship store near Tienanmen Square opened in 1987. A two-piece meal + drink cost about the average Chinese weekly wage. Six years later, KFC had less than 12 stores in China - starting out slow was also its guide. A few Chinese items have been added to the menu, and a 'Chicky' mascot proved much more effective than Col. Sanders (viewed as a stern grandfather figure), especially with children. The firm focused on premier locations near tourists, partly because advertising was practically non-existent. While meal costs are less than comparable U.S. offerings, so are costs - overall meals are about 3-4X as profitable as in the U.S.
Avon went to China in 1990. Struggling in the U.S. (women had growing opportunities), and targeted at the middle-class here, its initial 1,000 Chinese representatives were highly educated and skilled (they lacked alternative opportunities). One of its first was a 40-year-old pediatrician earning $120/month. Working part-time, she soon sold $5,000 in products, pocketed $1,500, and thought of going to Avon full-time. Avon also boosted its success by tailoring products to the tastes of local women, and producing them in China as well. However, the Chinese government was suspicious of multi-level sales arrangements (fear of high prices and Ponzi-schemes) and disliked the large-meeting recruiting drives (feared anti-government activities). Direct sales were then banned in 1998. Avon switched to retail sales and continued to do well. In 2006, the government allowed direct sales to resume.
Trade deficits are a sensitive problem in a number of nations. The topic is acerbated by unclarity of statistics. Assembling a G.E. appliance in a Chinese factory it owns is not likely to be classified as an import when the product arrives in Long Beach. However, if the same product had been outsourced to a Chinese company and produced on the mainland, it would be classified as an import upon arriving here. (Thus, our trade deficit is understated; this may partly explain why it has grown so fast. Other reasons include a preoccupation with terrorism and Iraq.)
Karabell claims that one reason Chinese leaders have been so adamant about not allowing China's currency to trade freely is they believe this would lead to a collapse of the currency as in Russia during the early 1990s. The problem centers around concerns over the large proportion of non-performing Chinese bank loans. However, Karabell's explanation of the link was unclear and ineffectual. Meanwhile, the Chinese government is working to 'clean-up' the problem.
By 2007, more than 400 of the S&P 500 derived 40%+ of their profits from outside the U.S. International sales also are faster growing. (Karabell doesn't explain whether this is from sales to outside nations, or profit allocations to offshored work.)
"Superfusion" ends with Karabell recounting Britain's need for large loans after WWII. The U.S. took advantage of the situation and required Britain to open up its empire to trade, thus ending the British Empire and forcing it to take a backseat vs. the U.S. Karabell believes the same may happen to the U.S. vs. China, and recommends we re-orient ourselves away from current military and security challenges (eg. Given their intertwined economies, do Japan and Taiwan need the U.S. Navy's 7th Fleet in the Pacific to protect them from China?) to a greater economic focus, and working closer with China. (Despite Karabell's excellent material, I still believe we need to restrict free trade with China.)