Friday, April 18, 2008

An Existential Threat

Since joining this august body a couple of years ago on Intel Dump, I have read and engaged in discussions of how there is currently no existential threat to the US. Typically, this is in the context of the events of 9/11, the GWOT, and the like.

As the current economic events unfold, my thoughts return to a conversation I had with a friend back around 1963. He was a strategic economist for a major NY bank at the time. He was born and raised in Hong Kong, and did his graduate work at Oxford. Was quite unusual to find a Chinese person in such a responsible position in the "lily white" world of NY banking.

A group of us were enjoying an evening of beer and bull shit at a local tavern. The conversation turned to the "Red Menace". Nothing extreme, but intelligent conversation, much as we generally enjoy in this group. Victor said, "The threat to the US by Communist China is not military. The threat China poses to our existence, as we know it, is purely economic, it is massive and, probably, inevitable."

Victor then went on to address some of the reasoning behind his prediction. At the top of the list was the availability of massive, truly massive, amounts of cheap labor. Once China began to industrialize, this huge labor pool would offer a cost advantage and production capacity previously unknown in the world. I haven’t taken the time to check the stats of 1963, but today, slightly more than one out of every five inhabitants of this planet lives in China. Further, China is nowhere near having tapped the available manpower for industrial production. 76% of the Chinese population still lives in rural areas, versus 25% of Americans.

Victor was not concerned just about "competition", but addiction. He said that once China began to produce inexpensive goods for export, the US would become addicted, and thus dependent upon Chinese goods. And, China could afford to keep their prices low for an incomprehensibly extended period of time, because the vast pool of untapped labor would keep that cost element down considerably as compared to nations where the bulk of the labor pool is employed. He then spoke about the flow of money out of the US, and the resulting "ownership" of the US that could result. He also addressed some of the advantages that a Communist government/economy has in the manipulation of currency, especially the ability to operate without classical market considerations, for an extended period of time.

Now, this was in 1963, and the only significant "trade partner" offering cheap goods was Japan, and back then, Japanese "stuff" had not fully climbed above the "recycled beer can" level. America was still a major producer of the necessities of life purchased by Americans.

In summary, Victor said that all China had to do was begin to industrialize on a scale modest in proportion to its population, establish market inroads in the US and then be patient. Our voracious appetites and quest for a quick buck would succumb to good old patience and overwhelming numbers.

So, my good friends, are we wasting our time worrying about a military existential threat, when our own cultural propensities make us a sitting duck for economic suffocation by China? Does our need to incur debt to grow suffer a major strategic weakness in comparison to China’s almost "cash and carry" economy? Or, to draw on one of JD’s oft repeated phrases, have 19 miscreants with box cutters diverted our attention from 1.3 + billion industrious Chinese?

I’ve just grazed the surface of this issue. I leave it up to your comments to flesh it out!

8 comments:

Anonymous said...

Al-

Maybe that's what the Iraq fandango was all about, gaming the odds for us using our military might to ensure a choak hold over the ME oil which would be necessary for China's ever expanding economy.

With the food crisis, along with the financial crisis we might be getting to the time when we start wondering about the "invisible hand's" ability to do everything? That maybe the market has become simply too speculative, not even close to a reflection of our actual economic reality?

I think the Olympic Game torch fiasco might be something of a beginning here in Europe, people are starting to look at China in a different way. They constantly repeat how it "ain't about politics and prestige", but it soooo clearly is. . .

seydlitz89

J.D. said...

I am not sure the rise of another economic power has to be seen as a threat (economics need not be a zero-sum game), but of course all power that is not ours is potentially a threat. Power can be used for good or ill.

Even though power in another nation need not be a threat, it could be. Here again the action of the Bush years will continue to damage us far beyond the grand day of 1/20/09. That man and his ship of fools has harmed us greatly. As our national reputation has been shredded the seeds of future conflicts have been sown.

Imagine the rise of the US as seen from outside of our nation: were we a threat that had to be met with hostility? One would have to watch our behavior to know how to deal with us. That is what other nations did as we grew in strength.

Now, as China rises, we have to watch their behavior - but they have to watch us too, and we aren't looking too trustworthy or smart lately...

Aviator47 said...

JD-

When I speak of a threat, I am not necessarily referring to a hostile one. One of the key concepts in marketing is market share, and the worst possible position for a company (or economy) is to be suffering a decreasing share of an expanding market. In this situation, you don't even have a "niche" to occupy.

As we become more and more dependent upon foreign goods, we produce less and less domestically. We are occupying a decreasing role as a producer in a world where the production of goods is rising. In global terms, we have some "niche" industries, but as an overall
producing economy, we do not have a "niche". Rather, we are retreating.

In order to stimulate the economy, we have gone on a long term program of cutting taxes, with a resulting inability to invest in and maintain critical infrastructure. Our biggest accomplishment has been the accumulation of massive public and private debt. At the same time, China has been investing heavily in infrastructure. We will soon face massive needs to address our failing infrastructure, diverting precious resources away from commercial activity and capability, further shrinking our share in the global economy.

And, while we are surrendering to the "invisible hand", as Seydlitz mentions, China is wisely using a very visible hand to guide her into the future.

Just a few "tip of the iceberg" points. I's not a matter of China being a "threat" in the traditional manner, but our actions as this mammoth Chinese economic engine begins to get tuned up and operating.

Al

Sticking to a thread that won't anger me!

srv said...

What seydlitz said. Iraq and Iran are ultimately proxy wars to throttle China and to a lessor extent the EU. But we shot our wad, and from the vacuum we have created, there will plenty of new 'threats' that will take us off focus.

While the Gov't will make a good show of keeping Chinese funds out of the US, they really don't have a choice in the matter. The invisible hand of WalMart will win over Lockheed. China will get a seat at the table in Wall Street, and that will be a good thing.

Think what you want of China, but they will arguably be more responsible with the levers of the economy than the crooks running it now.

Brian said...

Al,

Your friend Victor's perspective is very interesting and it must have been amazing to here such a profound statement made 40 years ago. I see Victor's argument, the statistics are staggering and logic seems "inevitable." But, as I often enjoy doing, will offer a contrarian point of view.

One of the great similarities between the Roman Empire, and U.S. of the last 50 years, is the sharing of cultures, economy, and of course, military action between the Romans and the rest of the world. Some have differentiated the two by stating that the Romans used their Legions to conquer and assimilate cultures,however, the U.S. instead uses McDonalds, Rock and Roll and the all mighty dollar, thus, an economic and cultural cross polination.

However, is this true? Have we truly reached our status in the world through our powerful economic and labor resources alone? No. We've reached this status, as the Romans did, by injecting our economy, our culture, and at time our military, into other nations though overt military or economic invasions (sometimes invited, sometimes not).

Is it really possible that the Chinese, a nation that historically has only shown interest in being a regional power, can achieve "world domination", or at least domination over the U.S., through mere economic means? I think it is a trinity of economic, cultural and military influence that is needed to achieve such a status, and the Chinese only posses one (in an international sense).

I don't see a "Blade Runner" world any time in my lifetime.

bg said...

brian = bg BTW

Aviator47 said...

Brian-

Yes, at the time, we found Victor's comments interesting, but not relevant! IIRC, he was looking 50 or more years into the future, and as one of our crowd said something like, "That's almost science fiction", referring to the time frame. And, one must realize that in 1963, no one thought of China's huge population in other than military terms, and their power projection ability was nil.

I would also conjecture that our thinking was skewed by our view at the time that the Soviet Union would last a little longer than it actually did, thus causing China to focus more on defending their common border.

I have mused on Victor's words numerous times over the years, and wish I could recall more of the details he offered. But, applying the precise acuity of hindsight, I see that there is great merit in his ascribing great power to having vast amounts of human resources at a nation's disposal. Modernization of industry allows a nation to do "more(production) with less (people)", and in America's situation, that is necessary to grow. There simply is no way to do "more (production) with more (people), as there aren't significantly more people available in America. But when you have vastly more people, and the innate production capacity of those people is virtually untapped, "doing more with more" is a piece of cake, even without the technological efficiencies of "modern" production methods.

I do remember Victor addressing this, as he used a joke to illustrate his point. He was saying that while we could take comfort in the notion that it might take 10 Chinese workers to eliminate the job of one American, the absolute numbers painted a different picture in the greater scheme of things. Thus he told this joke:

Back in the late 1930's, there was a Japanese general who had patronized a Tokyo barber for years. The barber was of Chinese ancestry. As the general would sit in the barber chair and exchange pleasantries with the barber, the barber would always inquire, "Tell me, honorable general, how go the fortunes if the Imperial Army". Of course, there was the subject of the Sino-Japanese front, but the general decided to address that as well, so when he got to that portion of the picture he would say something like, "Ah, this week, Japanese fortunes are again good. 5,000 enemy casualties, only 1000 Japanese." The barber would respond by saying, "Very good. Very good."

After months of this exchange, the general was perplexed. Over time he had even inflated the ratio more in favor of the Japanese, yet his Chinese barber always gave the same reply. Finally, the general decided to grotesquely inflate the Chinese numbers and told this barber, "This week was major good fortune. 100,000 Chinese casualties, only 500 Japanese." As always, the Chinese barber said, "Very good. Very good", and continued to cut the general's hair.

Unable to understand how the barber could be so supportive of the huge Chinese losses as compared to the Japanese, the general asked, "Won Lo, for two years I have described how China looses a million soldiers while Japan looses only a few tens of thousands. And every week, you comment, 'Very good'. You are Chinese. How can this be very good?"

The barber smiled and said, "Because, honorable general, soon, there will be no more Japanese soldiers."

While in relative terms, one American worker can currently outproduce one typical Chinese worker, in absolute terms, 3 billion Chinese workers can compete quite readily with 300 million Americans.

Am I advocating fear and trembling? Hell no. But, assuming that our economic, political and military might is destined to be eternal is a stretch. We could very easily become a "niche" player.

Al

FDChief said...

One thing to consider when weighing China as the potential superpower of the 22nd Century is the internal cotradictions within the old dragon.

China has its own problems: it is much less monolithic than its Han Chinese masters try and present; it has immense infrastructure and poverty built-ins; it has NEVER had a truly sound government that has reflected even the Han majority. At the moment it is doing tremendous damage to itself in terms of desertification and pollution, and it lacks even the less-than-robust means to self-correct that pulled this country back from the worst excesses of the Industrial Revolution.

And you yourself point out, Al, tht traditionally China has been a continental and regional power, wh little aspirtion to go out and rule the barbarians.

I suspect that we are doing a perfectly adequate job of tearing down our own house - in fifty years we may well be looked at like Britain or Italy, home of former empires now tourist destinations - and that China may well be among our successors. But I'm not sure that we need to regard them the same way, say, that I look at Russia: a dangerously unstable autocracy with pretensions of global hegemony.

(How unfortunate that we have put ourselves closer to fitting that very description over the past eight years...)

I will say this: I hope that our "leadership" is paying attention to the Chinese, since I agree that we need to think very carefully before placing ourselves squarely on the other side of any issue that they consider existential. We may have to, for all that, but the cost may be grave and the risk ever increasing.