U.S.-China Competition: Trade, IT, and Other Considerations

By Stormy

How is China handling the global slow-down? And what precisely are China’s prospects? The answers to the first are more neatly framable than the answers to the second. The answer to the second depends not only on China but also on the West, specifically, the U.S. How the U.S. confronts the issue of China will be central as both move through the present crisis.

Reviews of how China is handling the present slow-down coming are complex. On the one hand, we have iStockAnalyst watching China, now flush with cash, snap up bargains in commodities like copper, iron, and oil:

Update: Live from Davos

  • Iron ore imports were up 6.2% in December, on a year-over-year basis
  • Copper imports were up 19.3%
  • And imports of crude oil climbed 11.6%

China is helping out its own producers of zinc, aluminum, and copper as they face a slow-down in global demand. China will stockpile those commodities for brighter days. On the other hand, China is aggressively trying to acquire foreign companies:

China’s third-largest zinc producer, Zhongjin, bought a 50.1% stake in Australian zinc miner Perilya Ltd. for $32 million.

China’s Jinchuan Group…will take 100% of the nickel the Zambian mine produces over the rest of its life. (Jinchuan now has an 18% stake in Albidon Ltd, an Australian company that owns the Zambian mine.)

Additionally, China has struck deals with other Australian companies:

  • Centrex Metals sold a 50% interest in two magnetite deposits to Wuhan Iron & Steel Co., China’s third-largest steel maker for $180 million
  • Mount Gibson Iron brokered a rights issue and share placement to Chinese interests, with two major companies taking a stake of as much as 40% in the miner, while also securing discounted off-take agreements.
  • China’s second-largest steel maker, paid $162.1 million to boost its stake in Gindalbie Metals from 12.6% to 36.28%.
  • Grange Resources is currently set to merge with Australian Bulk Minerals, which is majority-owned by a Chinese steel maker

On the other hand, China is worried about its huge export-oriented economy. Lay-offs and slow-downs multiply. Additionally, currency exchange watchers will see that China has put once again firmly pegged the yuan to the dollar.

While U.S. the U.S. pours billions into failing banks, China hands checks to its companies for a global buying spree. Chinese companies can tap China’s immense current account surplus. Furthermore, China’s acquisition timing could not have been better. Commodity prices have plummeted; deals can be made.

And, as has been noted in the economic press, China has now surpassed Germany as the Number 3 economy. Japan is next. And then there is the U.S.

But…and there always is a but…China now faces a serious problem: Its export platform is collapsing. Nonetheless, China is looking ahead. The question is: Can China continue is present path of development?

While there are many ways of looking at this problem, in this short space, I would like to look ahead, beyond the present crisis. Specifically, I want look at the problem from the U.S. point of view.

Much has been said that China is simply shoes and textiles…cheap consumer goods… Actually, nothing could be further from the truth. Consider, for example, U.S. net trade deficit in Advanced Technology:

While imports and exports are both climbing, the absolute difference between the two reveals that imports are climbing faster than exports.

In 2007, Pacific Rim countries accounted for most of U.S. imports of Advanced Technology. Of those countries, China was number one, surpassing even Japan. Surprised? There are many ways of explaining how China, a presumably third world economy, could surpass Japan in exporting Advanced Technology to the U.S.

Of passing interest as well is the fact that the U.S. in 2007 ran a net trade deficit in Non-Automotive Capital Goods. Note the following 2007 statistics:

All of which brings me back to the problem of China, which now has the world’s number two economy, Japan, clearly in its sights. Ahead lies the U.S., now in deep trouble.

While China plans for the future, the U.S. and the West are intent on saving their financial institutions while blunting the worst of this Depression.

Many look at the problem as simply one of stimulating aggregate demand. That is a rather myopic view, in my opinion. Trade and the current account balance are important, as is national indebtedness.

I do, however, see signs in the Obama administration that it does see the U.S. trade deficit as the serpent in any future garden. (Remember Geithner’s remarks about currency manipulation, for example.)

China and other countries now running a substantial account surplus might weather the financial storm in somewhat better condition, if, if, they can handle the loss in exports. (A big “if.”) I suspect that China is counting on our stimulus package to rescue its export machine.

Another part of that “if” is how seriously the U.S. reconsiders its position vis-à-vis trade…and how it looks upon its own corporations that have fled its shores for juicier deals elsewhere.

In this last regard, I found the complaint of Hewlitt Packard’s Shane Robison, HP’s chief strategy and technology officer, that America’s great IT companies might go the way of the automotive industry. He would

like to see the following: a permanent research-and-development tax credit, which would encourage tech companies to do more basic science research, which in turn would benefit everyone, not just the company that conducts the research; more government funding for basic science research; more spending on education; and changes in immigration laws to help foreign-born students who study in the United States to stay in the country afterward.

Now it is true that we do need to invest more heavily in advanced technology. But take another look at the above graphs. Now consider that of the 321,000 HP employees, only 100,000 work in the U.S. According to Stan Williams, a senior fellow at HP labs:

“Technology has been paying the bills in this country,” he says. “It’s delivering all of the innovation and the profits in the United States. The IT industry has created the wealth that we’re enjoying now. But because the industry is doing well, it gets neglected. We’re killing the goose that lays the golden eggs.”

Consider again the above graphs.

IT may be garnering the wealth, but it is not necessarily providing the jobs. And jobs are now the name of the game.

While we seem to be doing well in semi-conductors, Intel and others are building huge plants in the Philippines and elsewhere (cheaper labor).

If you have any question about major IT companies honing their off shoring strategies, then you should consider IBM’s global strategy. (See my comments here. Ironically, the link in this piece to IBM’s stated strategy is no longer operative. Nonetheless, the quotations are accurate.) It is simply not a question of more and better education. It is a question of salaries…of jobs.

How would I address this issue? Here are just some possibilities.

  • Place an import tax on any American company whose products originated in a country that manipulates its currency or in a country that does not allow labor to bargain freely.
  • Insist that any future companies springing from government-funded research be required to stay solely within the U.S. for ten years.

To return to my original question: What are China’s prospects? In some respects, they depend on how the U.S. handles its own problems, not the least of which is trade and the corporations it has nourished and will nourish.

Beyond all of these issues loom even larger ones.

According to some recent studies, global warming is now irreversible. Similarly…and just as important…global pollution grows apace, along with unabated population growth. How every country faces this triple threat will govern its real success in the next couple of decades.

China, I think, is just as aware as we are of these coming problems. (It, too, is trying to develop, for example, an affordable and usable electric car. It, too, is trying–albeit abortedly–to create cities that are “green.” While IT will continue to be central to any economy, the future will be in melding that technology with a “green” technology, a technology that will radically change how we all must live, if live we will.