Greg Autry

Fighting for space, not over it.

Why Obama is on the Offense In Ohio

What to know why President Obama has just gone on the offensive on China trade policy?   See the results of this just released Zogby poll commissioned by Death By China Productions.  The poll shows Obama faces a huge “soft on China” gap relative to Mitt Romney in the key swing state of Ohio – and some very interesting findings as well.

 

New Zogby Poll in Crucial Ohio Swing State

 

  • Obama and Romney in Statistical Dead Heat
  • Obama Faces Large “Soft on China” Gap
  • The Best Jobs Program is Trade Reform With China
  • Ohioans Overwhelming Support a Boycott of Made in China.

 

President Obama may have opened a lead in national polls, but it remains a statistical dead heat in the crucial swing state of Ohio.  In the latest Zogby Poll of 601 likely voters conducted by JZ Analytics, President Obama’s lead of 45%.3 to 43.2% over Mitt Romney is well within the statistical margin of error.

 

Candidates take note:  An overwhelming majority of Ohioans — 80% — agree that “the single most important issue in the 2012 Presidential race is jobs.

 

50% of Ohio respondents believe that the best jobs program for America is “cracking down on China’s unfair trade practices like currency manipulation, illegal export subsidies, and counterfeiting and piracy” while only 22% favor more government stimulus; and these results are consistent across liberals, moderates, and conservatives.

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This finding is particularly bad news for President Obama as he faces a double digit “soft on China gap” relative to his opponent.  Fully 43% of Ohioans believe Mitt Romney is more likely to crack down on China’s unfair trade practices compared to only 30% for Obama.  Among independents where the largest bloc of undecided votes remains, this gap holds at 35% to 26% in favor of Romney.  (This finding may also help explain why Obama has recently ratcheted up his tough on China messaging.)

 

56% of respondents also believe “Americans should boycott Made in China products because of China’s unfair trade practices and human rights abuses” while only 19% are against the boycott.  This result is consistent across party affiliation, indicating the issue of China is an American issue, not a partisan issue.

 

If Obama is to win in the crucial swing state of Ohio – and thereby likely win the election — he would do well to try to close his very large “soft on China” gap not by attacking Romney for being soft on China – Ohioans won’t believe that.  Rather, Obama should carry the slogan “the best jobs program is trade reform with China” and lay out very specific policy actions that will curb China’s cheating.

 

For his part, Romney would do well to further press his “tough on China” advantage in Ohio by extending his campaign talking points significantly beyond his promise to brand China a currency manipulator on his first day in office.  Clearly, China’s cheating is a flashpoint for Ohio voters who have seen whole factories uprooted and replanted in China.

 

The Zogby Poll was commissioned by the filmmaker of Death By China Peter Navarro to benchmark attitudes of Ohioans on the China question.  Navarro is traveling throughout the state showing the film and conducting town hall meetings, with stops in Youngstown, Akron, Dayton, Cleveland, Cincinnati, Columbus, Toledo, Mansfield, Portsmouth, Sandusky, Athens, and Findlay.

What you See is, What you Get: On UFOs, Unicorns, Bigfoot, and Comparative Advantage

Sometimes I think it’s a sin, when I fell like I winnin’, but I’m losin’ again.

–       Gordon Lightfoot, Sundown

As a lecturer and a PhD student, I’ve taught David Ricardo’s theory of Comparative Advantage to hundreds of MBA students. This is the brilliant little economic model that demonstrates how when each nation focuses their resources on the work they are best at – even if they are not better than all others – production will be maximized and consumers will benefit. In its pure, abstract form, Comparative Advantage represents an unarguable truth. There is a beautiful, transcendental moment when a business student suddenly “gets” the simple mathematical model and sees the nearly magical benefits Ricardo’s model offers to “all trading nations.” It’s comparable to the experience of an undergrad sociology student encountering Karl Marx for the first time. Suddenly the world is brilliantly clear and the solutions are so simple, if only everyone could be compelled to embrace them.

As different as Ricardianism is from Marxism, the two economic theories share a common theme – they sound swell, but fail completely when faced with the reality of human behavior. The problem is that both of these grand ideas require that individuals or nations, respectively, repress their natural inclination to act in a self-interested manner, for the promise of a mutual beneficial outcome.

In the real world, we know this promise never works. Letting individuals pursue their own, inefficient, unplanned, selfish economic courses actually works out better than getting smart folks to organize them for the greater good – the free market has trumped socialism in every sad empirical test of Marx’s dream.

The ideology derived from Comparative Advantage that has erroneously been labeled “Free Trade” actually involves the same logic as socialism – that free nations subsume their national desires for control of their jobs and strategic resources to a greater global interest, which promises to benefit their consumers as well. Even more curiously, the strongest supporters of individual freedom are the first to villainize anyone who suggest “protecting” a domestic market for the benefit of their nation. They then invariably drag out the ghost of David Ricardo to explain to us simpletons that becoming the world’s trade bitch will be good for us. China’s 25% tariff on U.S. cars vs. our 2.5% tariff on their imports is no problem because American consumers benefit from low prices when American producers shut down!

However, the empirical evidence is again, perfectly clear: nations that pursue the acquisition of technology and capital, fight for high-value manufacturing jobs, and seek smart trade advantages increase their national wealth and individual prosperity. Naïve countries that actually practice, “free trade” spiral into decline and unemployment. There is no better example of this than 19th century Britain, the first nation to embrace Ricardo’s crazy idea.

After the brilliant theoretician sold Parliament on his simplistic theory, the UK went on a free trade frenzy. During the next century the United States, operated on Hamilton’s “American System” featuring very high tariffs, and an active industrial policy geared toward rewarding production, building infrastructure and developing markets. America gutted England’s manufacturing base. Despite controlling a third of the world’s resources Britain entered a slow decline. Only those Brits involved in investing capital elsewhere gained real wealth. Building a welfare state became unavoidable to avoid revolt. Meanwhile, the U.S. developed a vibrant middle class and rose to global prominence.

However, in the last century smart leaders in Japan, Korea, Taiwan and others have followed the American System to perfection, while giving “free trade” the appropriate lip service for a senile America. The results were absolutely predictable to anyone with common sense.

In most ways, China’s rise has been no exception. It isn’t that the Communist Party has been run by brilliant new thinkers (the last really new thing out of China was probably gunpowder), it is simply that they steal good ideas and have belatedly copied a proven economic formula. China’s leaders have followed a policy of pure self-interest while mumbling all the right words in public as they dance their way through the free trade tango with skill. If they’d actually had good sense they would have done this fifty years earlier and spared the Chinese people decades of misery.

The exception with China is, of course, that the Communists never have any concern for personal misery. Their goal is nothing but building greater power for those at the top of the Communist Party dog pile and economic planning is just a tool to achieve that. That’s why handing over the torch of global leadership this time is a very different thing than it was with the UK-U.S. transition last century. Supporting the U.S. to Communist China power transfer is tantamount to endorsing a new Dark Ages for humanity.

In my next posting, I’ll address the theoretical weaknesses that cause comparative advantage to backfire in the real world. In the meantime, understand that counter-intuitive economic theories are always the rage with academics and pundits that need to sound cleverer than the average citizen. Remember, these are the folks that sold us the “we can borrow and spend our way to prosperity” theory under the label of Keynesianism. When something looks like economic slight of hand to you it probably is; and whenever you encounter an ideology-driven economic theory fiercely supported by a cadre of closed-minded, true believers run!

Empirical evidence should trump theory. When medical researchers see that an experimental treatment appears to be actually killing their patients they halt the research and re-evaluate, regardless of how good the thing looked on paper. This common sense protocol should apply to U.S. economic policy – where we only have one patient. If the theory is obviously not delivering economic benefits STOP! Instead, while we congratulate our self on the victory of free trade our trade deficit soars, unemployment skyrockets, GDP plummets, and a staggering debt accumulate. The true believers tell us to close our eyes and stay on course, because the enormous Chinese market is just about / very soon / any day now going to usher in a new generation of prosperity. Sure, right.

In my next post, I’ll address the theoretical problems with Comparative Advantage.

 

Greg Autry serves as Senior Economist with the American Jobs Alliance and is the co-author of the book Death by China, now a documentary film directed by Peter Navarro and narrated by Martin Sheen.

Please follow Greg on Facebook at: http://www.facebook.com/gregwautry

and sign up for email updates at: http://www.gregautry.us/updates

 

 

 

 

 

 

 

 

 

 

 

 

Blog Moved – Welcome

As the Death by China Movie promotion ramps up, the Death by China website will be refocused for the film. My blog has moved here, where I’ll continue addressing Communist China’s rising threat and growing influence in America and around the world.

Thanks for following me here and please click on the update page to join my mailing list.

– Greg Autry

Huntsman Continues his Old Job of Passing on Chinese Threats – Romney Rocks

When John Huntsman’s turned on his fellow GOP candidate, Mitt  Romney in order to flaunt his Mandarin in Saturday night’s debate, he accused the former Mass Governor of not understanding the situation in regards to China’s currency manipulation scheme.

Actually what was clear from the exchange and from Mr. Huntsman’s actions as kowtowing ambassador to the world’s largest police state that it is Huntsman who just doesn’t get it.

Huntsman didn’t bother to either deny of defend the charges of currency manipulation, trade cheating, and IP theft. All he wanted to do, was his familiar job of delivering imperious Chinese threats.

This time he was the mouthpiece for the tired old assertion that holding China up to international norms and the trade agreements it has signed up to would result in a “trade war.”

Romney promptly and properly pointed out that in a trade war the country that is benefiting from the trade is the one that has the most to fear. In the US-China relationship it’s very apparent who this trade is profiting and who this trade is hurting. If the China trade vanished today and the US got back its domestic markets the main thing that would happen is a 2% increase in our GDP and huge drop in our unemployment.

Sure we’d lose that plant in Georgia selling chopsticks to China, but in exchange could be making iPads in California. Nothing could be more representative of the raw deal America gets from working with China.

Further, the key point is that there is a huge moral hazard in letting your friend cheat you out of the fear that they might not play with you anymore. Trading partners, like anyone else learn from your previous behavior and I’ll continue doing what works. In China’s case that’s lying, cheating, stealing, and occasionally threatening.

The American public does not want a President who channels Hu Jintao and threatens the American people in Chinese.

 

Black Friday: China, Wal*Mart, the Social Bifurcation Engine and Inevitable Disaster

 

When Black Friday comes I’ll stand down by the door

And catch the grey men when they dive from the fourteenth floor

When Black Friday comes I’ll collect everything I’m owed

And before my friends find out I’ll be on the road

When Black Friday falls you know it’s got to be, don’t let it fall on me

– “Black Friday” by Steely Dan, from Katy Lied (1975)

 

Y = C + I + Xn + G

–       John Maynard Keynes, The General Theory of Employment, Interest and Money

–        

In Keynes’ famous GDP equation the size of nation’s economy is measured by its Consumption (C), Business Investment (I), Net Exports (X), and Government Spending (G). Of these four factors only two really offer an eventual return: Business Investment and positive Net Exports both create new wealth for a nation. Investment results in improved production efficiencies, funds new technologies, and generally raises standards of living in the most efficient way yet discovered. When a nation exports more value in goods and services than it imports it recognizes a profit, like any business and its people reap the dividends (albeit not always equally).

However, when a nation focuses it short-term economic hopes entirely on the importation and consumption of consumer products the net result is spending on dead-end goods that do not contribute to production of wealth and are not exported for profit.  Financing of the associated sustained trade deficit must result in either capital transfer (loss of savings or assets) or debt (borrowing against assets or future earnings), which reduces investment and retards future consumption.

When the inevitable shortfall is filled by government spending directed at increasing consumption rather than investment the process of decline is accelerated. In the aggregate funds can only be expropriated from the more productive sectors and are naturally reallocated to the ones that are most quickly failing. Factories close while housing prices and retail sales artificially sustained. Houses do not produce new wealth; factories produce new wealth by adding labor value to raw material and creating something more valuable than the sum of its parts. Using tax revenues to subsidize the purchases of imported consumer goods simply expands the economic leakage.

The result of all this is simple to predict:

  1. The demand and hence value of domestic labor falls
  2. The demand and hence value of labor in the foreign producer rises
  3. The returns to capital invested aboard rises

Bottom line: America has created a system perfectly designed to kill jobs, reduce middle class wages, and make the top-end of the investor class wealthier.

I call this our “Social Bifurcation Engine” and anytime the economy turns down, our citizens encourage our government (Democrat or Republican) rev this engine up higher and higher in the mistaken belief that it will stimulate the economy into a return to production. However, because of the giant leakage of consumer spending and the accelerated flight of capital investment to China such stimulus is no longer effective. At some point, probably not to long from now, this overworked engine will simply explode in an economic disaster with significant business and political consequences.

This is not an indictment of capitalism nor of appropriate government investment in things like infrastructure or R&D, it is an indictment of political naivety and CEO stupidity.

Now, if you wanted to make this scenario even worse, assume that your “trading partner” – the one who is making all the money off this – understands how this works and intentionally suppresses the cost of labor in its own nation by repressing worker’s rights, and ignoring safety and environmental regulations that have enormous health consequences because they don’t value individuals. In other words, “China.” These factors all prevent the natural balancing mechanism that would check the death spiral of American wages by reducing the incentives for U.S. capital to flee to Shanghai.

When the Boys from Beijing beat striking workers with batons, poison Chinese kids with their unbreathable air, and slowly kill the elderly in their “cancer villages” they don’t do it without reason. They do it because they know the never ending trade deficits are undermining the American and European economies and that the Social Bifurcation Engine will eventually undermine the political stability of their enemy. The domestic collateral damage in China is simply a necessary and acceptable cost in their quest to stamp out liberal democracy and export their brand of National Socialism with Chinese characteristics to the world.

Understanding that the existence of a healthy and wealthy America has long driven Chinese yearnings for political reform – witness the Goddess of Liberty at Tiananmen in 1989 – Hu Jintao and co. know that in the end their unpleasant system cannot survive while democracy prospers.

The men who rule China have carefully crafted and sold the world a Big Lie whereby they convince the West that the policy of engagement will lead to Chinese political reform and eventually to shared prosperity through trade. Obviously there is no empirical evidence for either of these outcomes after three decades of experimentation. We have simply created a stronger, more repressive communist China and a weaker, bifurcated America. For God’s sake, it’s time to stop!

You can start by skipping your Black Friday shopping trip to the Great Wall of Mart and instead invest your money in America by buying a U.S. made good or service from a local firm. Or you can save your money for the real Black Friday that is sure to come if nobody else heeds this call.

Greg Autry is the co-author of Death by China.  He teaches macroeconomics at the Merage School of Business, UC Irvine.  He writes and speaks on China, space, economics, investing, and business strategy.  For more information, please visit http://www.gregautry.us and follow the author on Facebook and Twitter.

 

China Trade Policy and the Fallacy of ‘Idea-Land’

Reposted from American Thinker (http://www.americanthinker.com/2011/09/china_trade_policy_and_the_fallacy_of_idea-land.html)

It is becoming painfully obvious that our China trade policy is deindustrializing America.  Even our latest “green technology” firms like Massachusetts’ Evergreen Solar have packed up their manufacturing bags and fled to Wuhan in search of huge subsidies, the freedom to pollute, and a union-free work force held down by jackbooted cops.  So how does a “free trade at any cost” pundit slap a happy face on the reality of 10% unemployment?

Well, many a cockeyed optimist has been quick to assert that America will triumph as the “land of ideas!”  In Idea-Land we will design and market fantastic products and not worry about what goes on in Chinese factories.  Fareed Zakaria, the patron saint of globalization, recently posted this on CNN’s GPS blog:

In America’s case, we have all the ingredients to succeed in the 21st Century. We have the most innovative companies in the world such as Facebook, Apple and Google.

He goes on to conclude that America’s problems are consequently the fault of our own dysfunctional domestic political system (no argument), not the fault of unfair Chinese competition.  Mr. Zakaria’s three exemplars of American innovation offer the perfect opportunity to analyze Idea-Land.

Facebook is a classic example of China’s non-tariff trade barriers at work.  The Social Network is illegal in China, and its website is blocked as part of China’s social repression system.  Yet, Beijing actively supports the growth of its Chinese competitor Renren, which just had a successful IPO on the NYSE.  While Facebook’s idea has no access to the Chinese market, American capital pours into a firm that stole it!

Apple Computer has become the poster child for China trade.  Research by Greg Linden, Kenneth Kraemer, and Jason Dedrick (from my own institution) suggests that the majority of profits from the iPod and other insanely great Apple stuff accrue in the U.S. because most of the value is generated by Apple’s innovation rather than in production.  While confirming that labor rates are not a big part of product cost — the work could be done by Americans with little impact on the retail price — it overlooks the effect of currency manipulation, massive subsidies (entire factories provided by the government for free), and the plethora of other Chinese trade cheats that make the both the production inputs and the final product cheaper.

Additionally, Steve Jobs is smarter than your average CEO; Apple was not forced into a minority partnership like most U.S. firms.  Companies like GM find their profits skimmed, their operational control restricted, and their technology forcibly transferred to a “partner” that often evolves into a brutal competitor.

By using Taiwan-based, mainland-savvy Foxconn group as a contract assembler, Apple keeps its profits and technology.  Tying their operating systems to their hardware avoids Microsoft’s fate in China — most Windows copies there are bootlegs.  Not that fake iPods, iPads, and even entire faux Apple stores can’t easily be found.

Finally, my experience with production engineering and a recent visit to Foxconn City — a complex with 350,000+ workers — convinces me that Foxconn makes a greater contribution to the design value than is visible from the data.  As a product moves from prototype to production, a lot of re-engineering takes place.  Done well, this results in a feedback process that yields manufacturing efficiency and product enhancements.  Worryingly, this process works best with the design team closer to the production environment.  As America’s manufacturing moves to China, much of our corporate R&D is following, and Chinese policy actively encourages that.  Let’s hope it we don’t find an Apple R&D center in Beijing next to GE’s new X-Ray division HQ.

Anyway, Foxconn isn’t going to be making cars, airplanes, or nuclear reactors anytime soon.  Apple is a rare exception, not the standard for analysis.  Joint partnership hell and rampant idea theft remain the norm for American firms behind the Great Wall.

Google tried to play China’s game but was burned.  Beijing directed it to censor offensive search results like “Chinese democracy.”  Though originally compliant, the California firm was continually disadvantaged by induced disruptions to its Chinese network, a blatant public preference for its Chinese competitor, and hassles over its internet “license.”  In order to avoid the trap Beijing laid for Yahoo — demanding dissidents’ emails and info — Google disabled services such as gmail.  Its YouTube service was completely blocked.  China eventually requested that Google also censor “objectionable” Chinese material from its U.S.-based site.  In 2009 Google discovered that Chinese agents had hacked their systems — along with more than 200 other U.S. firms — and swiped their cherished source code.  So much for the advantage of ideas.

Remember that these are the experiences of three of the smartest firms in America.  For almost every other company, from Hollywood movie studios and online video game developers to aircraft and auto manufacturing, it has been far worse.  It is simply impossible to base our nation’s future on ideas, when ideas are systematically repressed and methodically stolen by a powerful and immoral tyranny masquerading as our trading partner.

Finally, Idea-Land itself is a “bifurcation trap.”  Linden, Kraemer, and Dedrick state:

As long as the U.S. market remains dynamic, with innovative firms and risk-taking entrepreneurs, global innovation should continue to create value for American investors and well paid jobs for knowledge workers.

That’s great for the Stanford engineering grads designing the next iPhone and the Wharton MBAs who will market it.  However, the career for the rest of us — sub-120 IQ America — will be a pair of 30-hour-a-week (no benefits) retail jobs selling Chinese-made products to the new knowledge-worker nobility.

Americans need manufacturing because we have varying skillsets, and it offers the highest value-add career for people who are not product-innovators.  And it isn’t just assembly jobs; it’s the aforementioned production engineers, as well as the safety officers, HR staff, plant services, janitorial crew, and cafeteria cooks.  As we abandon manufacturing, we are being forced to embrace either a highly stratified social order or enact a massive and inefficient wealth redistribution scheme.  Both are already happening as the jobs that our stimulus “created” pay far less than the ones we packed off to China and we extend unemployment to those completely displaced.  In Idea-Land, America’s future looks a lot like Latin America’s past.

Greg Autry is the co-author of Death by China.  He teaches macroeconomics at the Merage School of Business, UC Irvine.  He writes and speaks on China, space, economics, investing, and business strategy.  For more information, please visit http://www.gregautry.us and follow the author on Facebook and Twitter.

Please Don’t Feed the Dragon

The Pentagon has released its annual report to Congress on the “People’s Republic” of China’s rapidly growing military menace and once again, we are presented with a frightening armory designed to rain death on America and her allies. This time around the PLA’s toy list includes a new stealth fighter and aircraft carrier as well as improved ICBMs and nuclear warheads. Of particular interest is the DF-21D missile specifically designed to destroy U.S. Navy carriers at sea.

Let’s just be honest, China is working overtime to assemble the force required to eject America from her role as peacekeeper of the Pacific so that it can have its way with its Asian neighbors. The Vietnamese know it, that’s why they are buying submarines from Russia as fast as they can get them. Taiwan knows it, which is why they are nearly in a panic for higher tech U.S. weapons. Even ancient enemies Korea and Japan are coming together over their mutal fear of Chinese hegemony.

Meanwhile, President Obama says, “I absolutely believe that China’s peaceful rise is good for the world and it’s good for America.” Well, Mr. President, this DOD report details the most expensive “peaceful rise” since Hitler’s, as everyone’s favorite communist dictatorship has once again increased military spending by double digits to a whopping $160 billion. In fact, China has been growing its military budgets even faster than its phenomenal GDP for the last decade.

While China invests, builds and trains, the U.S. military is wearing out its people and its equipment in fruitless desert conflicts and faces a future of painful budget cuts. You don’t need Excel to understand where those two trajectories lead. The question is what can we do about it? Rather than dwell on the obvious fact that we cannot afford another Cold War build up, let’s ask ourselves just how is China funding theirs? Any ideas Wal-Mart shoppers?

It turns out that America’s trade deficit with China – on track to easily break last year’s record $273 Billion– covers the whole thing with room to spare. Imagine if American businesses and consumers had been funding the Soviet Union’s military machine; Doctor Strangelove would have a seizure. Yet, here we are and so we must ask this question:

Why does America do business with a nation that is preparing to attack our allies and threatens our own families with nuclear death?

Further, if the fact they are preparing to kill your kids isn’t enough to send you screaming from the shelves at Target then consider that China also:

1. Delivers a hugely disproportionate percentage of defective and dangerous products, while effectively avoiding liability and burdening U.S. taxpayers with the regulatory costs.

2. Regularly hacks the computers of our businesses, government offices, military, and humanitarian groups.

3. Cheats on nearly every World Trade Organization rule.

4. Maintains a record on human rights, censorship, women’s rights, and religious tolerance that is on par with Syria and Iran – two countries China regularly provides weapons to.

5. Represses the rights of its own workers in order to gain economic advantage.

6. Terribly pollutes its own and the world’s environment for financial gain.

8. Steals our intellectual property and counterfeits our products.

9. Is taking nearly a million jobs per year out of our economy via the reduction in U.S. GDP caused by the trade deficit.

We could write an entire book detailing the personal tragedies and national costs behind each of these criminal acts (and we did). Suffice it to say most Americans accept that these charges are accurate, but have failed to grasp that together they detail a threat much larger than the sum of the parts. China’s dictators love America’s inability to think strategically about the costs of our fruitless China policy. While they are running a carefully integrated game of economic-military-geopolitical dominance America’s diplomats stick with a flailing, tactical plan of “divide and be conquered” from the last century.

Mr. Kissinger’s policy of “engagement” with China was necessary right up to the day the Soviet Union was driven bankrupt fighting a double-ended cold war. Since then it has been little more than a giant subsidy for the expansion of another communist threat and it is America that will soon face default or obliteration.

While U.S. shoppers may think they are saving money and large multinationals reap short-term profits on this trade, it is clearly not in the long-term interest of America to continue business as usual with the Boys from Beijing. If we must, there are a plethora of countries where we can find cheap labor for Wal-Mart without funding a repugnant regime that views us as its enemy.

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Greg Autry is the co-author of Death by China. He teaches Macro Economics at the Merage School of Business, UC Irvine. He writes and speaks on China, space, economics, investing, and business strategy. Please follow us on Facebook at http://www.facebook.com/DeathByChina

 

The Time has Come to Haul Obama’s Fox Out of our Jobs Hen House

Hidden amongst the chaos of the debt ceiling / deficit circus, you may have missed a news story trying to sneak by on that ticker at the bottom of your TV screen. This was the announcement that General Electric was quietly moving the headquarters of its 115 year old X-Ray division from Waukesha, Wisconsin to Beijing. Yes, that’s the HQ, not merely some assembly jobs; we’re talking the executives and the whole shebang here! The plan has been in the works for sometime and the press announcement was clearly being held for a moment when it would get the least possible media exposure.

This is another in a long series of kowtows that GE CEO Jeff Immelt has made before the throne of state capitalism as a means of proving that GE is a “friend of China.” That’s the phrase Communist Party apparatchiks use to signal US firms that they will be expected to perform certain acts that cannot be explicitly required by the Chinese government because they would violate WTO rules China has agreed to. However, it is needless to say that those who do not prove to be “friends of China” often find that they have problems with market access.

Just last year GE invested about $2Billion of mostly American capital into authoritarian China despite having disappointing returns. Revenues of $5billion were half of what GE projected for 2010 and down $300million from 2009. Perhaps this is what prompted Mr. Immelt in a rare moment of honesty to warn some Italian Executives that:

I really worry about China . . . I’m not sure that in the end they want any of us to win, or any of us to be successful.
He went on to share his concern that China was “colonizing” many resource rich nations and blasted President Obama with:
Business does not like the US president and the president does not like business.

Tough talk, indeed, but something – we may never know what, but we would love to – inspired Mr. Immelt to do a quick 180 the administration’s pet business guy. In January of this year the GE CEO accepted the President’s invite to a cozy session with Chinese dictator Hu Jintao at the White House – a state visit all the ethical members of congress snubbed. Just a couple of days later he was anointed our nations “Job Czar” or officially “Chairman of the Council on Jobs and Competitiveness” and along came this plan to move an entire GE division to Beijing! You just can’t make this stuff up, because nobody would believe it.

Immelt announced his appointment to the newly named council in a self-congratulatory piece in the Washington Post last January. Among other ironic gems, the king of outsourcing commented:

Persistent and high unemployment – and the pessimism it breeds – should not be accepted.

Tell that to the folks in Waukesha. Yes, GE has promised none of the 120 employees will be laid off when the division closes – that is if they don’t mind sending their kids to a Chinese high school this fall or only seeing them during the Lunar New Year break. It’s a cynical vow from a cynical guy, but even if it were true the ripple effects of tearing out that division will surely contribute to persistent and high unemployment in that municipality of just 70,000. It’s probably not a coincidence that GE recently made a $25,000 donation in support of homeless shelters in the little Wisconsin town where Immelt once lived.

Greg Autry is the co-author of Death by China. He teaches Macro Economics at the Merage School of Business, UC Irvine. He writes and speaks on China, space, economics, investing, and business strategy. He also blogs at The Huffington Post at http://www.huffingtonpost.com/peter-navarro-and-greg-autry

China’s Silent Spring is an Economic Weapon

 

 

Communize costs and privatize profits-but don’t tell anyone. This has been a formula for success for centuries.

– Garret Hardin[1]

 

 

 

 

 

Of all the myriad sins committed by the Chinese Communist Party, its wholesale rape of China’s natural environment and complete toxification of its urban landscape is often the most puzzling to Westerners who focus on economic gains. Why, on Earth should anyone care – except those left-wingnut tree huggers – what happens to the Yangtze river dolphin or to the kids in Beijing? Well, let me offer an explanation that even the most free-range capitalist can put his arms around.

First, a couple of facts:

The health costs of China’s rampant pollution binge amount to 4.8% of China’s GDP and the total costs are 5.8% of GDP according to a report from the World Bank.[1]

700,000 Chinese die each year from polluted air and water according to a report from the World Health Organization.[2]

Lee Liu, of the University of Central Missouri documenting China’s infamous “Cancer Villages” reports that, “China appears to have produced more cancer clusters in a few decades than the rest of the world ever had.” [3]

We could go on about species loss, desertification, and more but the question is why would anyone allow this sort of damage to their economy and their people if it weren’t a necessary choice? The answer to this question, like so many others in China, is: it keeps the Communist Party in power. The World Bank and WHO reports have been suppressed in China to prevent “Civil Unrest” (the PRC scare words for revolt against the party).

What Westerners cannot put their heads around is the topsy-turvy relationship between economics and politics in Communist China. We are used to a system where the goal of politics should be the bettering of life for the citizens. In China, the bettering the life of citizens is simply a political tool – along with censorship, labor camps, and torture – for maintaining order. GDP growth is a goal ONLY because it can be used to justify the continued rule of the Boys from Beijing; not because of any benefit it offers actual Chinese.

So just how does a country with an inefficient and astoundingly corrupt, centrally planned economy manage 10% year over year growth? By cheating of course! There are several ways to cheat on todays GDP and most involve pushing costs – notably negative economic externalities – off the national P&L, usually by moving them to the future.[4] China uses a variety of cheats not the least or which is virtually enslaving a large portion of its rural poor in the plantation like factories that enable Wal-Mart’s price matching strategy. When you drill down, the environmental issue is actually no different.

For instance, if China can’t make steel as efficiently as America – the fact is that it cannot – and if its low labor cost isn’t an advantage – the total labor per ton is less than the shipping per ton – how about just using a lot of the world’s dirtiest coal and dumping all your mill waste right into the Yangtze river – birds, people, and dolphins be damned! Might as well rename the province from 四川 to 死川![5]

I’m not just passing on the hysterical reporting of some NGO, anybody who has breathed the air in Beijing and come home sick (I have more than once) knows what’s going down and anyone who travels out of the cities and opens their eyes will see it there too. Consider this series of photos I shot on a 2007 Yangtze cruise:

The first picture shows some coal bins along the river that are used to load the thousands of barges

 

 

 

 

 

 

 

 

 

 

that service the endless power plants and mills (second photo) which pump God knows what into the oddly green and sterile waters of China’s formerly great river.

 

 

 

 

 

 

 

This third photo shows where one of these bins collapsed and dumped its load into the river.

 

 

 

 

 

 

 

The forth shows the “Repair Job” – honest to God – in progress. I can hardly wait to see the “environmental remediation plan!”

 

 

 

 

 

 

 

Alas, some poor woman downstream trying to earn her keep fishing in the cesspool that was once the majestic Three Gorges.

 

Obviously, all interspecies ethics aside, if you destroy your fishing grounds and plunder your agricultural and urban water supply you are going to incur real, hard economic losses in the future. But, hey cancer takes a while and you can still sell whatever fish you can raise in this florescent green ooze to the Americans for a few more short-term GDP points.

 

 

 

 

Those all-important GDP points make party bosses happy because they keep Chinese busy and restless Chinese have a tendency to toss out their rulers – a fact which keeps Wen Jiabao up at night. If citizens die in the future or become extremely ill, at least they aren’t protesting and besides the Chinese government doesn’t really provide healthcare for anyone outside the government.[6]

Running this game is not only destroying China’s once beautiful landscape, but it also creates competitive pressures that are leading the world in yet another Chinese race to the bottom. China directly exports their Dickensian environmental ethic in the extraction of African and Latin American resources acquired by their SOEs and indirectly by driving out of business American and other Western firms that are required to compete without killing their neighbors. While using this invisible hand of communist coercion against defenseless Chinese and others (for instance by gutting Tibet or damming of the Mekong river that feeds Vietnam) the Boys from Beijing are still able to cloak themselves in a mantle of “free trade” while actually communizing all the costs of their fraudulent and unsustainable economic “boom.”

A perfect example of this is the business of rare earth elements. Just a decade ago, about 80% of rare earths came from the US, specifically Molycorp’s Mountain Pass mine in California. Now, California might rightly be called the home of excessive environmental regulation, but Molycorp was supplying the world without poisoning its neighbors. The central planners in Beijing decided to corner the market in rare earths, because among other things they are critical to most high tech military hardware. China embarked on a scorched Earth policy in Sichuan province and its captive state of Mongolia using a massively destructive acid leaching process to extract things like Yttrium from the clay. Thousands of acres of pristine forest and farmland have been rendered unrecoverably toxic, while China rapidly cornered 97% of world production – shutting down Mountain Pass in the process. Upon doing so, China promptly claimed monopoly-pricing power and implemented illegal (violation of the WTO rules they signed on to) export restrictions to raise world prices on these metals up to 1000% in just two-years![7] So what if several thousand farmers go belly up or die in places nobody ever looks at? How’s that for “free trade?”

Now, if China’s pollution victims had any say in the choices being made it might be a different story, but until that day the multinational firms extracting cost savings through China’s coercion of its population are not simply “choosing to exercise their best economic option in a free market” anymore than is the businessman who “chooses” to develop a relationship with the local mob to clear out his competitors and intimidate his employees. The manufacturers and big retailers are simply co-conspirators in denial and it is no wonder they and their captive pundits run screaming “save free trade!” whenever criticism of their fascist friends comes to the fore. That too is unsustainable as more Chinese are beginning to bravely push back on their oppressors and average Americans are starting to notice that under this so-called “free trade” regime, they may be saving money but they sure as hell are not living better.

– Greg Autry teaches Macroeconomics at the Merage School of Business, UC Irvine and is co-author (with Peter Navarro) of the new book “Death by China” www.gregautry.us


[4] For instance, the US borrows money from China it can probably never repay to keep its anemic economy on its last legs (a looming diaster that Beijing happily accommodates for obvious reasons to be discussed in a future posting).

[5] A little Chinese pun here.  Si-chaun (四川) means “4 rivers” while substituting 死 for the first character (Sǐ) makes it “death river” with a very similar pronunciation.

[6] Although, of course they falsly claim to insure a significant portion of the population. A topic for a future posting.

[7] They’ve also demonstrated the ability to extort policy changes from other nations with this monopoly when they halted shipment of rare earths to Japan until that nation relented in a maritime dispute.