Dangerous Business: The Risks of Globalization for America

Book by Choate Pat

Chapter One

Modern Mercantilism
In 1989, Alan M. Webber, then the managing editor of the Harvard Business Review, returned from a trip to Japan and wrote to his readers:

The world is changing, and Japan is different. On both sides of the Pacific, the old, entrenched interests are hard at work denying these conclusions, pretending that business as usual will do, and silencing the observers and analysts who call attention to the new situation. Japan’s motives are not hard to fathom; after all, every day the country gains in wealth, economic power, and global momentum. The longer Japan successfully confounds U.S. leaders into thinking that all the old rules still apply, the longer the transfer of wealth and power can continue unimpeded. It is not Japan’s job to inform us of our blind stupidity.
What Webber found in Japan was a nation actively pursuing a mercantile trade policy, the approach to global commerce where the government and industry work together to build national wealth through increased exports while maintaining an economic moat around their country to stop direct foreign investment, sharply limit imports, and build up huge financial reserves. Adam Smith would have immediately recognized this Japanese policy as mercantilism; however, even after more than a quarter century of engagement, U.S. leaders still do not.

If we fast-forward in time about twenty years, what Webber found in Japan in 1989 is happening all over Asia and in parts of South America today. And, as then, U.S. leaders and opinion elites do not recognize that they are witnessing a new rise of mercantilism, particularly in China. Rather, they view China’s economic and trade activities as a steady march from socialism to market-oriented capitalism like that of the United States, though a bit more exotic.

China is actively creating a hybrid economy that the Chinese define as a “socialist market system” (SMS). While to many outsiders that system appears to be market-oriented and largely controlled by the private sector, it is neither. China is well along in creating an economy where the government owns and controls the strategic industries while secondary and service industries are left to private ownership, which the government also controls.

The giant enterprise called China, which accrued a historic global trade surplus of $262 billion in 2007, is pursuing export-driven, beggar-thy-neighbor trade policies that are so blatantly nationalistic they are undermining the World Trade Organization and putting the entire global trading system at risk. To understand China’s approach to global economics, we must examine its basic elements.

Mercantilism In the sixteenth through eighteenth centuries, the dominant economic theory in Europe, mercantilism, held that national prosperity depended on a nation’s supply of capital, which at the time was gold. The fastest way to acquire capital was to run a trade surplus with other nations by exporting more goods than were imported. To facilitate this economic dynamic, governments subsidized production and exports, at the same time imposing barriers on foreign imports. The idea was simple: to make exports so inexpensive that foreign consumers would prefer them over domestically made goods and conversely make imports so expensive that local consumers would prefer domestic goods over foreign-made ones.

England, under the intellectual influence of the economists Adam Smith and David Ricardo, gradually abandoned mercantilist policies in the nineteenth century and replaced them with an ideology of free trade and comparative advantage. The United States continued to pursue a mercantilist economic agenda until the early 1930s, when Roosevelt’s secretary of state, Cordell Hull, began a move to a free- trade regime, which also promoted FDR’s foreign policy objectives.

China is taking the mercantilist path abandoned by England and once used by the United States. The principal differences are that the United States did not own the major enterprises on which its economy depended, as the Chinese government does, and the U.S. government operated under a two-party, democratic system, while China is governed by one-party rule.

The ownership and democratic differences between the United States and China are fundamental. The Chinese government announced in December 2006 that seven industries were critical to the nation’s economic security and would remain under strict government control. They are defense, power, oil, telecommunications, mineral resources, civil aviation, and shipping industries. This list, moreover, is not exclusive; Chinese officials noted that the government intended to expand the volume and structure of those industries so that they would become leading world businesses.

One-Party Rule by the Techno-Elite In a nation of 1.3 billion people, about 63 million Chinese are members of the Communist Party. Its principal national body is the Party Congress, which has about 3,000 delegates and meets every five years. The real control of the government resides in the Politburo Standing Committee (PSC), which since 2002 has consisted of nine persons drawn from the twenty-two- member Politburo. One of these nine serves as head of state (president) and another as head of government (premier). The number is kept uneven to prevent deadlocks.

All of the nine members of the Sixteenth Politburo Standing Committee (2002–2007) are trained engineers, experienced in various national development disciplines. One is a civil engineer, another is a geological engineer, three are electrical engineers, and four are mechanical engineers. All have extensive development experience in which they began at the bottom of organizations and worked their way up.

Unlike when Mao Tse-tung and political ideologues governed the nation, China’s development planning now reflects leadership by a techno-elite. Major projects are phased. Industries are clustered to gain the efficiencies of colocation. Transport systems, from local industrial areas to seaports, are entwined. Basic infrastructure, such as electric generating power, is being given priority in planning and allocation of resources. Foreigners are involved when they can bring something China lacks, but their actions are controlled. The nation is developing along the lines set forth in Five-Year Plans, which set strategic directions and overall priorities. All of this is precisely the type of order that trained engineers would impose.

The point is that competent and experienced people lead China’s government. For instance, Minister Wu Yi, a senior petroleum engineer who has represented China in trade discussions since 1991, is what U.S. Secretary of the Treasury Henry Paulson calls a “force of nature.” Beyond having talented negotiators, China’s leaders are systematically strengthening their nation’s public infrastructure and consolidating and modernizing their industries so the enterprises can compete globally against those of Europe, Japan, and the United States.

Restructuring to Compete When the Communist Party seized control in 1949, it nationalized the economy. For the next thirty years, China’s economic enterprises had little contact with the outside world and were considered by most Western observers to be quite backward. As recently as the late 1970s, most of China’s industries were remnants of nineteenth-century investments or mirrors of those of the Soviet Union. Since 1979, however, China has been rapidly modernizing its economy, bringing to its production many of the world’s most advanced technologies along with the leading management tools of major Western corporations.

To close the gap with other nations, China began reconstituting its state-owned industries in the 1980s. In the process, the government has encouraged foreign direct investment, joint ventures, the elimination of redundant production, the transformation of state industries into joint-stock ventures, the outright sale of some operations, and the liquidation of tens of thousands of failing ventures.

The magnitude of this challenge is daunting. In 2002, China’s central government placed the responsibility for overseeing almost 200,000 state-owned enterprises in the state-owned Assets Supervision and Administration Commission (SASAC). Imagine SASAC as the world’s largest equity fund, whose sole owner is the Chinese government. The chairman is Li Rongrong, born in 1944 and trained as an engineer, who began his career in 1963 as a factory worker in a plant he eventually came to manage. In 1986, he was appointed vice chairman of the Wuxi Municipal Economic Commission in Jiangsu province, and from that position he took on increasingly important responsibilities, including secretary general and then vice chairman of the State Economic and Trade Commission.

At the first SASAC working conference in August 2003, Li Rongrong identified five priority sectors for future development: (1) national security, (2) monopolies for natural resources, (3) provision of key public goods and services, (4) critical resources, and (5) core enterprises and high-tech industries.

Within those five divisions there were originally 196 central enterprises, many of which controlled dozens of subsidiaries. In 2003, the 196 central industries were consolidated to 191, and in 2007 they were further reduced to 161. At the 2003 conference, Li Rongrong also announced that China would create 30 to 50 large corporations with international competitive power before 2010. These will be companies on the scale of Microsoft, Motorola, GE, General Motors, and Pfizer.

Under SASAC, it is clear that China’s economy is being transformed in a way that will form a pattern of development for the next generation or so. A cluster of state-owned enterprises (SOEs) will remain under the tight control of the central government. They include what the Chinese call the “lifeline” sect...