Monday, December 06, 2004

The Rising East

While the U.S. remains bogged down in Iraq and waging war with Islamist fanatics, China continues to consolidate its economic might. A Chinese computer company is now in negotiations to purchase IBM's personal computer business. If that acquisition is finalized and approved by the U.S. government, it will represent one of the most stunning technology transfers in recent memory.

And it is emblematic of the ambitions of emergent Chinese industrial giants to create global brand names and capture market share beyond their own borders. Formerly relegated to a low profile as the cheap assemblers for the rest of the industrialized world, Chinese companies now have their sights set on becoming global powers in their own right.

The Lenovo Group, partly owned by the Chinese government, had sales of over $3 billion last year and is currently ranked eighth globally among PC makers. It is the overall leader in Asia outside Japan, where NEC and other Japanese companies dominate. (IBM's Japan unit is in the top five there, though, adding to IBM's allure for Lenovo.)

Note that Lenovo, like many Chinese companies, is actually part owned by the Chinese government. That means that technology developed or acquired by Lenovo will be directly conveyed to the Chinese military. This represents a cause for concern. With the U.S. trade deficit with China growing ever larger, and the Chinese military growing ever stronger, now is the time to ask whether selling a Chinese "company" such important high technology is a wise idea. It can be argued that IBM's consumer PC division is hardly cutting edge. But there can be little question that the Chinese will adapt the technology they acquire to advance their entrance into the PC industry. Given how China has quickly come to dominate every other industry it has entered, should the U.S, permit this technology transfer?

Founded in 1984 by a group of Chinese scientists with government financing, [Lenovo] then known as Legend started out as a distributor of computers and printers, selling IBM, AST and HP models in China.

In the late 1980s, however, as an exemplar of a trend that would play out in many Chinese industries, the company moved higher up the food chain by beginning to design its own personal computers. By 1997, it had passed IBM to become the largest seller of personal computers in China.

Purchasing IBM's PC line does not guarantee success for Lenovo or the Chinese PC industry, but it would be an impressive step. The Chinese would learn a lot from IBM's operations, and from IBM's proprietary technology. Free traders will argue that such trans-Pacific deals are good for China and American, and better still for consumers everywhere. However, a glance at the U.S.-China trade deficit - $150 billion for 2004 - shows that American workers aren't enjoying much benefit from this one-sided trade relationship.

Wal-Mart alone imports $18 billion worth of Chinese-made goods for its stores. When China and India can compete across the entire spectrum of high-tech networking jobs, globalization begins to lose its allure. China's sidewalk moneychangers are betting the renminbi is now a stronger currency than the dollar. Chinese companies are luring Chinese-American executive talent from U.S. multinational corporations with higher compensation packages.

Seemingly unconcerned, the administration says the external deficit has little to do with conspicuous consumption and much to do with the sluggish economies in Europe and Japan. Fast-buck economists -- or reckless high rollers -- argue the disappearing dollar could be the answer to all of the administration's problems, as it will automatically shrink the U.S. deficit. And the more the dollar falls, they explain, the more expensive European and Japanese goods become, choking off their exports to the United States -- and boosting now much cheaper U.S. exports.

But such a laissez-faire policy -- besides poisoning anew trans-Atlantic and trans-Pacific relations -- will only encourage the dollar stakeholders all over the world to unload ever faster. The dollar is expected to shrink another 30 percent during the Bush 43B mandate. This could then be the biggest default in history, wiping out anyone holding dollar assets, and burying the dollar as a global reserve currency.
The consequence?
A run on the dollar would knock the props from under the United States' global alliances and further erode what little support the United States has left for defeating the insurgents in Iraq and midwife-ing a democratically elected government. The only victor in such a tragic denouement would be Osama bin Laden and his global network of extremist troublemakers and terrorist destroyers.
Actually, the other victor would be China, whose international prestige would be greatly boosted by a U.S. decline. Since U.S. military might and global dominance are based on economic supremacy, anything that erodes the U.S. economy ultimately undercuts American military power.

In deciding whether a potential enemy is truly a menace, one needs only to ask: What do they make? The Nazis and the Soviet Union were powerful enemies because they manufactured everything from washing machines to war planes (and in the case of the USSR, ICBMs). We defeated the Nazis by bombing every German manufacturing center out of existence (while our manufacturing centers remained safely beyond their reach). The USSR, in the end, couldn't make washing machines that worked very well, or nearly enough of them, which ultimately doomed their military might. The Soviet Empire crumbled from within. The Islamists make nothing. There is no manufacturing anywhere in the Middle East. If the Islamists were to win control of every Islamic country, that wouldn't change. The Chinese, on the other hand, make everything from decent washing machines to nuclear bombs - and they are learning how to make ICBMs that can reach the U.S. Moreover, they keep improving their washing machines (and ICBMs). Which, then, represents the real long term threat to the U.S.? Fanatics who can be simply kept out of the U.S. (if we were willing to keep them out) or a nation of almost a billion and a half people with growing manufacturing might?


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