Maybe Japan Was Just a Warm-Up

Discussion in 'Economy & Infrastructure' started by SHASH2K2, Jan 23, 2011.

  1. SHASH2K2

    SHASH2K2 New Member

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    IN the 1980s, the United States faced an unnerving challenge from a rising economic powerhouse and export dynamo. It was an impressive challenger, to be sure, but one that often bent rules of global competition unfairly to its advantage by handing out financial subsidies to domestic companies, discriminating against foreign suppliers in government contracts, pilfering Western technology and keeping its currency cheap.
    Three decades later, Americans are hearing an echo of the past. Yet this time, the object of admiration and angst is not Japan Inc., but China Inc.

    “We’ve seen this movie before,” says Clyde V. Prestowitz Jr., president of the Economic Strategy Institute and a former United States trade negotiator with Japan in the 1980s. “Like Japan, China is climbing up the ladder of economic and technological development, and using every means at its disposal to do so.”

    China, of course, is different from Japan in the 1980s in many ways — larger, less affluent, ruled by a Communist government and yet in some respects culturally more entrepreneurial. Silicon Valley venture capitalists, for example, have begun setting up offices in China to forge links with entrepreneurs there, as they never really did in Japan.

    Economic events and market trends are notoriously unpredictable. In the early 1980s, the Japanese high-technology assault on the American computer and semiconductor industry seemed scary. “What are our kids supposed to do?” asked Walter F. Mondale, the former vice president, speaking to a group of electrical workers. “Sweep up around the Japanese computers?” It captured the economic pessimism of the time, even if it serves as a laugh line today because, after all, how often do you see a Japanese computer?

    So, applying equal doses of humility and hindsight, a look anew at the economic challenge symbolized by Japan — and the American response — might offer perspective on the China challenge today.

    First, a reality check on Japan. Yes, that nation’s big-business culture missed the personal computer revolution and the Internet, producing no rivals to Microsoft, Apple, Google or Facebook. But Japan is no basket case. It is a world leader in autos, machine tools, flat-panel displays and other parts of the consumer electronics industry. Some of Japan’s policies did indeed prevail, and America still runs a sizable trade deficit with the country.

    Japan, which lacks natural-resource wealth like oil, has a per-capita income of more than $42,000, compared with about $47,000 for the United States, according to the International Monetary Fund. China’s per-capita income is less than $4,300.

    In America, the 1980s were Ronald Reagan’s decade, a time that celebrated free markets, free trade and tax cuts. “Government is not the solution to our problem, government is the problem” was his famous distillation. Yet, for certain industries, the Reagan administration took steps that amounted to a measured approach to industrial policy. Washington negotiated so-called voluntary export restraints with the Japanese in the automobile industry. That forced Japanese automakers to build factories in the United States that now employ many thousands of American workers. And a semiconductor trade agreement helped pry open the Japanese market.

    “People often forget that we did a lot of things to address the Japanese challenge,” says Robert D. Atkinson, president of the Information Technology and Innovation Foundation, a nonpartisan research group in Washington.

    IN the 1980s, the United States government’s semiconductor policy focused the minds of industry leaders facing the demise of their industry. There is still considerable debate over the effectiveness of a consortium, created by the federal government and several companies. Called Semiconductor Manufacturing Technology, or Sematech, it shared the costs and risks of developing computer chip-making skills. But the partial lifting of antitrust and collusion restrictions gave companies a chance to innovate.

    I.B.M., for its part, was worried that a vital supplier, the chipmaker Intel, was in danger, so it invested in it. That gave Intel — under siege from Japanese companies in the market for memory chips, which store data temporarily — the breathing room to risk making the jump to microprocessors, which process data and serve as the brains of personal computers. Intel made the move to the more profitable chips before the PC industry really took off — but when it did, Intel never looked back. The Japanese didn’t make that innovative leap and became stuck in a commodity business that South Korean and Taiwanese companies eventually dominated.

    “In semiconductors, we got organized to defend and stay ahead,” says William A. Reinsch, a foreign trade expert and the chairman of the United States-China Economic and Security Review Commission, a bipartisan advisory group to Congress. “In that industry, there was a considerable amount of cooperation between the U.S. government and business. The computer chip industry was deemed too important to lose, not least because of all the military applications of computer chip technology.”
    One big reason that Japan posed a threat in the 1980s in computer chips and large computers was the technology transfer that had occurred years before. In order to sell in the Japanese market and repatriate profits, I.B.M. and Texas Instruments, an early leader in chips, had to share technology with the Japanese. They set up factories there, too.

    In China these days, the details may differ, but the government imposes the same kind of requirements to share technology and set up manufacturing plants in joint ventures for preferred access to the domestic market.

    China has a lengthy list of industries where it has long-term ambitions. They include commercial aircraft, telecommunications equipment, high-speed trains, clean-energy goods like solar panels and wind turbines, and even automobiles.

    “The bet for I.B.M. in Japan, as it is for companies like Boeing and General Electric today in China, is that they can stay ahead, innovate faster than the potential competitors they are helping,” says Edward J. Lincoln, professor of economics at the Stern School of Business at New York University, and director of its Japan-U.S. Center for Business and Economic Studies.

    In China, however, American companies are making a much larger bet that they can stay ahead in the intellectual property race. In some fields, particularly computer software, China has a well-earned reputation for theft, though Beijing has pledged to curb the practice in government agencies and state-owned companies. And in China, many more Western companies are engaged in technology-sharing joint ventures than was ever the case in Japan.

    Japan sharply limited direct investment by foreign companies, while China has welcomed it. And in China, the terms and conditions of investment have evolved over the years. Beginning in the 1980s, China opened up “special economic zones,” mainly in the southern part of the country, where foreign companies could set up factories and export goods. In the 1990s, China opened up more broadly to foreign investment, allowing companies to sell in the domestic market.

    In the last couple of years, the Chinese government, analysts and executives say, has prodded foreign companies to transfer more advanced technology for the inside track in its market. The government effort to accelerate China’s technological climb is called “indigenous innovation.”

    “The campaign is focused on employing China’s fast-growing domestic market and powerful regulatory regime to decrease reliance on foreign technology and develop indigenous technologies,” explains a report on the U.S. Chamber of Commerce Web site.

    C. Fred Bergsten, director of the Peterson Institute for International Economics, says: “China was much more clever than Japan with its investment policies. It invited foreign direct investment and then took the American corporations hostage.”

    The lure of tapping the fast-growing Chinese market — far larger than Japan’s — gives China a lot of leverage with American companies, which mutes complaints in Washington, Mr. Bergsten says. Most American corporations, he says, have resisted trade restrictions on China because they hope to tap the Chinese market and produce goods there.

    Yet American corporations are worried about China’s innovation policy, since it means potentially jump-starting Chinese rivals. Business leaders pushed that to the top of the agenda for President Hu Jintao’s trip to the United States last week, Mr. Bergsten says. And, indeed, in meetings during the week, the Chinese delegation gave American executives assurances that China would be flexible in pursuing its innovation initiative.

    The Chinese currency, the renminbi, took a back seat as an issue during the state visit. But Mr. Bergsten estimates that the renminbi is undervalued by 20 percent or more — the Chinese central bank’s purchases of dollars depress the Chinese exchange rate and the subsequent lower value of the renminbi makes Chinese exports less costly abroad. “It’s an across-the-board export subsidy,” he says.

    THERE will be ceaseless currency and trade issues with China, as there were with Japan. Still, as China grows wealthier, economists predict, it will buy more of the high-value, high-technology products and services at which the United States excels.

    The real answer to the China challenge, like the competition from Japan in the 1980s, must come from the United States, the industrial policy thinkers say. A mix of several ingredients will undoubtedly be sought: skillful government policy, smart private-sector strategies, national investment in research and development for long-term innovation, and improved performance of the American education system. In short, all the things the United States should be doing anyway, but with an added measure of urgency because of the global competition that China epitomizes — an economic Sputnik.
     
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  3. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    What will happen to the Chinese economy when USA starts repatriating their money back to USA?? This is a reason Chinese have to continue cooking their books any sign of slowing growth and Billions of dollars will be pulled out of China, it will be a stampede out the door.
     
  4. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    http://www.fool.co.uk/news/investing/2011/01/19/is-it-time-to-get-out-of-china.aspx

    Is It Time To Get Out Of China?


    It could be the world's biggest ever bubble.

    China is the future. Everybody agrees on that. China is a shiny new capitalist metropolis rising from the ashes of Chairman Mao's cultural revolutions and Great Leaps Forward. Its army of communist worker ants in their Mao suits has been transformed into a busy army of entrepreneurs in Gucci clothes and German automobiles.

    That's what people say.

    China is buying up its Western imperial conquerors with a cash mound worth trillions of dollars. In 15 years, it will be global economic superpower number one. The West, notably the US, risks being eaten by the dragon.

    China even has the best mothers. Through hard work and application, an army of "Tiger Mothers" will transform their children into piano geniuses at the age of four and economic titans by the age of 24, while we raise our semi-literate, self-indulged brats for a life on the dole, or if they're lucky, sweeping up in a Chinese car parts factory.

    So why, given all this, are analysts suddenly warning investors to get out of China?
    Exit the dragon

    Oh yes they are. Going cool on China is a recent phenomenon, as I reported last year in R.I.P. The China Growth Story, but it is starting to gather momentum.

    This week, it might be reaching the tipping point. Analysts have been worried about Chinese property prices for months. Inflation is rising and the Chinese government has started tightening. Press reports suggest that hedge funds are betting on the China bubble bursting. On Monday, the Shanghai stock exchange fell by 3.8%.

    My fellow Fool Tony Luckett would invest in the US rather than China, and he's not the only one. Goldman Sachs is getting out of China and setting a beeline for the developed world, notably the US. Guy de Blonay at Jupiter Financial Opportunities is too.

    They want out. Should you?
    What are they thinking?

    Why the rush? The Chinese economy is expected to grow 10.5% this year, according to the IMF. The country is sitting on $1.2 trillion of reserves, while the profligate US owes a ridiculous $14 trillion. China's stock market is still trading on an undemanding P/E of 13.8%. Western governments, notably our own, are falling over themselves to sign contracts with Chinese businesses.

    China has even promised to prop up the euro, something even the Germans don't want to do.
     
  5. SHASH2K2

    SHASH2K2 New Member

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    nothing but their growth rate will start slowing down and they will start to have a flat growth rate like Japan. But USA will be doing it in phased manner and will take years for impact to be visible .
     
  6. LETHALFORCE

    LETHALFORCE Moderator Moderator

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    It will be instantly visible in their stock market and then trickle down to other areas slowly.
     

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