To some, this was going to be The American Century with the US as the hub of a booming knowledge economy. Lower-paid menial jobs would go, and Americans would upgrade to higher-paid knowledge jobs. George Bush, when asked what he would say to someone who had just lost his job to someone in India, said he’d give that poor worker some money to get a better education in a community college. But many of those losing jobs to offshore companies don’t need community college educations, because they are already graduate engineers or PhDs in computer science. The White House has become an Ivory Tower.
Business Week has a fascinating breakdown of the impact of Chinese competition on the manufacturing sector in the US. But, alarming as it is, the problem is a lot larger and a lot more immediate than this article suggests. The focus of the article is mainly on what damage Chinese productivity and/or economics are doing to the manufacturing sector in the US, and the associated balance of trade issues.
Manufacturers are hurting, at least the smaller ones are. Retailers, however, currently benefit from sourcing cheap goods in China. But they also become dependent on their suppliers. WalMart is doing $18 billion with China this year, getting 70 percent of its stock there. WalMart is China's eighth largest trading partner, beating entire countries like Russia and Canada. It has taken only three years to get to this, and the process is accelerating. You’d think cheap suppliers make for good profits and sweet dreams. But if the CEOs of retailing companies are sleeping well at night they do not know what is going on.
A very high percentage of everything that US consumers buy comes from a factory in China. What happens when Chinese entrepreneurs wake up to e-commerce and disintermediate the entire US retail sector? Why would you pay $500 for a designer suit at Macy's when you can get the same suit from the same factory online for $50? $35 for a blender at Target, or $5 for the same thing online? A couple of Chinese Amazon.coms and a Chinese FedEx could cripple one of the few sectors in the US where employment is currently growing. And it could happen overnight.
One telling quote from the Business Week article: "Can China dominate everything? Of course not. America remains the world's biggest manufacturer, producing 75% of what it consumes, though that's down from 90% in the mid-'90s." Of course not?? If we have lost that much that fast, we can lose a lot more even faster. Disbelief in its own vulnerability is one of Americas biggest obstacles.
That's why I get annoyed when politicians in both camps talk about the slump in the US economy as if it is something cyclical that we will pull out of. It is a one way street. In the interests of achieving quarterly profit targets and pumping up the immediate value of our investments, we are offshoring everything to an Indian-Chinese hemisphere that will be eating our lunch by the time the next Olympics take place, appropriately in Beijing. The US has bigger problems to deal with than terrorism, but the next round of White House cabinet appointments will probably not reflect any of these concerns.
The US is negligently imperiling the future of its economy with a callous disregard that makes Enron seem benign. That may seem like the jingoistic ranting of an extremist, or worse, a Sinophobe. But the facts are these:
The American scientific/engineering base is weakening – enrollments in graduate and post-graduate courses are down by huge percentages
Numbers of foreign students coming to America to study and stay are way down
We are not producing or importing the critical mass of brilliant minds that we used to
China and India produce many more scientists and engineers every year than the US
China and India are capable of innovative thinking and good design, not just sweatshop work
Combine the massive growth in China’s economy with its urgent need for oil, and we could see the US being outflanked in the Middle East, further compounding America’s economic problems.
American retailers are endangered, but do large American manufacturers care? They are investing heavily in having a manufacturing base right there in China to supply not American demand but the enormous demand that is coming from increasingly affluent (relatively) Chinese consumers. They know how the boom years in the 50s and 60s made them giants, as newly-middle-class Americans put refrigerators and washing machines and TV sets in their new homes. They did well out of a couple hundred million Americans -- there are a couple of billion potential consumers in India and China. But the profits will probably not make it back to the US, because financial headquarters are being offshored too, to tax havens.
Corporate America apparently no longer values having brain-power or talent on the domestic payroll – the notion of human capital as an investment is being replaced with the notion of human ingenuity as an expense. If our money, our designers, our R&D, our manufacturing, our management, our business partners, our suppliers, and our major markets are all in Asia, where does that leave the USA?
Figuring out creative ways to survive what will surely become known as the Chinese decade should be a national priority.
