The U.S. Senate Hog Wild over the Chinese Bid for Smithfield Pork

When Shuanghui, China’s largest pork producer, made an offer to buy Smithfield, it should have been a straightforward business transaction. Smithfield is America’s largest pork producer.  By acquiring Smithfield, Shuanghui would be positioned to fill China’s rising demand for more pork.

Chinese living in America have been long familiar with the premium priced Smithfield country ham; the cured meat reminds them of the taste of “Jinhua” ham famous throughout China. Through Shuanghui’s distribution channels, America stands to export a lot of pork to the most dynamic growing market in the world—not incidentally, exporting is an activity encouraged by President Obama for job creation.

What should have been a simple win-win deal is becoming a lot more complicated thanks to Congressional review. As presented at the hearing, the humble bacon has suddenly risen to become an ominous threat capable of imperiling the security of the United States.

According to the testimony of one alleged expert on China, Usha Haley, pork is a strategically important industry for China. Therefore even if heretofore pork consumption is declining in the US, suddenly because the Chinese desires American pork, the US should think hard about denying them access.

Then Daniel Slane, a member of the U.S.-China Economic and Security Review Commission, artfully blackened the Chinese tycoon behind Shuanghui by labeling Mr. Wan Long a high-ranking member of the Chinese Communist Party at the beck and call of the Beijing government. The day after Mr. Slane’s testimony before the Senate Agriculture Committee, the Wall Street Journal ran a profile on Mr. Wan that supported none of his allegations.

While the per capita American consumption of beef is around 7 times that of per capital Chinese consumption, China’s per capita consumption of pork is roughly 20% higher than in the US. Since China’s population is more than four times greater, the claim that China consumes a lot of pork is not in question. As China’s middle class continues to swell, demand for their favorite meat will only increase.

Hogs in China are raised mostly in small family-owned farms and could never match the productivity of factory farms in the US. Thus demand will continue to exceed domestic supply. That the Chinese hog farmers won’t be swamped by the import of American pork is only because some Chinese consumers prefer the more robust flavor of “free range” pork than the more consistent but blander tasting meat from the US.

There isn’t any question that Smithfield represents the standard that Shuanghui aspires to attain. Without a significant economic comparative advantage, there wouldn’t be any reason for Shuanghui to tender for the American company.

Part of the motivation for acquiring Smithfield would be to learn from the Americans in raising healthier hogs and producing more consistent quality of meats. Even if the Chinese improve their productivity using American technology, why should the US object to having more pork to go around? It’s not as if pork has suddenly become a material for the weapons of mass destruction.

In fact, such a development would be a good thing for the world as a whole. Americans may eat more than that’s good for them, but the rest of the world wouldn’t mind having a bit of meat once in a while. In a world of burgeoning population facing perpetual hunger, for the august members of the US Senate to look at this deal as a zero sum game—where Chinese dietary gain is somehow equated to America’s loss--reflects small minds of petty consequences.

But leave it to the politicians to make a pig of themselves and raise the threat of national security at every imagined shadow even when cast by a dangling ham. “Shuanghui” could be loosely translated from Chinese as “both win.” If Senator Debbie Stabenow and her committee have their way, it seems only a “both party lose” outcome can satisfy their proclivity for xenophobic paranoia.

A version appeared in New America Media and China-US Focus.

China enters first bilateral swap agreement with G7 countries (UK)

I have not been tracking swap agreements as closely as I once did. But China has just entered such an agreement with UK for up to 200 billion RMB over a three year period. This is the first with one of the G7 countries and could be considered as part of China's movement toward having a convertible renminbi. A fuller explanation can be found in the Wall Street Journal.

The French Also Wants RMB Swap Business

No sooner than Bank of England having proudly announced that London will be the newest swap center for RMB, China's currency and the only one in Europe, Bank of France expressed the intention of becoming the RMB swap center for the Eurozone.

Noyer, governor of Bank of France, expressed confidence that RMB will soon become one of three major international currencies next to the dollar and euro.

To my knowledge, China has entered into bilateral swap agreements with about 20 trading nations. You can follow my observations in reverse chronological order starting with this blog.

The End of the Dollar is Neigh

While Congress is wringing their collective hands over US Olympian uniforms that are made in China and incumbent president Obama and presumptive challenge Romney are mud wrestling over who has sent more jobs offshore, along comes another observation on the doom of the dollar. This article gives eleven reasons why the role of the dollar as a global reserve currency is about to end.

I have been tracking currency swaps that China has entered with other nations. The aforementioned article points out that China is not the only country making this trade provision that would by-pass the need to hold onto dollars.

No one in the mainstream media seems to be following this global trend of shying away from the dollar nor examining the consequence to the American economy when the value of the dollar plummets and inflation grabs the consumer by the throat. 

Condemning Olympic Apparel Made in China: Another Tempest in a Teapot Brewed by Congress

Congress is tackling yet another crisis of gargantuan proportions. They are upset that the spiffy outfits the American Olympic team will wear at the opening ceremony while designed by Ralph Lauren are (gasp) made in China.

Senate Majority Leader Harry Reid was outraged and declared that all the uniforms should be burned and just let the athletes wear singlets with hand painted logo of USA. Members of Congress from both sides of the aisle jumped in to castigate the Olympic Committee for failing to buy American.

A representative of the American garment industry pointed out that at about $1500 to outfit each athlete, the committee could easily have sourced the apparel from US makers.

What the person did not point out was that a made-in-the-USA outfit would have taken out the entire margin of the opening wear--a margin that the committee undoubtedly intended as part of their fund raising effort.

Just go on to the official website of the US Olympic Committee and one can see all kinds of “official” souvenir gear from berets to shirts and blazers available for fans to purchase. If the apparel were made in the USA and still affordably priced to sell, the committee would not raise much money, if any.

Unlike some countries, such as China, where Olympic participation enjoys state financial support, the US Olympians will go to London through donations and private sector fund raising efforts.

The US government, even if it wanted to, does not have the money to finance the Olympians. Members of Congress surely know all this.

Since much of what Americans wear are made in China, it shouldn’t surprise anyone. But when it became known that the Olympian garb was also from China, it was a no risk, no cost, no downside, and no brainer opportunity to take a pot shot at the Olympic Committee and vilify once again things made in China.

In the meantime, disaster looms as America hurtles towards the “fiscal cliff” at yearend. That’s when tax cuts expire and mandated government spending cuts begin.

While all the economists and pundits are certain that such a combination will result in the next economic disaster for the US, they are also certain that no one in Washington has the political courage or vision to enact anything meaningful that would stop the runaway train.

Such has the state of our democracy become: Terrifically adept at jumping into petty minutia but cowardly absent when it comes to tackling real issues confronting the future well-being of this country.

To conform to Senator Reid’s wishes, the standard bearer leading the US delegation into the opening ceremony in London should wear nothing (made in China), just a G-string with a made-in-USA label emblazoned to the extent possible.

Such a spectacle will convey several concurrent messages to the worldwide viewers: Washington kingmakers have no clothes and no statesmanship, and America is a poor country in more ways than one. 

See another version in New America Media. The LA Times carried the astonished view of the controversy from China.

Ukraine is Next on Swap Deal with China

Ukraine's central bank has entered into a currency swap deal with China. The deal at approximately yuan 15 billion is not big as size goes but a significant development in other aspects. Ukraine sees this deal as a commitment for close bilateral cooperation.

Ukraine is also about to conclude a swap deal with Russia and restart negotiation with Belarus. Other countries have announced bilateral currency swap deals not involving China. This is clearly a global trend to minimize exposure to holding American dollars.

My last blog on this subject picks up the thread on my tracking of China's currency swaps.

China's Latest Swap Agreement is with Brazil

Some call this currency swap deal, between China and Brazil, to be the biggest one yet by China with a value of about $30 billion. The swap deal is part of a broad, long term bilateral cooperation between the two countries.

Since I have been keeping track, this is the first swap agreement China has entered with another member nation of BRICS, the others being Russia, India and South Africa.

Of course, while China has no formal swap agreement with Japan, their publicly announced agreement to settle their trade in their own currency and bypass converting into dollars is potentially a much bigger deal than the swap deal with Brazil just by virtue of the magnitude of their bilateral trade, well north of $300 billion annually.

Many have speculated on the significance of China's gradual introduction of the renminbi as an international currency.

Internationalization of the Renminbi

Speaking of collateral damage, an interesting discussion of the gradual replacement of the dollar by the renminbi has come to my attention from, of all places, Australia. The author sees savings accounts denominated in dollars as "collateral damage" when the dollar is displaced by the renminbi.

When should you begin to stuff renminbi under your mattress? Now. When will you be glad that you did? The author thinks it could come as soon as 36 months. Maybe not says China central banker, but let the market decide.

I have been monitoring this situation since I wrote about the bilateral swap agreements and plan to continue to do so. See also my April post on related matter between the renminbi and the yen. Certainly China-Japan bilateral trade represents a significant part of global trade and the significance of settlement that by-passes the dollar has been published  by several sources recently.

See this twit for a recent comprehensive explanation of the benefits of swap agreements: The BRIC Currency Swap Proposal Is A Global Game Changer http://read.bi/L221R5

Comment on Bilateral Relations of China and Russia

This is interview took place on April 28, 2012

http://old.rt.com/v/Upload/george-koo.asf

Internationalization of the Yen and Yuan

A detailed explanation of the interaction of the Japan's yen and China's yuan can be found here. Tokyo is about to join Singapore and London in becoming currency swap centers for the Renminbi.

Internationalization of the Renminbi

The steady but gradual appearance of China's currency in the global market is comprehensively described on the China Economic Net. According to this article, Turkey, the latest to sign a bilateral currency swap agreement, worth 10 billion yuan, is the 16th nation to enter into such agreement with China.

My previous tabulation listed 18 countries including Brazil and Japan. Apparently these two have agreed to settle their bilateral trades in their own currency but did not actually enter into a swap agreement. A typical swap agreement with China is for initial term of three years, renewable on mutual acceptance and has a stipulated amount.

The Myth of China Dominating the American Economy

Despite recent hue and cry about China taking unfair advantage of trade with the U.S., an analysis revealed that the amount of Chinese goods and services being consumed by the Americans in 2010 accounted for (gasp) 2.7% of America's total personal consumption. Not only that, but 1.2% were actual costs of imports from China. The other 1.5% were accounted by the U.S. business transporting, selling, and marketing of the made-in-China goods. By contrast, 88.5% of the total personal expenditures were spent on goods and services made in the U.S.

This study was performed by the Federal Reserve Bank of San Francisco and can be read in its entirety here. Ostensibly the reason for conducting this study was to determine how inflation in China might impact on the U.S. economy. Obviously, if Chinese imports only account for 2.7% of our total personal expenditure, it won't matter if China experience inflation in the near future. For that matter, it is immaterial whether China is manipulating its currency or not.

Keep this study in mind, the next time some politician or pundit makes a mountain out of this mole hill or indulge in flights of runaway imagination on how China is ruining our economy. Your response should be simply: Nonsense.

China's Reminbi as a Global Currency

Since the collapse of Lehman Brothers and the ensuing tsunami from Wall Street that almost swamped the financial world in 2008, China has been busy signing bilateral currency swap agreements in order to minimize the exposure of holding too many dollars.

Such swap agreements allow the two signatory nations to do business with each other using their own currency and skip having to buy dollars and settle the trade invoices in dollars.

This article co-authored with Henry Tang posted in China-U.S. Focus apropos on leap year day can be read in its entirety here.

On going tracking of bilateral swap agreements China has entered can be found here.

The Making of Renminbi on Becoming a Global Currency

In 2002, I remember visiting the Leaning Tower of Pisa as a tourist. I was surprised to see a souvenir stand displaying a prominent sign: "Your Reminbi are welcome here" written in Chinese. This was significant on two counts. One, there were already significant amount of tourists from China visiting Europe and two, the Chinese yuan was becoming a global currency, albeit unofficially.

After the financial crisis of 2008, it became obvious that the dollar was on a long term path of declining value. While China has not been the only country to want to avoid holding on to too many dollars, China has been the busiest in entering currency swaps with its many trading partners. Bilateral currency swaps allow the participating nations to pay their trade invoices with their own currency and not with dollars.

Here is a compilation of swap agreements China has entered to date.
2008, December - South Korea, 180 bn yuan since extended
2009, January - Hong Kong, 200 bn yuan since doubled to 400 bn in Nov 2011
February - Malaysia, 80 bn yuan, extended 2/12 & increased to 180 bn yuan
March - Indonesia, 100 bn yuan
- Belarus, 20 bn yuan
- Argentina, 70 bn yuan
June - Brazil, no exact amount known
2010, June - Iceland, 3.5 bn yuan
July - Singapore, 150 bn yuan
2011, April - Uzbekistan, 0.7 bn yuan
- Mongolia, 5 bn yuan, doubled to 10 bn yuan in March 2012
June - Kazakstan, 70 bn yuan
December - Thailand, 70 bn yuan
Pakistan, 10 bn yuan
Japan, no exact amount known
2012, January - U.A.E., 35 bn yuan

February - Turkey, 10 bn yuan
March - Australia, 200 bn yuan

Other imminent swap deals currently under discussion include Nigeria and South Africa. The number of deals are likely to accelerate. As more countries hold and accept Reminbi, the more appealing the yuan will become as the alternative to holding too many dollars and more bilateral swap agreements will result.

Even if all the swap agreements were drawn down in full, there might be as much as two trillion yuan circulating outside of China. This might be enough liquidity for the renminbi to act as a de facto global currency but not enough to replace the dollar as the hard currency.

We can be sure, however, is that the dollar will cease to be the only global currency because no one will be satisfied with owning a currency that decrease in value with time. Japan has entered a currency swap deal not just with China but also with India, and Turkey with Malaysia. These are some examples how others are looking for ways of going around the dollar.

America narrowly missed being a deadbeat--this time

The last time the world faced a financial tsunami in 2008, smart money looked for safe harbor and that was to buy U.S. treasury bills. Even though it was the American financial market running amuck that led to the financial collapse, everybody remained convinced that the dollar as the safest place to be. So much money piled into the U.S. that, for a while, the dollar actually rose in strength relative to other currencies.

After the latest fiasco from Washington, will the rest of the world continue to have faith and confidence in the value of the dollar? After watching Congress played politics and care not a whit about upholding the honor of United States, can the world assume that America is not about to become a deadbeat to beat all deadbeat nations in history?

Even if the US Treasury honors its obligations this time after undergoing the tortuous exercise between House, Senate and the White House, can any investor feel assured that there would be a certain outcome the next time? Who is to say that some fringe group won’t successfully hijack the government and decide to renege on the government obligations?

China holds more US federal debt than any other foreign country. What has China done about this situation other than wringing the collective hands in Beijing? Actually, quite a lot.

On the one hand, even at the outset of the financial crisis, Beijing asked Washington to keep the value of the dollar from sliding. Members of the Obama administration serially assured China that the US will uphold the integrity of the dollar, maintaining as deadpan a demeanor as possible all the while knowing that printing more money is inevitable.

Of course, no one in Beijing took the U.S. assurance to the bank. Instead, China has been actively investing declining dollars into hard assets, such as oil fields and mineral deposits in Africa, Australia and Latin America. (China would make more investments in the U.S. as well except for Washington's generally frosty reception.)

Since the activity of China’s central bank is not transparent to outsiders, we can only speculate that China has also been diversifying their foreign exchange holdings into other currencies. However, no other currency has large enough circulating volume to allow China to fully divest out of dollars by exchanging into it.

The other means of not depending on the dollar is to conduct bilateral trade based on bilateral currency swap agreements that would allow the use of Chinese yuan rather than the dollar to settle the trades. China has entered such agreements with selected countries such as Brazil, Russia and South Korea. This is considered a step towards internationalizing the Renminbi.

In May, I attended an international conference on global financial security in Beijing. All the speakers from outside of China as well from inside China expressed concern on what action the U.S. will take to stabilize the world financial market. None anticipated that the American politicians would play political chicken and brinksmanship with the U.S. national debt and throwing America’s prestige and image down the sewer.

Since America’s financial collapse that drag the world down, which China side-stepped with its own considerably more effective economic stimulus plan (one that does not require bailing out banks), China has been looking at the U.S. with skepticism. Now that China has seen America’s much touted democracy in action, China is even more certain not to follow the U.S.

China’s economic stimulus meant more superhighways and bridges as well as a high speed rail system becoming the envy of the world, recent accident notwithstanding. In contrast, America’s superhighways need repairing and bridges that threaten to fall down.

Since 2008, China has formulated a national development plan that placed reduced reliance on export, especially away from labor intensive, low cost goods but aimed for higher valued added manufacturing. Recent Wall Street Journal article reported that multinational corporations are placing their high value manufacturing investments near foreign markets where they are making profits, not in the U.S.

China has continued to invest in education and allocated more of the national budget for R&D. Hundreds of thousands of graduates, mostly in technical disciplines, have gone overseas for graduate education. Many have returned to China to found companies that are competing on the global market such as Baidu, Huawei, and Suntech.

These companies compete on their proprietary innovations. With a pipeline of well trained technologists, there will be more coming from China. The U.S. with an increasingly dilapidated education system will need a steady infusion of foreign students to keep pace.

It’s not at all certain that the eventual accord reached by Congress will create jobs and restore the dignity of the millions of Americans seeking employment. The next time the U.S. lectures China about human rights, the spokesperson should be careful lest he/she is accused of wearing no clothes.

The U.S. is mired in two wars it doesn’t know how to win. Now the dysfunction of Washington has been laid open for all to see. While China is too diplomatic to question America’s vulnerability, will the rest of the world continue to see America as the sure footed hegemonic power that can be counted on to step in as the ultimate peacemaker?

There are pundits that still insist that America remains a great power and that eventually the country will pull out of this downward spiral. I would like to know how.
___________________________
A shorter version ran in New America Media. The New America Media version was also picked up by Xinhuanet and Global Times.

See interview on Russian TV.

World Financial Security and the U.S.

Last week, I attended an international symposium on “Financial Security: China and the World,” held in Beijing and sponsored by China Institute for International Strategic Studies and the Katie Chan Foundation. Speakers came from all over the world including a former President of the European Commission, a former First Secretary of State of the UK and a former President of China’s Export and Import Bank.

Chen Fengying, George Koo & Katie Chan

Inevitably, the status of the U.S. financial health was on the minds of most of the speakers. They raised concerns over the mounting national debt and expressed skepticism as to whether any real solution has been proposed. One economist pointed out that interest payment could take up 20% of the US government revenue now and debt service by 2040 could amount to 58% of the total revenue, clearly an unsustainable proposition.

The US budget deficit continues to increase with no end in sight and counting on foreigners to continue to buy 70% of the US debt remains a keystone to the US strategy. But the foreign appetite for US treasuries cannot keep up with growing supply. As America having to print more money as the only resort becomes more obvious, foreign buyers will avoid buying rather than increase their purchase which will exacerbate the debt crisis.

Concerns were also raised over the prospects of the financially strong nations in the European Union having to bail out the weak yet again. The Germans in particular may face having to bail out the bad debt nations or bail out the over-exposed German banks that carried too much sovereign bad debt in their books. Eventually, the EU will have to create a bail out mechanism that does not look like bail outs in order to overcome domestic political pressures among donor nations.

The speaker from Australia announced that his nation suffered least from the financial tsunami and experienced no recession from 2007 to 2010. Australian banks continue to lend and provided the highest shareholder return among the world’s leading banks. In addition to having China as its major customer, he attributed strong regulation and close government supervision as the cause of the success of the banking sector.

There was universal agreement among the speakers that the world needs regulatory reform in order to prevent another financial meltdown. The speaker from Singapore pointed out that having Standard & Poor or Moody’s provide sell side credit rating for a fee is basically flawed. He offered a not-for-profit organization to compute creditworthiness based on scientifically sound methodologies and offer access to the ratings free of charge to users.

Comments by Mme Chen Fengying, Director of World Economic Studies, China Institute of Contemporary International Relations made quite an impression on me. She said while 9-11 radically changed the U.S. perspective on terrorism, 9-15 (the date Lehman Brothers filed for chapter 11) has led to financial terrorism. Heretofore the world looked up to the US financial model. Now the world needs to look for another.

Ms. Chen went on to say the US debt has now exceeded its GDP by over 30 fold*. She wondered how this could be sustainable but then she professed not to understand how 98% of dot com companies in the US could lose money and not suffer in the price of the their stock. She labeled the US as a credit card economy.

Only 11% of the US GDP comes from manufacturing while nearly twice that percentage comes from financial services sector of the economy. “Wall Street is supposed to serve the economy,” Ms. Chen said, “And not to hold the White House hostage.”

One veteran America watcher from China commented on the current US budget and debt service crisis and speculated that the two political parties will begin by taking on extreme and polarized positions but hopefully in the last minute the Congress will end brinksmanship and do the right thing. If the US government actually collapses, the financial terror that will strike the collective hearts of the world would be beyond comprehension.

I spoke by comparing the economies of Macao with Singapore and it is reported on Peoples’ Daily Online.

======================
* A friend who read the blog commented that total US debt, public + business + financial + household, amount to approximately 52 trillion, which is 3.6 times GDP. Accounting for all public and private sector assets, US probably has a net worth about 5 times its GDP. In other words, the US debt crisis is serious but not so dire as presented by Ms. Chen.

When it works for the West, it's free market economics

When it works for Asian countries, it's state controlled capitalism. This is just one of the scathing observations by John Cassidy written in the guise of book reviews in December 13, 2010 issue of the New Yorker.

Didn't UK and later the US rise to great economic power on the backs of free trade? Nonsense, Cassidy said. UK used gunboat diplomacy to force China to accept opium import in order for Britain to erase it's bilateral trade deficit. UK used tariffs as trade barrier to protect it's home grown industries until they were able to compete internationally.

The US economic policies followed UK. From Alexander Hamilton to Abraham Lincoln, the US used high import duties to protect domestic industries. Even today, selected American agricultural products are protected by tariffs and subsidies.

"Not one of today's economic powers practiced free trade during its developmental stage," Cassidy observed in his piece.

Some other quotations from Cassidy's piece are excerpted below:

"Compared with these naked exercises in industrial policy (by western powers), some of the Chinese infractions that have most exercised the W.T.O. seemed relatively minor."

"Part of the evidence he (referring to author Halper*) presents for China's malign influence is the fact that it helped build a hospital, an irrigation project and a vocational training center in Ghana--a multiparty democracy that, mystifyingly, is on his list of repressive African regimes."

"The heavy hand of American demostic and foreign policy in shaping economic outcomes tends to get ignored in current policy debates.."

"Western governments have used the methods of state capitalism for hundreds of years in their bid to shape the world around them....The idea that market forces alone led to the West's success is nonsense." This quote Cassidy attributes to chief economist of HSBC.

Cassidy's concluding remark: "The greatest danger that Western prosperity now faces isn't posed by any Beijing consensus; it's posed by the myth of the free market."
________________________

*Halper's book reviewed by Cassidy was "The Beijing Consensus: How China's Authoritarian Model Will Dominate the Twenty-first Century."

Obama Delivers on Export Control Reform

The White House recently announced its intention to fundamentally reform the US export control process. This overhaul has been long overdue and will have significant impact on the American economy particularly in Silicon Valley, strengthen US China bilateral relations and simplify the lives of ethnic Chinese professionals working in high tech industry.

As the announcement said, “The current export control system is overly complicated, contains too many redundancies, and, in trying to protect too much, diminishes our ability to focus our efforts on the most critical national security priorities.” Amen. Those of us working in the high tech companies have been saying that, probably in more pungent terms, for decades.

The reform if implemented as announced will greatly simplify the licensing procedure. By strictly defining those items that are subject to control and eliminating multiple and often conflicting agencies, the new policy should render export license application transparent and take away the pain of exporting.

The White House release cited the brake pads for the M1A1 tank as one example of what ails the current export control practice. Same degree of control is applied to the export of the brake pads as it is for the entire tank. Yet the same brake pad is used in fire trucks which can be exported without control. This is the kind of regulatory contradiction the reform hopes to remove.

While the announced intent for export control reform is in general terms and not specifically addressing exports to China, it will have the greatest impact on trade with China. Heretofore, China has been placed in not outright foe and not exactly friend category--which means even export of heavy duty brake pads, in the aforementioned example, is subject to intense scrutiny as regulators examine the likely “dual use” nature of the export sale. Dual use is bureaucratic speak of items for civilian use that could have military application as well, and thus need to tie red tape around the transaction.

China is potentially America’s biggest customer for high tech export. Because of the ambiguity of prevailing export control policy, much of the potential has not been realized. Instead, China buys from Western European countries and Japan because they do share the same concern as the US.

Obama’s intention is good news for Silicon Valley—and other high tech regions—as these companies can now concentrate more on exporting and less energy on walking through the labyrinth of government approval.

This development should also be good news for Chinese Americans working in the high tech industry. Since China has become a major buyer, many of the Silicon Valley companies have wisely employed ethnic Chinese in their firm to engage in marketing and sales to China. Such occupation carried unexpected hazards.

Silicon Valley has witnessed cases where the export manager to China landed in jail for alleged sale of dual use items to China. In one case, it involved the sale of shaker tables. The government accused the ethnic Chinese export manager of selling to a missile making facility in China rather than the locomotive factory stated in the application. By the time the government dropped the charges for lack of substantiation, the ex-export manager had been out of a job for months and confronted with the reality of a ruined career.

With the new regulations, such ambiguity should not happen again and exporting to China no longer a cause for racial profiling.

The export control reform, while long overdue, will be an all around win. We can only hope that politics do not interfere.
--------------------
A similar commentary was posted on New America Media.

Senators find China Bashing easier than Policy Making

Senators Lindsey Graham and Charles Schumer (Reuters called odd couple) are at it again. They are sponsoring a bill in Congress demanding that China adjust the exchange rate of their currency, Renminbi (RMB), to the dollar because, they claim, the “artificially” low rate is costing America jobs.

This time their arguments are bolstered by commentaries written by no less than Paul Krugman, Nobel winning economist, accusing China of mercantilist practices. Krugman as a columnist for the New York Times certainly has the soapbox to preach his version of global economics.

Fortunately, other equally credentialed, if not as well known, professional economists have stepped up to offer persuasive contrarian views exposing flaws in Krugman’s reasoning.

I found three conclusions particularly noteworthy in Stanford Professor Ron McKinnon’s rebuttal to Krugman. First, he points out that trade imbalance has nothing to do with currency exchange rates. A sudden increase in the RMB value to the dollar may actually increase and not lessen the trade imbalance.

McKinnon argues that fixing the exchange rate of 6.83 RMB to a dollar was essential to stabilizing China’s economy against the global economic downdraft caused by Wall Street. With a stable yuan, China was able to stimulate its economy replacing fallen export with huge boost in domestic consumption, which in turn meant increasing imports from China’s neighboring countries and thus stimulating those economies.

China has contributed to a fast worldwide recovery which would not have been possible without a stable yuan. McKinnon presents data to show that it is America’s “ultra-loose monetary policy” instituted since the 2008 crisis that is guilty of manipulation.

UN Conference on Trade and Development (UNCTAD) has come out in support of China’s control of the exchange rate. According to UNCTAD, China has done more than any other emerging economy to stimulate domestic demand in order to mitigate the crisis and urges China not to cave in to the western pressure.

Dr. David Caploe, Chief Political Economist of online EconomyWatch largely echo McKinnon’s analysis but in more quotable sound bites. He points out that the US has run overall balance of payment deficit since 1959 and overall trade deficit since 1971 seemingly without doing any harm to the American standard of living. “Put bluntly,” Caploe says, “Both the US and the rest of the world have benefited greatly from a global political economy that is fundamentally unbalanced.”

Graham and Schumer haven’t said how and what jobs would return to America if China were to bow to pressure and make a substantial and sudden adjustment in the exchange rate.

In fact it has been obvious to all of us that the jobs that went to China by way of Mexico, Taiwan or Korea left the US long ago and would never come back. Nor would we wish for those low paying jobs to come back because it would mean a collapse in the American economy as it currently exists and return to a third world standard of living.

However, bashing China has always been easier than proposing a carefully thought out roadmap that would create well paying jobs and protect the current standard of living. In fact the challenge of a real plan seems to be beyond even the capability of a Nobel Laureate like Krugman.

Caploe says, “If the US is going to somehow manage to find a way out of the mess it’s in, it should stop blaming China, and admit the fault lies in ourselves.” He goes on to say, “But of course, that’s a lot harder than shifting the onus onto one of the few countries in the world that has a political leadership that actually knows what it’s doing when it comes to economic policy.” Ouch.

A more plausible argument for a stronger yuan is that it would make American exports more attractive but this argument doesn’t stand up to scrutiny either. China is already buying virtually all the lower-valued export such as agricultural products that America is selling. For higher-valued products, such as high tech equipment where the US has a comparative advantage, price has not been the issue. China has been willing to buy more than the US government is willing to sell under Washington’s anachronistic export control regulations.

Steve Forbes, publisher of Forbes magazine, reminds us, "We started in the 1970s to put pressure on Japan to change the value of the yen. The dollar today has fallen 75 percent against the yen, and we still have a trade deficit."

Maybe our problem is that we don't have leaders that can offer real solutions.
================================================
A shorter version appeared in the March 25 issue of the San Jose Mercury News.

Raising the image of "Made in China"

Since the rash of unfavorable publicity on poorly made products from China, some even with deadly consequences, I have been thinking about this matter. China has become such a dominant manufactuer of goods that any negative publicity hurts the image of all the products made in China. The damage can be enormous affecting not just export sales but the lingering reputation that China makes only shoddy goods.

Yet, given China's enormous population and geographical breadth, assuring product reliability and conformity to accepted standards from every manufactuer is a daunting if not impossible task. The irony is that as China become more successful as the global supplier, the task of protecting the image of products from China become ever more challenging.

In order to rectify the image of goods made in China, I have been an advocate for the Beijing Central Government to establish a website where any person or company can register and complain about quality and other problems they encounter from suppliers in China. In such a website, the complaint should identify the party and the location of the party as well as describing the nature of the dispute.

This approach can have three major benefits:

(1) By erecting such a site, China is proclaiming to the world that the government is promoting transparency in business transaction and is encouraging buyers from all over the world to help China maintain the consistent quality of products made in China.

(2) The information on the website can help QSIQ (full name: General Administration of Quality Supervision Inspection and Quarantine) identify the trouble spots and focus their surveillance and enforcement efforts in problem regions of China.

(3) Local officials are no longer motivated to abet, shelter or protect offending suppliers of sub-quality goods, since such producers can run and hide but the local officials cannot.

The immediate impact of such a website is to raise the confidence of buyers and consumers of goods made in China.

In order for such a website to realize its potential, it must be easy to use and must be tamper proof. Anyone wishing to register a complaint may not do so anonymously but must provide verifiable information about him/herself and the organization he/she is representing. The identity of the complainer must be kept confidential and available only to the people managing the website.

To encourage participation, the government may even consider offering a reward or suitable recognition as a friend of China for each complaint that leads to arrest of the offending party.