Many observers on both sides of the Taiwan Straits are worried that recent actions by Taiwan president Chen Shui-bian aims at misdirection, deploying one of 36 ancient Chinese strategies called “pointing east while attacking west.”
He has publicly avowed that he would not declare martial law in Taiwan and would never roll back the democratic process on the people of Taiwan. His critics fear that all his actions point to just the opposite.
Chen has repeatedly promised not to change the official name from Republic of China, not to declare independence, not to call a referendum that will change Taiwan’s status, and not to change the Constitution from the one-state doctrine.
But Chen has already removed the R.O.C. name from the passports, claimed de facto independence for Taiwan when such claims suited his purpose, and called referendum in past presidential elections that were repudiated by the voters. He has also obliterated public evidence of former president Chiang Kai-shek and rewritten the history of Taiwan.
Chen has been personally driving the referendum on whether Taiwan should apply for UN membership under the name of Taiwan. He wants to stage the referendum at the same time as the next presidential election in coming March.
The U.S. State Department has publicly and privately asked Chen to cease and desist because his actions will only raise tension across the Taiwan Straits. Chen insisted that he is merely following the will of the Taiwan people.
The opposition parties object to holding the referendum at the same time as the presidential election. Chen is persisting despite polls that predict resounding defeat for the referendum, because his objective is just to get enough votes cast--no matter for or against--to legitimize his referendum.
A frustrated Chen recently threatened to call martial law in order to have his way of holding the referendum. He publicly withdrew the threat the next day. It’s hard to know whether he tipped his hand prematurely or he was up to another misdirection ploy.
His latest gambit is to announce to the public of receiving repeated anonymous threats to harm himself, his wife and his family. To offset these alleged threats, he has called for heightened security about the presidential palace. In the meantime, his daughter apparently did not let the threats deter her from visiting Disneyland in Los Angeles.
Many in Taiwan, including the daughter of former president Lee Teng-hui, has asked Chen to stop creating more problems for people of Taiwan but to start solving some of the problems facing Taiwan. Taiwan is rife with speculation as to what Chen has up his sleeves.
Particularly worrying to people of Taiwan is that Chen has replaced all the senior generals in the armed forces with his appointees. His new minister of defense, Lee Tien-yu, admitted in his testimony before Taiwan’s parliament that he placed his loyalty to Chen ahead of loyalty to Taiwan’s constitution.
Chen’s threat is no idle bluff.
If Taiwan’s March election is held as scheduled, Chen would be out of the office by May 2008 and would face jail time for corruption charges. His claim of presidential immunity has protected him so far.
In his re-election bid in 2004, he was heading toward certain defeat by the reunited opposition when his belly was grazed by a mysterious assassin bullet on election eve. The military and police were put on alert. Most of them favored the opposition but could not go off duty to vote.
Chen with a bandage on his tummy squeaked through by the merest margins and took oath for office despite opposition charges of misconduct that were still pending in the courts.
He cannot run again and must think of another way to stay out of judicial trouble. Declaring martial law and canceling the next election would be one way out. Some in Taiwan even believe that Chen is capable of starting a military provocation with the mainland.
Unfortunately Washington has also been guilty of misdirection. On the one hand, State Department’s Thomas Christensen was the most recent spokesperson to ask Chen to abandon the referendum. On the other, the Bush Administration has recently announced sale of advanced ground to air missiles to Taiwan.
No wonder Chen has been assuming that the U.S. will come to his aid.
Considered the best of the 36 strategies, zou wei shang ji, which loosely translates into “getting the hell out when you can,” is also the best way out for Chen, the U.S., China and Taiwan.
Let the U.S. offer Chen, say, Los Angeles as the destination for exile in the manner former Philippines president Ferdinand Marcos found refuge in Hawaii. The threat of military conflict across the straits would vanish and the rest of world can collectively exhale in relief.
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Go to here, for review of Chen's earlier deception
Saturday, December 15, 2007
Tuesday, December 4, 2007
High Stakes Drama Across Taiwan Straits, U.S. in Middle
Editor’s Note: Beijing’s recent refusal to let the U.S. aircraft carrier Kitty Hawk into Hong Kong is a sign that all is not well in the Taiwan Straits. NAM contributor Dr. George Koo is an international business consultant. He has just returned from Beijing where he attended a Committee of 100 Conference, the first of its kind held on Mainland China. (First appeared in www.newamericamedia.org.)
BEIJING – If China were to engage in a military conflict with Taiwan, the United States best not interfere. This is the message China is sending to the United States in the recent drama on the high seas.
First, aircraft carrier USS Kitty Hawk, with its crew and escorts of some 8,000 was abruptly informed that they would not be permitted to spend Thanksgiving in Hong Kong when the ship was within two days of arrival.
By the time Beijing rescinded the order 24 hours later, Kitty Hawk had already reversed course and headed back to Japan to the disappointment of family and friends gathered in Hong Kong in anticipation of reunions over America’s favorite holiday.
No satisfactory explanation has been offered. Both Beijing and Washington, D.C., have quietly downplayed the significance of this incident.
Some observers attributed denying entry to Hong Kong as a sign of Beijing’s weariness to endless American tantrums. Whether it’s the United States honoring the Dalai Lama, or the recent Congressional Commission report demonizing China for rampant espionage, or American media’s bashing of China over tainted products such as lead paint on toys, China is tired of being the go-to piñata.
Others simply felt that the military and diplomatic sides of the Beijing hierarchy were not on the same page. The People’s Liberation Army (PLA) was holding naval exercise in South China Seas and did not want the Americans to get too close. They told Kitty Hawk to stay away without consulting with the Ministry of Foreign Affairs on possible collateral consequences.
Some also speculated that Beijing's refusal to permit the Kitty Hawk to enter Hong Kong had to do with the United States’ decision last month to sell Taiwan an upgrade to three sets of Patriot II ground-to-air missiles, for approximately $930 million.
All the suggested explanations contain some grains of truth. However, looking at the Kitty Hawk matter in a broader context, there is a lot more at stake.
Just a week after Kitty Hawk returned to Japan – having spent Thanksgiving on the high seas – a Chinese destroyer sailed into the Tokyo Bay amidst great fanfare. The Shenzhen was the first PLA navy ship ever to dock in Japan and both countries played this as a historic and inaugural event of closer Sino-Japanese military cooperation. This is perhaps China’s gambit: suggesting that neutrality over Taiwan is in Japan’s best interest.
The Kitty Hawk was also involved in a massive exercise on the Pacific a couple of months ago. To the surprise and consternation of the U.S. Navy, in the midst of the exercise, a Chinese submarine “popped” to the surface within torpedo-hailing distance of the aircraft carrier. Though surrounded by a flotilla of American navy ships, apparently none detected the presence of the submarine.
Was this another unintentional act? Hardly. China is sending a message to Washington: In the event of a military confrontation, the damage and cost will not be one-sided. The objective is to help the Pentagon more accurately assess the burden of adding Chinese engagement in Afghanistan and Iraq.
So why send this message to Washington at this time? Because Beijing is becoming increasingly alarmed by Taiwanese president Chen Shui-bian’s provocations – and frustrated by Washington’s apparent inability to appreciate the gravity of the situation.
Prosecuting on serious corruption charges is awaiting Chen once his presidential immunity expires. One way to extend his immunity is to stay in office, which Chen can do if he declares martial law and cancels the presidential election scheduled for March 2008.
Chen may be able to justify declaring martial law on Taiwan by declaring independence and hoping to provoke military reaction from Beijing.
Since Taiwan has missiles that can reach coastal cities across the straits, many Mainland Chinese now wonder if Chen might just initiate military action himself.
Chen has publicly asserted that Beijing will not take military action against Taiwan before the Olympics in August. He also assumes that the United States will come to Taiwan’s rescue.
He is wrong on both counts, but is oblivious.
Beijing is sending Washington a clear signal that the cost for Kitty Hawk or any U.S. naval ship caught in the Taiwan Straits when a military confrontation occurs might be far higher than previously imagined.
The Bush administration needs to throw away strategic ambiguity and unequivocally tell Chen to behave.
Perhaps by offering him asylum in the United States a la the late Ferdinand Marcos of Philippines (i.e., take his ill-gotten gains and get out of Taiwan), a crisis can be averted. Otherwise, tension across the straits could reach an incendiary flash point before March next year.
BEIJING – If China were to engage in a military conflict with Taiwan, the United States best not interfere. This is the message China is sending to the United States in the recent drama on the high seas.
First, aircraft carrier USS Kitty Hawk, with its crew and escorts of some 8,000 was abruptly informed that they would not be permitted to spend Thanksgiving in Hong Kong when the ship was within two days of arrival.
By the time Beijing rescinded the order 24 hours later, Kitty Hawk had already reversed course and headed back to Japan to the disappointment of family and friends gathered in Hong Kong in anticipation of reunions over America’s favorite holiday.
No satisfactory explanation has been offered. Both Beijing and Washington, D.C., have quietly downplayed the significance of this incident.
Some observers attributed denying entry to Hong Kong as a sign of Beijing’s weariness to endless American tantrums. Whether it’s the United States honoring the Dalai Lama, or the recent Congressional Commission report demonizing China for rampant espionage, or American media’s bashing of China over tainted products such as lead paint on toys, China is tired of being the go-to piñata.
Others simply felt that the military and diplomatic sides of the Beijing hierarchy were not on the same page. The People’s Liberation Army (PLA) was holding naval exercise in South China Seas and did not want the Americans to get too close. They told Kitty Hawk to stay away without consulting with the Ministry of Foreign Affairs on possible collateral consequences.
Some also speculated that Beijing's refusal to permit the Kitty Hawk to enter Hong Kong had to do with the United States’ decision last month to sell Taiwan an upgrade to three sets of Patriot II ground-to-air missiles, for approximately $930 million.
All the suggested explanations contain some grains of truth. However, looking at the Kitty Hawk matter in a broader context, there is a lot more at stake.
Just a week after Kitty Hawk returned to Japan – having spent Thanksgiving on the high seas – a Chinese destroyer sailed into the Tokyo Bay amidst great fanfare. The Shenzhen was the first PLA navy ship ever to dock in Japan and both countries played this as a historic and inaugural event of closer Sino-Japanese military cooperation. This is perhaps China’s gambit: suggesting that neutrality over Taiwan is in Japan’s best interest.
The Kitty Hawk was also involved in a massive exercise on the Pacific a couple of months ago. To the surprise and consternation of the U.S. Navy, in the midst of the exercise, a Chinese submarine “popped” to the surface within torpedo-hailing distance of the aircraft carrier. Though surrounded by a flotilla of American navy ships, apparently none detected the presence of the submarine.
Was this another unintentional act? Hardly. China is sending a message to Washington: In the event of a military confrontation, the damage and cost will not be one-sided. The objective is to help the Pentagon more accurately assess the burden of adding Chinese engagement in Afghanistan and Iraq.
So why send this message to Washington at this time? Because Beijing is becoming increasingly alarmed by Taiwanese president Chen Shui-bian’s provocations – and frustrated by Washington’s apparent inability to appreciate the gravity of the situation.
Prosecuting on serious corruption charges is awaiting Chen once his presidential immunity expires. One way to extend his immunity is to stay in office, which Chen can do if he declares martial law and cancels the presidential election scheduled for March 2008.
Chen may be able to justify declaring martial law on Taiwan by declaring independence and hoping to provoke military reaction from Beijing.
Since Taiwan has missiles that can reach coastal cities across the straits, many Mainland Chinese now wonder if Chen might just initiate military action himself.
Chen has publicly asserted that Beijing will not take military action against Taiwan before the Olympics in August. He also assumes that the United States will come to Taiwan’s rescue.
He is wrong on both counts, but is oblivious.
Beijing is sending Washington a clear signal that the cost for Kitty Hawk or any U.S. naval ship caught in the Taiwan Straits when a military confrontation occurs might be far higher than previously imagined.
The Bush administration needs to throw away strategic ambiguity and unequivocally tell Chen to behave.
Perhaps by offering him asylum in the United States a la the late Ferdinand Marcos of Philippines (i.e., take his ill-gotten gains and get out of Taiwan), a crisis can be averted. Otherwise, tension across the straits could reach an incendiary flash point before March next year.
Friday, November 23, 2007
Three Troubling Trajectories
Speech at Kyoto University, Economics Department, November 2007
Ladies and gentlemen,
I am honored to be invited to speak before you at the world renowned Kyoto University and it is a distinct personal pleasure to be here. I have been to Kyoto a number of times but have always treasured my first visit. It was in October 1975, just a little over 32 years ago. I was on business for SRI International and my then colleague and now dear friend, Takaoka-san, took time out to show me Kyoto. He was then the executive director of SRI’s office in Asia. He was obviously proud of Kyoto and proud to be an alumnus of Kyoto U. And his pride made my visit that much more memorable.
I really enjoy traveling around the world. Each time and each place affords so many opportunities to learn about history, culture and the diversity of the people that populate our world. For example, my wife and I just spend ten days in Sicily, our very first visit there. I learned from this trip that Sicily was probably one of the earliest beneficiaries of ethnic diversity. You see, Sicily has rich soil constantly added by active volcanoes, lots of sun shine and a warm climate—a California of the Mediterranean. Many people came to settle there, Phoenicians, Greeks, Romans, Byzantines, Moors, Normans and now young Chinese selling souvenirs at tourist attractions. Each brought their culture and values to enrich Sicily and added to the island’s rich heritage.
I will be coming back to Sicily later in my talk. But I am here today to talk about China, Japan and the U.S. Except for elementary school education in China, I was educated in the U.S. and grew up in America. I have been visiting China regularly on business consulting assignments since 1978. I write commentaries about the sometimes troubled U.S. China bilateral relations. I think I know the two countries pretty well. I have been to Japan less frequently and can not claim to be an expert on Japan. So forgive me, if my presentation today appears unbalanced.
Nonetheless, I would like to take this opportunity to present some personal views that may sound blunt and direct. I hope you will forgive me if some of my statements sound untactful. My American upbringing is urging me to “tell it like it is,” and I would be remiss to pass up this chance to share some very serious concerns with this distinguished audience by obscuring my remarks in polite but ambiguous language. I hope you’ll find my remarks provocative but not offensive.
Some might argue whether China, Japan and the U.S. are the three major powers in the world, but there can be no doubt that they are the most important nations around Asia Pacific. Each shares many common interests but also has important differences in values and priorities. Each faces some ominous dark clouds in the horizon that I would like to discuss with you. The peace and stability of the Asia Pacific region depends on the three countries getting along with each other and staying in good health.
First, let’s talk about China. When I first went to China on business trips, late ‘70s to early ‘80s, just trying to place a phone call to make an appointment was a frustrating experience. There were so few telephone lines in Beijing in those days that I would get the busy signal even before I finished dialing the number. Today there are 500 million cellphone users in China and no bottlenecks at the switch boards.
In 1985, one of my clients, a maker of automotive components, celebrated the formation of a JV in China. That same year, Germany’s VW JV in Shanghai started production. At the time China’s total yearly production of motor vehicles was less half of million, most of them trucks and buses. Only 5000 passenger sedans were produced that year. In 2006, 21 years later, China’s vehicle production exceeded 7 million of which about 4.5 million are passenger cars. So vehicle production has increased more than 14 fold over this period of time while passenger cars grew by a phenomenal 900 times. China is now the third largest auto producing country in the world, after Japan and the U.S.
Today, everybody knows that China’s economy has been doubling every 7 years for nearly the last three decades. For a long time, skeptics found it hard to believe that this kind of unprecedented growth was possible and doubted the official statistics. They would point out that 28 out of 29 reporting provinces report their annual GDP growth as higher than the national average—clearly a mathematical impossibility. It was discovered later that the central government’s calculation for the national average was too low and less precise than the regional reports.
How did China accomplish such phenomenal growth? The full explanation is much more complicated than I can present today but I would like to outline a few highlights that I think were key developments.
In the early 1980’s, China removed the commune system in the rural sector. Farmers were essentially free to plant what they want and to pursue other livelihoods. Many, especially those living south of the Yangtze River became wealthy and even had time and energy to start small businesses. This was the beginning of the township and village enterprises which played an important role in China’s early economic reform.
Shortly after, China began a small experimental step and established a handful of special economic zones, most notably Shenzhen right next to Hong Kong. Hong Kong business took almost immediate advantage and moved their factories from Hong Kong to next door to maintain their competitive cost advantages. The whooshing sound that Ross Perot predicted for the U.S when North America Free Trade Agreement was signed, actually took place in Hong Kong, leaving many multi-storied factory buildings empty.
Following the Hong Kong businesses were business people from Taiwan and Southeast Asia, virtually all of them ethnic Chinese, who began to locate their manufacturing inside China. During this time, there was still much internal debate in Beijing between those wishing to remain with the planned economic model and those wishing to pry the economy wide open. One of the senior leaders was Chen Yun（陈云）who famously coined the term, “bird cage” economics （鸟笼经济）. The nation’s economy, Chen said, must be kept in the cage. Sometime the cage can be loose and other times tight but the economy must never be allowed to fly away.
In 1992, Deng Xiaoping decided to break the debate in favor of the free market proponents. He made the now famous tour of Shenzhen and declared that “to get rich is glorious.” And thus, China opened its doors wide and began to attract foreign direct investments at a rapidly increasing rate, first $30 billion at year, then $40 billion, $50 and now over $60 billion annually. Today, China has become the most open of market economies in the world and the most attractive magnet for foreign direct investment.
In terms of economic policy, China’s approach from Zhao Ziyang to Zhu Rongji to Wen Jiabao has been cautious, step by step and trial and error. “Crossing the stream by groping the stones,” another of Deng’s saying, describes the approach. The policy makers saw what happened to Soviet Union when they quickly adopted the western capitalism without the controls and thus imploded. Beijing looked to Singapore as their template for development and gradually loosened their control as the economy expanded.
In the early 1980’s China approached the World Bank for development loans. Unlike many 3rd world countries, China did not just want the money but also wanted to work with World Bank on the terms and conditions for those loans. Those terms and conditions, Beijing saw as a necessary learning process to establishing rules for internal control and to instilling financial discipline. To transition from a totally planned economy to a market economy, China needed outside guidance on rules, financial process and implementation of controls and they recognized the need and were willing to learn from outside sources. An interesting historical footnote is that the person that led the Chinese team in working with the World Bank was Zhu Rongji.
Subsequently, Zhu Rongji as premier dragged China into WTO over considerable internal opposition. He believed the discipline imposed on WTO treaty nations would be good for China and raise its competitiveness. By having to meet world competition, China would raise the quality of Chinese manufacturing and force inefficient factories out of business. The transition would be painful, as some 30 million or more for the workforce became under employed or unemployed. But give China credit, they have been willing to undergo short term pain for the long term benefits.
Today, China has become or will soon become the world’s third largest economy, amassed a foreign exchange reserve well over $1 trillion dollars, raised hundreds of millions out of the poverty line, and has become skillful in the exercise of soft power and making its presence felt in such places as Africa, South America and of course, the rest of Asia. Unfortunately, this is not the whole picture, but before discussing the dark side of China’s rise, I would like to summarize briefly what I think China has done right.
When China began its reform in 1978, the country had been cut off from the rest of the world for nearly 30 years. I believe their go-slow, trial and error approach to policy changes turned out to be the right approach. One aspect where the Beijing government did not go slow was recognizing early the importance of infrastructure investments. Not only the World Bank financing went toward infrastructure but Beijing even went into deficit spending to improve port facilities, increase power plants, double tracking of rails and construction of a network of superhighways. No other country, certainly not India, has made such a commitment to economic growth.
China is blessed with over 60 million ethnic Chinese living outside of the mainland including Taiwan. Many of these overseas Chinese, even if they are born outside of China, never lost their sense of identity and cultural ties to their motherland. Both the governments of Taiwan and Beijing go out of their way to encourage this sense of affiliation and kinship to their ancestral home. In turn, overseas Chinese including those living in Hong Kong were the first to invest in China. At the beginning of China’s reform before Deng’s southern tour of 1992, overseas Chinese investments were the major source of FDI. Taiwan investments, whether officially approved by their government or not, played a major role not only in job creation but in introducing to the mainland the methodology and approach needed to make consistently good quality products. (Some of you may be thinking, what about the recent rash of faulty products coming from China? Unfortunately, the propensity to take short cuts （上有政策，下有对策）is part of the Chinese character. I have a partial solution to this problem which we can discuss during the Q&A if you the audience is interested.)
For the last ten years, FDI has been coming from all over the world, Japan, S. Korea, the U.S. and Europe. Before then, it was mostly from overseas Chinese. No other country has this kind of diasporas to draw on with the possible exception of Israel. It was Beijing’s deliberate policy to risk letting a few Western flies in order to open its door wide open for foreign investment. Again, no other country has been as open or as successful.
Unfortunately, China followed the Western model of economic development without modification and failed to learn the price paid by all the predecessor nations that developed in that manner. Namely, it was economic growth without any regard to environmental consequences. Factories pollute, the society bears the cost and the common people paid the price in sickness and shortened life expectancy. Because of the size of China and the rapid rate of economic growth, the undesirable side effects are unfortunately magnified. The current generation of leaders is beginning to understand the grave consequences but have not found an effective way to deal with this problem. The more China’s economy expands, the darker is the air, dirtier the land and more toxic become the rivers and stream. The desertification of China has increased by 60% in 12 years. In 1994, 17.6% of China was desert. Now it is 27.5%. For those of us fortunate enough to enjoy fresh air, blue skies, clean water and green parks, this is a very depressing picture.
The reason this has become such a difficult problem for Beijing is their need to continue to expand their economy and create jobs to serve a huge population. The central government has made a deliberate policy to greatly increase college enrollment, an investment in human capital, but now they are faced with the need to find jobs that match with their training and aspirations, along with a range of new jobs over the entire economic spectrum. This drive to maintain economic growth is almost out of control. Local officials are still driven by how quickly their GDP is growing. Beijing has been trying to measure a “green” GDP by subtracting the environment damage and cost of remediation from the reported GDP, but so far they have not been able to find a way of calculating the down side of rampant economic growth and have not been able to convince the local officials to pay equal attention to environmental protection.
Today, any visitor to China, and one does not have to be an environmental scientist, can see the enormity of this problem and challenge. There is a real opportunity for Western technology to go into China and help restore the balance. Whether it’s the power plants or the motor vehicles, China is wasting a lot of energy and throwing off too many pollutants. China is already extremely water poor with only one quarter of the world average per capita and this problem will get worse. These are just a couple of areas where foreign technology can make a difference. Helping China remediate their environmental degradation not only can be profitable but is in our self interest. After all, the consequence of pollution respects no national boundaries.
Part of China’s problem is, of course, that it is not yet a rule based country. Too much latitude and inconsistency can take place when it is dependent on who has the authority. There is too much room for corrupt practices. China’s President Hu Jintao has again proclaimed a systematic crackdown on corruption at the recent People’s Congress. It remains to be seen how successful he will be. I think China is much too big for any central authority to be able to enforce anti-corrupt practices uniformly and effectively.
I do see help coming along in the form of the Internet and the cell phone. China recognized both as important communications tools and encouraged their growth while trying to control its use. I believe the flow of information will always outpace the authority’s attempt to monitor and restrict flow of information. Instead of control, I wish Beijing would find a way to channel the webpages, blogs, emails and sms in such a way as to bring more transparency to the country and allow the general population to shine the spotlight on the corrupt officials and wrong doers. Even if the central government does not encourage such practices, I think the use of these devices will inevitably increase, people’s voices will grow louder and the public will benefit.
Unlike the prevailing American sentiment, I do not believe a democratic form of government is necessarily the solution for China, certainly not the form of democracy that is being practiced in the United States today. In America, democracy is measured by the dollar sign. The likely success of a political candidate depends on the amount of money backing his/her candidacy. The first thing a candidate has to do, even running for the local dog catcher, is to raise money. Should the candidate be successful, the first thing after being elected is to raise more money, to ensure that as an incumbent, the candidate will not face a serious challenge for re-election.
In America, money has trumped all other aspects of the democratic process. The candidates themselves have to have a large war chest for TV ads but they are technically limited by the amount they can raise. Therefore, special interest groups compensate by raising unlimited amounts of money mostly for attack ads against candidates they do not like or issues they are against. These attack ads are unencumbered by facts and truths but deal with innuendos and outright lies. They can get away with lies with impunity, because they hide behind anonymous groups and storefront organizations.
In this environment, it is possible for a petty scam artist to make a lot of money for himself by posing as a big political donor. There is a case going on in America right now, a Norman Hsu who discovered that by giving investors’ money to cash hungry candidates in lieu of making legitimate investments, he became instantly respectable and have no trouble raising more money from others. There will always be con-artists but America’s current climate provides them the arena to make it big, albeit illegally. In short, the American democracy has drifted so far from the original ideals that the founding fathers would not recognize the country they founded.
The state of U.S. China bilateral relations is like a roller coaster riding on the rails of American domestic politics. Periodically, China becomes the convenient whipping boy for aspiring politicians who should know better but cannot resist the temptation to put the blame of American domestic problems on China. Trade deficit is just one example. In 1997, China accounted for 27% of America’s trade deficit while rest of East Asia, including Japan, accounted for another 47% for a total of 74%, almost ¾ of the overall U.S. deficit. In 2006, China accounted for 28% while rest of East Asia accounted for only 17% for a total of only 45%. A reasonable and objective observer would say that much of the manufacturing from East Asia has moved to China and that the ballooning trade deficit is due to fiscal policies of Washington and not because of any alleged predatory practices. However, the American propensity to spend beyond their earnings, the weak dollar, the barriers to export and other domestic causes are too difficult for politicians to tackle and it is just much easier to go on the podium and blame China for everything that is wrong.
For Washington (and for that matter for Tokyo) to feel threatened by China’s military expenditure is even more ludicrous. Former Secretary of Defense Rumsfeld made a fool of himself, when he, figuratively speaking, stood the deck of the American carrier off China’s coast line and accused China of aggressive intentions by daring to develop a navy with blue water capability. It will be years before China’s military firepower can match Japan’s technology and even longer to America. China has too much to do in their domestic agenda to entertain a confrontation with the U.S. However, one can understand China’s desire to continue their domestic agenda unmolested by foreign interference. Best assurance is to make sure they have a credible retaliatory strike capability. I would call it the porcupine defense.
I am absolutely convinced that the September 11 attack on the World Trade Center changed the course of world history. Just April of that year, the world was transfixed by the spy plane incident where a Chinese jet collided with an American air reconnaissance plane off Hainan Island. Thanks to the neoconservatives who had taken over Washington, China and the U.S. were on a collision course. After 9-11, Washington found a real enemy and China became a tenuous ally in the fight against terrorism instead of being the adversary of choice.
I don’t believe bin Laden in his wildest dream could have anticipated the success of 9-11 in unraveling America. Instead of finishing off the military task in Afghanistan, the Bush Administration allowed bin Laden to get away, charged into a war in Iraq and blundered the aftermath in the most appallingly incompetent manner. Thanks to Guantanamo and Abu Ghraib, the U.S. has lost all moral high grounds when it comes to human rights issues. The Bush Administration even invented a new terminology, “enemy combatant” in order to circumvent the Geneva Conventions—not being prisoners of war, the reasoning goes, means it was OK to deprive them of human rights and dignity. America’s message has become “do as I say, and not as I do.” American prestige world wide is at an all time low and Washington is finding out that even the world’s greatest military power cannot solve the world’s problems unilaterally and simply by relying on guns and bombs. Unless the next administration consists of capable, clear-eyed, non-ideologs willing to undo the damage of Iraq, I am afraid history will identify the Bush response to 9-11, not 9-11 itself but Bush response, to be the slippery slope of America’s decline. Of all the trajectories, this is the most troubling to me.
While visiting the city of Syracuse on Sicily, I learned an interesting history lesson. Syracuse was a powerful city state during the Greco period. In 413 BC, the invading Athenian navy was annihilated by Syracuse defenders which led to the decline of Athens and a relative peaceful period for Syracuse. For a brief while, Syracuse experimented with a form of democracy but then the people from Carthage came to invade Sicily. The people of Syracuse quickly elected Dionysius as their tyrant to lead them in the battle against the Carthaginians. Then as now, in times of war, people find comfort in relying on an authoritarian leader. I believe Bush’s advisors understood the psychology which is why he declared war on terror. Only difference is that Dionysius was a brilliant and effective leader.
Despite the gloomy future I see for America because of the self-inflicted injury by the Bush Administration, there are some inherent strengths that America possess that others can only envy. Thanks to a university system that continues to offer quality education, America remains the most desired destination for the best and brightest from all over the world. Right now, we are undergoing some back lash against immigrants, but by and large, America has had its welcome mat out for the best minds of the world. This is very important to America’s future because America’s school system below the college level is failing. Too many of the children born in America are not properly trained to face a future of high technology and globalization, instead they are getting an equal dose of pseudo sciences such as creationism and intelligent design along with biology and evolution.
Silicon Valley remains a beacon of strength for America. Silicon Valley continues to be the center of innovation because it continues to attract the world’s most entrepreneurial and talented people. As you may know, the two founders of Google are from Russia. One of the two founders of Yahoo is born in Taiwan. One of the original founders of Sun Microsystems who has become a high profile venture capitalist is from India. A Chinese who grew up in Vietnam then Hong Kong founded Lam Research a major semiconductor equipment company. A Chinese from Beijing who immigrated to South America, came to the U.S. for education founded Qume, a major printer company in its days. Silicon Valley is unlike any other parts of the United States. About 2% of the U.S. population resides in Silicon Valley and yet every year, around 30% of the all the venture capital is invested there. Why? Because this is where anybody with a bright idea has a chance to form a team and get financing, where failure in starting a venture is tolerated and counted as valuable experience. This tolerance for failure encourages people to take risks and think out of the box because they know that if they fail, it would not be the end of the world.
Can you see how my remarks so far is leading to what I am about to say about Japan? Historically, China and Japan have had a complicated relationship. For a long time, China was the teacher and Japan the student. Then in the 19th century, China became the student as the country began to send many of their brightest minds to Japan for further education and to learn how Japan was able to catch up to the Western powers so quickly. Many of these students such as Chiang Kai-shek became leaders of the revolution that overthrew the Manchu dynasty and led China into the republic form of government.
Then when economic reform began during the Deng Xiaoping era, Japan again became an important partner for China, not only for the loans on friendly terms but the opportunity to learn from Japan’s management style, particularly the just-in-time and continuous improvement manufacturing processes. Japanese trading companies were among the earliest to establish offices in China, not just in Beijing or Shanghai but quickly spread their presence to lower tiered cities. Matsushita established a manufacturing joint venture in Beijing even before China began the special economic zones. Nissan began a long relationship with Dongfeng Motors, at the time China’s largest automotive operation, and eventually formed a 50/50 joint venture. These are just some of the examples of the close economic and business cooperation between China and Japan and Japanese presence in China was generally earlier than the Americans or Western Europeans.
However, tensions between the two countries, and for that matter with rest of Asia, will persist until Japan rid itself of national amnesia concerning what happened in World War II. People of Japan have forgotten about the role of Imperial troops as brutal aggressors and only Hiroshima to remind them of being victims of the war. But other people especially in Asia have not forgotten about the war and will not sympathize with Japan’s self image. I believe it is in Japan’s national interest to face history forthrightly. Only then can other people forgive and begin to forget. Only then can future generations of Japanese travel around world and not be puzzled by the undertone of resentment. Japan has been the most generous nation in dispensing of foreign aid around the world, even more generous than the U.S., not counting American aid in weapons and arms. Surely Japan deserves to be a leading nation in the world and take a seat on the Security Council but I am very pessimistic that this will happen any time soon, not until Japan comes to terms with World War II.
Because of its single child policy to bring the population under control, China is facing a demographic challenge in a few decades when there will be fewer able bodied workforce to support an increasing population of retirees. Japan has a similar but more immediate problem. Japan’s population is already getting older and is the first developed nation to be shrinking. I am not a professional economist or a demographer and have no expertise in this subject area but I do have a remedy that might help reverse the trend. This remedy will be very difficult because it would require a drastic change in Japan’s national character. Here’s what I mean.
For centuries, Japan’s culture is insular, what I would call an island mentality. Only some people living on the islands qualify as Japanese—not the Ainu, for instance, and not ethnic Koreans who have been here for many generations. Even a Japanese national, say a trading company executive who has been posted overseas for a few years, when he returns, his family is often treated as gaijins (外人) by neighbors and schoolmates. In Japan, it seems to be very easy to be gaijins and very difficult to be accepted as Nihonjin. Yet at this juncture in history, Japan’s economy is in need of new blood, new people that can bring new ideas and new vigor. Japan needs to open up and welcome other nationalities to live and work in Japan, needs to create an environment that make these foreigners feel welcome and not feel like gaijins. China actively recruits overseas Chinese to return to China and has programs that invite foreign experts of any ethnicity to teach and work in China. The U.S. and especially Silicon Valley does not have any organized program, just an appealing, multi-ethnic and diverse environment where anybody from anywhere in the world could come and feel at home. In my humble opinion, it would be in Japan’s interest to review whether a systemic change in national attitude is possible and would be in the best interest of Japan. In just the recent memory, Japan transformed from a country that makes shoddy products to one known for the Deming Prize and famous all over the world for high quality, high precision products. Perhaps it’s time for another dramatic transformation.
Before concluding my talk, I have been asked to specifically comment on possible impact of the three trajectories on the tri-lateral economic relationships. To do so, we should first consider where China is heading in the coming decades. The anticipation is that China will:
• Develop a greater consumer oriented economy
• Concentrate on higher valued manufacturing
• Reduce pollution and restore the damaged environment
• Place special emphasis on increasing availability of clean water
• Encourage more inland investments
• Increase regulatory transparency in banking and in securities market
• Improve the enforcement of intellectual property rights
• Improve efficient use of energy in cars, power plants, and others and develop alternative energy and coal gasification
One does not have to be a professional economist to see that each of the above represents opportunities for western technology and businesses and profitable participation while helping China accomplish its objectives. However, compared to the U.S., Japan enjoys certain comparative advantages that are difficult to overlook.
Japan is closer to China than America by about 10 hours in flight time. Common similarities in culture and language are leverage-able for Japan companies in China. I personally believe that many of consumer products developed for the Japanese market enjoy inside track in getting acceptance in China’s consumer markets.
There is a form of “reverse” outsourcing that Japanese companies may have not considered. Japanese companies are already outsourcing some IT related work to China but have they considered outsourcing call center work to young Japanese living in China? Some American companies are already hiring your Americans, Brits and Aussies living in Shanghai or Beijing to handle customer service calls. The advantage of this arrangement is that the expat in China get paid wages considered generous by local standards but still no where near an expat package of compensation. The irate customer gets to complain to someone that sounds right next door and not far away from India. The employer gets a good deal.
In my view, the biggest comparative advantage Japan has over American competition in China is Japan’s lack of a political agenda in dealing with China. Japan does not share America’s invasive zeal to judge how other countries honor human rights. Ordinary business transactions are not subjected to restrictive export control in such a way that it no longer becomes a transaction of equals but between adversaries.
Lastly, Japan is host to a large number of students from China. These students represent a significant resource to the future development of Japan if only Japan can figure out a way to recruit and keep them and let them know that they will be welcome to stay, and not as gaijins.
Since all of you in this audience are professional economists, I am sure you are aware that globalization leads to open markets. In trade, there is a buyer and a seller and the transaction has to be a fair deal for both. In other words, it has to be a win-win deal and such win-win arrangements have no impact and are not impacted by trade surpluses or deficits. There is nothing that says that each country must maintain a balanced trade with each bi-lateral trading partner. In fact, it is downright impossible to do so.
Ladies and Gentlemen, I apologize for prattling on like this. I touch on just some of the challenges of the three troubling trajectories but alas, I don’t have any sure fire solutions to offer. I do feel that these trajectories will keep China, Japan and the U.S. fully occupied for years to come without having to create artificial confrontations. Again I thank you for this opportunity to speak and I look forward to your questions and exchanging ideas with you. Thank you very much.
Ladies and gentlemen,
I am honored to be invited to speak before you at the world renowned Kyoto University and it is a distinct personal pleasure to be here. I have been to Kyoto a number of times but have always treasured my first visit. It was in October 1975, just a little over 32 years ago. I was on business for SRI International and my then colleague and now dear friend, Takaoka-san, took time out to show me Kyoto. He was then the executive director of SRI’s office in Asia. He was obviously proud of Kyoto and proud to be an alumnus of Kyoto U. And his pride made my visit that much more memorable.
I really enjoy traveling around the world. Each time and each place affords so many opportunities to learn about history, culture and the diversity of the people that populate our world. For example, my wife and I just spend ten days in Sicily, our very first visit there. I learned from this trip that Sicily was probably one of the earliest beneficiaries of ethnic diversity. You see, Sicily has rich soil constantly added by active volcanoes, lots of sun shine and a warm climate—a California of the Mediterranean. Many people came to settle there, Phoenicians, Greeks, Romans, Byzantines, Moors, Normans and now young Chinese selling souvenirs at tourist attractions. Each brought their culture and values to enrich Sicily and added to the island’s rich heritage.
I will be coming back to Sicily later in my talk. But I am here today to talk about China, Japan and the U.S. Except for elementary school education in China, I was educated in the U.S. and grew up in America. I have been visiting China regularly on business consulting assignments since 1978. I write commentaries about the sometimes troubled U.S. China bilateral relations. I think I know the two countries pretty well. I have been to Japan less frequently and can not claim to be an expert on Japan. So forgive me, if my presentation today appears unbalanced.
Nonetheless, I would like to take this opportunity to present some personal views that may sound blunt and direct. I hope you will forgive me if some of my statements sound untactful. My American upbringing is urging me to “tell it like it is,” and I would be remiss to pass up this chance to share some very serious concerns with this distinguished audience by obscuring my remarks in polite but ambiguous language. I hope you’ll find my remarks provocative but not offensive.
Some might argue whether China, Japan and the U.S. are the three major powers in the world, but there can be no doubt that they are the most important nations around Asia Pacific. Each shares many common interests but also has important differences in values and priorities. Each faces some ominous dark clouds in the horizon that I would like to discuss with you. The peace and stability of the Asia Pacific region depends on the three countries getting along with each other and staying in good health.
First, let’s talk about China. When I first went to China on business trips, late ‘70s to early ‘80s, just trying to place a phone call to make an appointment was a frustrating experience. There were so few telephone lines in Beijing in those days that I would get the busy signal even before I finished dialing the number. Today there are 500 million cellphone users in China and no bottlenecks at the switch boards.
In 1985, one of my clients, a maker of automotive components, celebrated the formation of a JV in China. That same year, Germany’s VW JV in Shanghai started production. At the time China’s total yearly production of motor vehicles was less half of million, most of them trucks and buses. Only 5000 passenger sedans were produced that year. In 2006, 21 years later, China’s vehicle production exceeded 7 million of which about 4.5 million are passenger cars. So vehicle production has increased more than 14 fold over this period of time while passenger cars grew by a phenomenal 900 times. China is now the third largest auto producing country in the world, after Japan and the U.S.
Today, everybody knows that China’s economy has been doubling every 7 years for nearly the last three decades. For a long time, skeptics found it hard to believe that this kind of unprecedented growth was possible and doubted the official statistics. They would point out that 28 out of 29 reporting provinces report their annual GDP growth as higher than the national average—clearly a mathematical impossibility. It was discovered later that the central government’s calculation for the national average was too low and less precise than the regional reports.
How did China accomplish such phenomenal growth? The full explanation is much more complicated than I can present today but I would like to outline a few highlights that I think were key developments.
In the early 1980’s, China removed the commune system in the rural sector. Farmers were essentially free to plant what they want and to pursue other livelihoods. Many, especially those living south of the Yangtze River became wealthy and even had time and energy to start small businesses. This was the beginning of the township and village enterprises which played an important role in China’s early economic reform.
Shortly after, China began a small experimental step and established a handful of special economic zones, most notably Shenzhen right next to Hong Kong. Hong Kong business took almost immediate advantage and moved their factories from Hong Kong to next door to maintain their competitive cost advantages. The whooshing sound that Ross Perot predicted for the U.S when North America Free Trade Agreement was signed, actually took place in Hong Kong, leaving many multi-storied factory buildings empty.
Following the Hong Kong businesses were business people from Taiwan and Southeast Asia, virtually all of them ethnic Chinese, who began to locate their manufacturing inside China. During this time, there was still much internal debate in Beijing between those wishing to remain with the planned economic model and those wishing to pry the economy wide open. One of the senior leaders was Chen Yun（陈云）who famously coined the term, “bird cage” economics （鸟笼经济）. The nation’s economy, Chen said, must be kept in the cage. Sometime the cage can be loose and other times tight but the economy must never be allowed to fly away.
In 1992, Deng Xiaoping decided to break the debate in favor of the free market proponents. He made the now famous tour of Shenzhen and declared that “to get rich is glorious.” And thus, China opened its doors wide and began to attract foreign direct investments at a rapidly increasing rate, first $30 billion at year, then $40 billion, $50 and now over $60 billion annually. Today, China has become the most open of market economies in the world and the most attractive magnet for foreign direct investment.
In terms of economic policy, China’s approach from Zhao Ziyang to Zhu Rongji to Wen Jiabao has been cautious, step by step and trial and error. “Crossing the stream by groping the stones,” another of Deng’s saying, describes the approach. The policy makers saw what happened to Soviet Union when they quickly adopted the western capitalism without the controls and thus imploded. Beijing looked to Singapore as their template for development and gradually loosened their control as the economy expanded.
In the early 1980’s China approached the World Bank for development loans. Unlike many 3rd world countries, China did not just want the money but also wanted to work with World Bank on the terms and conditions for those loans. Those terms and conditions, Beijing saw as a necessary learning process to establishing rules for internal control and to instilling financial discipline. To transition from a totally planned economy to a market economy, China needed outside guidance on rules, financial process and implementation of controls and they recognized the need and were willing to learn from outside sources. An interesting historical footnote is that the person that led the Chinese team in working with the World Bank was Zhu Rongji.
Subsequently, Zhu Rongji as premier dragged China into WTO over considerable internal opposition. He believed the discipline imposed on WTO treaty nations would be good for China and raise its competitiveness. By having to meet world competition, China would raise the quality of Chinese manufacturing and force inefficient factories out of business. The transition would be painful, as some 30 million or more for the workforce became under employed or unemployed. But give China credit, they have been willing to undergo short term pain for the long term benefits.
Today, China has become or will soon become the world’s third largest economy, amassed a foreign exchange reserve well over $1 trillion dollars, raised hundreds of millions out of the poverty line, and has become skillful in the exercise of soft power and making its presence felt in such places as Africa, South America and of course, the rest of Asia. Unfortunately, this is not the whole picture, but before discussing the dark side of China’s rise, I would like to summarize briefly what I think China has done right.
When China began its reform in 1978, the country had been cut off from the rest of the world for nearly 30 years. I believe their go-slow, trial and error approach to policy changes turned out to be the right approach. One aspect where the Beijing government did not go slow was recognizing early the importance of infrastructure investments. Not only the World Bank financing went toward infrastructure but Beijing even went into deficit spending to improve port facilities, increase power plants, double tracking of rails and construction of a network of superhighways. No other country, certainly not India, has made such a commitment to economic growth.
China is blessed with over 60 million ethnic Chinese living outside of the mainland including Taiwan. Many of these overseas Chinese, even if they are born outside of China, never lost their sense of identity and cultural ties to their motherland. Both the governments of Taiwan and Beijing go out of their way to encourage this sense of affiliation and kinship to their ancestral home. In turn, overseas Chinese including those living in Hong Kong were the first to invest in China. At the beginning of China’s reform before Deng’s southern tour of 1992, overseas Chinese investments were the major source of FDI. Taiwan investments, whether officially approved by their government or not, played a major role not only in job creation but in introducing to the mainland the methodology and approach needed to make consistently good quality products. (Some of you may be thinking, what about the recent rash of faulty products coming from China? Unfortunately, the propensity to take short cuts （上有政策，下有对策）is part of the Chinese character. I have a partial solution to this problem which we can discuss during the Q&A if you the audience is interested.)
For the last ten years, FDI has been coming from all over the world, Japan, S. Korea, the U.S. and Europe. Before then, it was mostly from overseas Chinese. No other country has this kind of diasporas to draw on with the possible exception of Israel. It was Beijing’s deliberate policy to risk letting a few Western flies in order to open its door wide open for foreign investment. Again, no other country has been as open or as successful.
Unfortunately, China followed the Western model of economic development without modification and failed to learn the price paid by all the predecessor nations that developed in that manner. Namely, it was economic growth without any regard to environmental consequences. Factories pollute, the society bears the cost and the common people paid the price in sickness and shortened life expectancy. Because of the size of China and the rapid rate of economic growth, the undesirable side effects are unfortunately magnified. The current generation of leaders is beginning to understand the grave consequences but have not found an effective way to deal with this problem. The more China’s economy expands, the darker is the air, dirtier the land and more toxic become the rivers and stream. The desertification of China has increased by 60% in 12 years. In 1994, 17.6% of China was desert. Now it is 27.5%. For those of us fortunate enough to enjoy fresh air, blue skies, clean water and green parks, this is a very depressing picture.
The reason this has become such a difficult problem for Beijing is their need to continue to expand their economy and create jobs to serve a huge population. The central government has made a deliberate policy to greatly increase college enrollment, an investment in human capital, but now they are faced with the need to find jobs that match with their training and aspirations, along with a range of new jobs over the entire economic spectrum. This drive to maintain economic growth is almost out of control. Local officials are still driven by how quickly their GDP is growing. Beijing has been trying to measure a “green” GDP by subtracting the environment damage and cost of remediation from the reported GDP, but so far they have not been able to find a way of calculating the down side of rampant economic growth and have not been able to convince the local officials to pay equal attention to environmental protection.
Today, any visitor to China, and one does not have to be an environmental scientist, can see the enormity of this problem and challenge. There is a real opportunity for Western technology to go into China and help restore the balance. Whether it’s the power plants or the motor vehicles, China is wasting a lot of energy and throwing off too many pollutants. China is already extremely water poor with only one quarter of the world average per capita and this problem will get worse. These are just a couple of areas where foreign technology can make a difference. Helping China remediate their environmental degradation not only can be profitable but is in our self interest. After all, the consequence of pollution respects no national boundaries.
Part of China’s problem is, of course, that it is not yet a rule based country. Too much latitude and inconsistency can take place when it is dependent on who has the authority. There is too much room for corrupt practices. China’s President Hu Jintao has again proclaimed a systematic crackdown on corruption at the recent People’s Congress. It remains to be seen how successful he will be. I think China is much too big for any central authority to be able to enforce anti-corrupt practices uniformly and effectively.
I do see help coming along in the form of the Internet and the cell phone. China recognized both as important communications tools and encouraged their growth while trying to control its use. I believe the flow of information will always outpace the authority’s attempt to monitor and restrict flow of information. Instead of control, I wish Beijing would find a way to channel the webpages, blogs, emails and sms in such a way as to bring more transparency to the country and allow the general population to shine the spotlight on the corrupt officials and wrong doers. Even if the central government does not encourage such practices, I think the use of these devices will inevitably increase, people’s voices will grow louder and the public will benefit.
Unlike the prevailing American sentiment, I do not believe a democratic form of government is necessarily the solution for China, certainly not the form of democracy that is being practiced in the United States today. In America, democracy is measured by the dollar sign. The likely success of a political candidate depends on the amount of money backing his/her candidacy. The first thing a candidate has to do, even running for the local dog catcher, is to raise money. Should the candidate be successful, the first thing after being elected is to raise more money, to ensure that as an incumbent, the candidate will not face a serious challenge for re-election.
In America, money has trumped all other aspects of the democratic process. The candidates themselves have to have a large war chest for TV ads but they are technically limited by the amount they can raise. Therefore, special interest groups compensate by raising unlimited amounts of money mostly for attack ads against candidates they do not like or issues they are against. These attack ads are unencumbered by facts and truths but deal with innuendos and outright lies. They can get away with lies with impunity, because they hide behind anonymous groups and storefront organizations.
In this environment, it is possible for a petty scam artist to make a lot of money for himself by posing as a big political donor. There is a case going on in America right now, a Norman Hsu who discovered that by giving investors’ money to cash hungry candidates in lieu of making legitimate investments, he became instantly respectable and have no trouble raising more money from others. There will always be con-artists but America’s current climate provides them the arena to make it big, albeit illegally. In short, the American democracy has drifted so far from the original ideals that the founding fathers would not recognize the country they founded.
The state of U.S. China bilateral relations is like a roller coaster riding on the rails of American domestic politics. Periodically, China becomes the convenient whipping boy for aspiring politicians who should know better but cannot resist the temptation to put the blame of American domestic problems on China. Trade deficit is just one example. In 1997, China accounted for 27% of America’s trade deficit while rest of East Asia, including Japan, accounted for another 47% for a total of 74%, almost ¾ of the overall U.S. deficit. In 2006, China accounted for 28% while rest of East Asia accounted for only 17% for a total of only 45%. A reasonable and objective observer would say that much of the manufacturing from East Asia has moved to China and that the ballooning trade deficit is due to fiscal policies of Washington and not because of any alleged predatory practices. However, the American propensity to spend beyond their earnings, the weak dollar, the barriers to export and other domestic causes are too difficult for politicians to tackle and it is just much easier to go on the podium and blame China for everything that is wrong.
For Washington (and for that matter for Tokyo) to feel threatened by China’s military expenditure is even more ludicrous. Former Secretary of Defense Rumsfeld made a fool of himself, when he, figuratively speaking, stood the deck of the American carrier off China’s coast line and accused China of aggressive intentions by daring to develop a navy with blue water capability. It will be years before China’s military firepower can match Japan’s technology and even longer to America. China has too much to do in their domestic agenda to entertain a confrontation with the U.S. However, one can understand China’s desire to continue their domestic agenda unmolested by foreign interference. Best assurance is to make sure they have a credible retaliatory strike capability. I would call it the porcupine defense.
I am absolutely convinced that the September 11 attack on the World Trade Center changed the course of world history. Just April of that year, the world was transfixed by the spy plane incident where a Chinese jet collided with an American air reconnaissance plane off Hainan Island. Thanks to the neoconservatives who had taken over Washington, China and the U.S. were on a collision course. After 9-11, Washington found a real enemy and China became a tenuous ally in the fight against terrorism instead of being the adversary of choice.
I don’t believe bin Laden in his wildest dream could have anticipated the success of 9-11 in unraveling America. Instead of finishing off the military task in Afghanistan, the Bush Administration allowed bin Laden to get away, charged into a war in Iraq and blundered the aftermath in the most appallingly incompetent manner. Thanks to Guantanamo and Abu Ghraib, the U.S. has lost all moral high grounds when it comes to human rights issues. The Bush Administration even invented a new terminology, “enemy combatant” in order to circumvent the Geneva Conventions—not being prisoners of war, the reasoning goes, means it was OK to deprive them of human rights and dignity. America’s message has become “do as I say, and not as I do.” American prestige world wide is at an all time low and Washington is finding out that even the world’s greatest military power cannot solve the world’s problems unilaterally and simply by relying on guns and bombs. Unless the next administration consists of capable, clear-eyed, non-ideologs willing to undo the damage of Iraq, I am afraid history will identify the Bush response to 9-11, not 9-11 itself but Bush response, to be the slippery slope of America’s decline. Of all the trajectories, this is the most troubling to me.
While visiting the city of Syracuse on Sicily, I learned an interesting history lesson. Syracuse was a powerful city state during the Greco period. In 413 BC, the invading Athenian navy was annihilated by Syracuse defenders which led to the decline of Athens and a relative peaceful period for Syracuse. For a brief while, Syracuse experimented with a form of democracy but then the people from Carthage came to invade Sicily. The people of Syracuse quickly elected Dionysius as their tyrant to lead them in the battle against the Carthaginians. Then as now, in times of war, people find comfort in relying on an authoritarian leader. I believe Bush’s advisors understood the psychology which is why he declared war on terror. Only difference is that Dionysius was a brilliant and effective leader.
Despite the gloomy future I see for America because of the self-inflicted injury by the Bush Administration, there are some inherent strengths that America possess that others can only envy. Thanks to a university system that continues to offer quality education, America remains the most desired destination for the best and brightest from all over the world. Right now, we are undergoing some back lash against immigrants, but by and large, America has had its welcome mat out for the best minds of the world. This is very important to America’s future because America’s school system below the college level is failing. Too many of the children born in America are not properly trained to face a future of high technology and globalization, instead they are getting an equal dose of pseudo sciences such as creationism and intelligent design along with biology and evolution.
Silicon Valley remains a beacon of strength for America. Silicon Valley continues to be the center of innovation because it continues to attract the world’s most entrepreneurial and talented people. As you may know, the two founders of Google are from Russia. One of the two founders of Yahoo is born in Taiwan. One of the original founders of Sun Microsystems who has become a high profile venture capitalist is from India. A Chinese who grew up in Vietnam then Hong Kong founded Lam Research a major semiconductor equipment company. A Chinese from Beijing who immigrated to South America, came to the U.S. for education founded Qume, a major printer company in its days. Silicon Valley is unlike any other parts of the United States. About 2% of the U.S. population resides in Silicon Valley and yet every year, around 30% of the all the venture capital is invested there. Why? Because this is where anybody with a bright idea has a chance to form a team and get financing, where failure in starting a venture is tolerated and counted as valuable experience. This tolerance for failure encourages people to take risks and think out of the box because they know that if they fail, it would not be the end of the world.
Can you see how my remarks so far is leading to what I am about to say about Japan? Historically, China and Japan have had a complicated relationship. For a long time, China was the teacher and Japan the student. Then in the 19th century, China became the student as the country began to send many of their brightest minds to Japan for further education and to learn how Japan was able to catch up to the Western powers so quickly. Many of these students such as Chiang Kai-shek became leaders of the revolution that overthrew the Manchu dynasty and led China into the republic form of government.
Then when economic reform began during the Deng Xiaoping era, Japan again became an important partner for China, not only for the loans on friendly terms but the opportunity to learn from Japan’s management style, particularly the just-in-time and continuous improvement manufacturing processes. Japanese trading companies were among the earliest to establish offices in China, not just in Beijing or Shanghai but quickly spread their presence to lower tiered cities. Matsushita established a manufacturing joint venture in Beijing even before China began the special economic zones. Nissan began a long relationship with Dongfeng Motors, at the time China’s largest automotive operation, and eventually formed a 50/50 joint venture. These are just some of the examples of the close economic and business cooperation between China and Japan and Japanese presence in China was generally earlier than the Americans or Western Europeans.
However, tensions between the two countries, and for that matter with rest of Asia, will persist until Japan rid itself of national amnesia concerning what happened in World War II. People of Japan have forgotten about the role of Imperial troops as brutal aggressors and only Hiroshima to remind them of being victims of the war. But other people especially in Asia have not forgotten about the war and will not sympathize with Japan’s self image. I believe it is in Japan’s national interest to face history forthrightly. Only then can other people forgive and begin to forget. Only then can future generations of Japanese travel around world and not be puzzled by the undertone of resentment. Japan has been the most generous nation in dispensing of foreign aid around the world, even more generous than the U.S., not counting American aid in weapons and arms. Surely Japan deserves to be a leading nation in the world and take a seat on the Security Council but I am very pessimistic that this will happen any time soon, not until Japan comes to terms with World War II.
Because of its single child policy to bring the population under control, China is facing a demographic challenge in a few decades when there will be fewer able bodied workforce to support an increasing population of retirees. Japan has a similar but more immediate problem. Japan’s population is already getting older and is the first developed nation to be shrinking. I am not a professional economist or a demographer and have no expertise in this subject area but I do have a remedy that might help reverse the trend. This remedy will be very difficult because it would require a drastic change in Japan’s national character. Here’s what I mean.
For centuries, Japan’s culture is insular, what I would call an island mentality. Only some people living on the islands qualify as Japanese—not the Ainu, for instance, and not ethnic Koreans who have been here for many generations. Even a Japanese national, say a trading company executive who has been posted overseas for a few years, when he returns, his family is often treated as gaijins (外人) by neighbors and schoolmates. In Japan, it seems to be very easy to be gaijins and very difficult to be accepted as Nihonjin. Yet at this juncture in history, Japan’s economy is in need of new blood, new people that can bring new ideas and new vigor. Japan needs to open up and welcome other nationalities to live and work in Japan, needs to create an environment that make these foreigners feel welcome and not feel like gaijins. China actively recruits overseas Chinese to return to China and has programs that invite foreign experts of any ethnicity to teach and work in China. The U.S. and especially Silicon Valley does not have any organized program, just an appealing, multi-ethnic and diverse environment where anybody from anywhere in the world could come and feel at home. In my humble opinion, it would be in Japan’s interest to review whether a systemic change in national attitude is possible and would be in the best interest of Japan. In just the recent memory, Japan transformed from a country that makes shoddy products to one known for the Deming Prize and famous all over the world for high quality, high precision products. Perhaps it’s time for another dramatic transformation.
Before concluding my talk, I have been asked to specifically comment on possible impact of the three trajectories on the tri-lateral economic relationships. To do so, we should first consider where China is heading in the coming decades. The anticipation is that China will:
• Develop a greater consumer oriented economy
• Concentrate on higher valued manufacturing
• Reduce pollution and restore the damaged environment
• Place special emphasis on increasing availability of clean water
• Encourage more inland investments
• Increase regulatory transparency in banking and in securities market
• Improve the enforcement of intellectual property rights
• Improve efficient use of energy in cars, power plants, and others and develop alternative energy and coal gasification
One does not have to be a professional economist to see that each of the above represents opportunities for western technology and businesses and profitable participation while helping China accomplish its objectives. However, compared to the U.S., Japan enjoys certain comparative advantages that are difficult to overlook.
Japan is closer to China than America by about 10 hours in flight time. Common similarities in culture and language are leverage-able for Japan companies in China. I personally believe that many of consumer products developed for the Japanese market enjoy inside track in getting acceptance in China’s consumer markets.
There is a form of “reverse” outsourcing that Japanese companies may have not considered. Japanese companies are already outsourcing some IT related work to China but have they considered outsourcing call center work to young Japanese living in China? Some American companies are already hiring your Americans, Brits and Aussies living in Shanghai or Beijing to handle customer service calls. The advantage of this arrangement is that the expat in China get paid wages considered generous by local standards but still no where near an expat package of compensation. The irate customer gets to complain to someone that sounds right next door and not far away from India. The employer gets a good deal.
In my view, the biggest comparative advantage Japan has over American competition in China is Japan’s lack of a political agenda in dealing with China. Japan does not share America’s invasive zeal to judge how other countries honor human rights. Ordinary business transactions are not subjected to restrictive export control in such a way that it no longer becomes a transaction of equals but between adversaries.
Lastly, Japan is host to a large number of students from China. These students represent a significant resource to the future development of Japan if only Japan can figure out a way to recruit and keep them and let them know that they will be welcome to stay, and not as gaijins.
Since all of you in this audience are professional economists, I am sure you are aware that globalization leads to open markets. In trade, there is a buyer and a seller and the transaction has to be a fair deal for both. In other words, it has to be a win-win deal and such win-win arrangements have no impact and are not impacted by trade surpluses or deficits. There is nothing that says that each country must maintain a balanced trade with each bi-lateral trading partner. In fact, it is downright impossible to do so.
Ladies and Gentlemen, I apologize for prattling on like this. I touch on just some of the challenges of the three troubling trajectories but alas, I don’t have any sure fire solutions to offer. I do feel that these trajectories will keep China, Japan and the U.S. fully occupied for years to come without having to create artificial confrontations. Again I thank you for this opportunity to speak and I look forward to your questions and exchanging ideas with you. Thank you very much.
Thursday, November 15, 2007
Yahoo Takes Hit Meant for China
Editor’s Note: U.S. Congress’ attempt to penalize Internet giant Yahoo is just collateral damage in the real political battle it is waging on China, asserts NAM contributor George Koo. (First appeared in www.newamericamedia.org)
No matter what the U.S. Congress will have us believe, Yahoo CEO Jerry Yang was just the proxy for Congressman Tom Lantos to vent his anti-China demagoguery, in the controversy involving Yahoo’s turning over Internet usage data to Chinese officials.
At a Congressional hearing on Foreign Affairs chaired by the Democratic Congressman from California, Lantos denounced Yahoo and CEO Jerry Yang as “moral pygmies” for turning over the data.
Yahoo’s office in Hong Kong allegedly complied with China’s official request for records that would identify the sender of messages forbidden by the Chinese government. Consequently, Chinese journalist Shi Tao was apprehended and sent to jail.
At the televised hearing, the grief- stricken mother of the jailed journalist sat behind Yang throughout his testimony.
Lantos’ grandstanding, captured in full by the TV cameras, was as dramatic as Nikita Khrushchev pounding his shoe at the U.N. general assembly nearly 40 years ago.
Of course, Lantos is well known as the defender of human rights and a critic of China’s policies and practices. Yang was just the proxy for Lantos to vent his anti-China demagoguery.
Unfortunately, members of the U.S. Congress aren’t exactly “moral giants” when it comes to defending America’s own human rights and principles we hold dear.
Lantos led the inquiries into the horrors of Abu Ghraib; but when the Bush administration decided to stonewall Congress, Lantos and his fellow pygmies quietly went away.
Shortly before the Yahoo hearing, Lantos received a group of Dutch legislators after they toured Guantanamo. They suggested that the prison base “symbolizes everything that is wrong with this war on terror.”
One would expect a defender of human rights to agree, but Lantos was indignant. He said that Europe was not as outraged by Auschwitz as by Guantanamo Bay. (At least he seemed to recognize that atrocities had been committed in both.)
Apparently, this eager defender of China’s human rights has been clueless about the abuses committed by his own homeland. By declaring war on terror, Bush has successfully pulled the wool over a Congress that should know better.
In coining the term “enemy combatant,” the Bush administration has found a technicality to incarcerate prisoners indefinitely without semblance of any human dignity and due process. The U.S. Congress has simply gone along.
Now Congress is in the process of legalizing the wholesale deprivation of Americans’ civil liberties: AT&T will be allowed to eavesdrop, free from legal liability, and turn in e-mail traffic to the Department of Homeland Security.
The reasoning is that we Americans should be willing to give up some liberties in exchange for a more secure homeland.
The difference between the United States and China is that China asked for Internet data on select citizens, while the United States spied on its people without asking.
The United States, meanwhile, claims that the central difference between the two nations is that China is guilty of human rights abuses that would be unthinkable here. Unfortunately, when it comes to human rights abuses, China and the United States have more in common than we would like to admit. There is no limit to how hypocrisy can cloud one’s sense of right and wrong.
No matter what the U.S. Congress will have us believe, Yahoo CEO Jerry Yang was just the proxy for Congressman Tom Lantos to vent his anti-China demagoguery, in the controversy involving Yahoo’s turning over Internet usage data to Chinese officials.
At a Congressional hearing on Foreign Affairs chaired by the Democratic Congressman from California, Lantos denounced Yahoo and CEO Jerry Yang as “moral pygmies” for turning over the data.
Yahoo’s office in Hong Kong allegedly complied with China’s official request for records that would identify the sender of messages forbidden by the Chinese government. Consequently, Chinese journalist Shi Tao was apprehended and sent to jail.
At the televised hearing, the grief- stricken mother of the jailed journalist sat behind Yang throughout his testimony.
Lantos’ grandstanding, captured in full by the TV cameras, was as dramatic as Nikita Khrushchev pounding his shoe at the U.N. general assembly nearly 40 years ago.
Of course, Lantos is well known as the defender of human rights and a critic of China’s policies and practices. Yang was just the proxy for Lantos to vent his anti-China demagoguery.
Unfortunately, members of the U.S. Congress aren’t exactly “moral giants” when it comes to defending America’s own human rights and principles we hold dear.
Lantos led the inquiries into the horrors of Abu Ghraib; but when the Bush administration decided to stonewall Congress, Lantos and his fellow pygmies quietly went away.
Shortly before the Yahoo hearing, Lantos received a group of Dutch legislators after they toured Guantanamo. They suggested that the prison base “symbolizes everything that is wrong with this war on terror.”
One would expect a defender of human rights to agree, but Lantos was indignant. He said that Europe was not as outraged by Auschwitz as by Guantanamo Bay. (At least he seemed to recognize that atrocities had been committed in both.)
Apparently, this eager defender of China’s human rights has been clueless about the abuses committed by his own homeland. By declaring war on terror, Bush has successfully pulled the wool over a Congress that should know better.
In coining the term “enemy combatant,” the Bush administration has found a technicality to incarcerate prisoners indefinitely without semblance of any human dignity and due process. The U.S. Congress has simply gone along.
Now Congress is in the process of legalizing the wholesale deprivation of Americans’ civil liberties: AT&T will be allowed to eavesdrop, free from legal liability, and turn in e-mail traffic to the Department of Homeland Security.
The reasoning is that we Americans should be willing to give up some liberties in exchange for a more secure homeland.
The difference between the United States and China is that China asked for Internet data on select citizens, while the United States spied on its people without asking.
The United States, meanwhile, claims that the central difference between the two nations is that China is guilty of human rights abuses that would be unthinkable here. Unfortunately, when it comes to human rights abuses, China and the United States have more in common than we would like to admit. There is no limit to how hypocrisy can cloud one’s sense of right and wrong.
Saturday, September 29, 2007
The Not so Strange Case of Norman Hsu
Editor's Note: Democratic fundraiser Norman Hsu's Chinese roots has attracted much attention after his financial shenanigans came to light. But New America Media commentator George Koo says Hsu's story is really an age-old American story.George Koo is an international business consultant and occasional contributor to New America Media. (First appeared in www.newamericamedia.org.)
Confidence man Norman Hsu drew the attention of the media on an otherwise slow summer by living the American dream and following the American way. He did this by giving away lots of other people’s money to politicians.
Until his unsavory past came to light, he was touted as a master bundler. After his expose, he went back to being just a petty con-artist who found the secrets to big times.
As anyone running Ponzi scheme can tell you, you have to bait your scheme by giving away money to early investors in order to establish credibility. Hsu’s action was a grand variation of the theme. Namely, he gave money to politicians and gained even greater credibility, instantly.
When the news first broke about the bundler’s prowess, the mystery was Hsu’s source of funds. Rush Limbaugh rushed to condemn China as the source of illicit funds. The actual truth turned out to be much more mundane. Hsu took investor’s funds and apparently gave some away in the form of political contributions.
Even though he was described as wanting nothing from the politicians for his financial support, he parlayed his hobnobbing with the famous and powerful into an aura of legitimacy that helped raised millions for various dubious schemes.
Mainstream media focused on Hsu’s Chinese from Hong Kong background as if his ethnicity merited heightened interest. Actually, there was nothing exotic about his story. He was following the American way.
To ask what is the American way is the same as asking why politicians flock towards the rich and famous. Because the rich and famous can write big checks and can influence others to do the same. If they are really good at it, they are called bundlers. If they step over the line and violate the law, they become launderers.
Conversely, those wishing to be rich and famous but cannot write big checks can spend their energy hustling for contributors in hopes of being recognized as bundlers. Successful bundlers get recognition and status. If the candidates they support get elected, they get appointed to positions in the government. At the very least, they get access and can claim to have influence in high places.
This is the American democracy in action. It’s all about money. To get elected, the candidate has to raise lots of money. Once elected, the successful candidate has to raise more money so as to scare potential rivals into not running against him or her again. The strength of any candidacy was measured by the amount money raised.
In less than one generation, the American democratic process has undergone a drastic transformation. Grass roots, door-to-door volunteers have gone extinct, replaced by professional telemarketers trolling for dollars. Neighborhood coffee klatches to meet the candidates now come with obvious strings where highest level donors get quality face time with the candidate and perhaps a photo op. Candidates now pay lip service to public forum where issues are discussed. Instead they favor artfully created spots on TV to present their best side to the public.
Today only money talks. Hsu simply used the system to create a new persona for himself. Others have done the same before him and others will follow. If they are not ethnic Asian, they will not be noticed.
Media’s attention has focused on the scoundrel but not the system that makes such scoundrels possible. Yet it is the system that is corrupt. In America, democracy is no longer one person one vote. It is $1 million (or some amount depending on the office but increasing with every election) one vote. It is not possible to run for local city council without raising a lot of money. Small wonder, public interest and voter participation is declining.
It’s laughable to go around the world telling others to be more democratic and be more like us when our system is badly broken and not one any other country would wish to emulate.
Confidence man Norman Hsu drew the attention of the media on an otherwise slow summer by living the American dream and following the American way. He did this by giving away lots of other people’s money to politicians.
Until his unsavory past came to light, he was touted as a master bundler. After his expose, he went back to being just a petty con-artist who found the secrets to big times.
As anyone running Ponzi scheme can tell you, you have to bait your scheme by giving away money to early investors in order to establish credibility. Hsu’s action was a grand variation of the theme. Namely, he gave money to politicians and gained even greater credibility, instantly.
When the news first broke about the bundler’s prowess, the mystery was Hsu’s source of funds. Rush Limbaugh rushed to condemn China as the source of illicit funds. The actual truth turned out to be much more mundane. Hsu took investor’s funds and apparently gave some away in the form of political contributions.
Even though he was described as wanting nothing from the politicians for his financial support, he parlayed his hobnobbing with the famous and powerful into an aura of legitimacy that helped raised millions for various dubious schemes.
Mainstream media focused on Hsu’s Chinese from Hong Kong background as if his ethnicity merited heightened interest. Actually, there was nothing exotic about his story. He was following the American way.
To ask what is the American way is the same as asking why politicians flock towards the rich and famous. Because the rich and famous can write big checks and can influence others to do the same. If they are really good at it, they are called bundlers. If they step over the line and violate the law, they become launderers.
Conversely, those wishing to be rich and famous but cannot write big checks can spend their energy hustling for contributors in hopes of being recognized as bundlers. Successful bundlers get recognition and status. If the candidates they support get elected, they get appointed to positions in the government. At the very least, they get access and can claim to have influence in high places.
This is the American democracy in action. It’s all about money. To get elected, the candidate has to raise lots of money. Once elected, the successful candidate has to raise more money so as to scare potential rivals into not running against him or her again. The strength of any candidacy was measured by the amount money raised.
In less than one generation, the American democratic process has undergone a drastic transformation. Grass roots, door-to-door volunteers have gone extinct, replaced by professional telemarketers trolling for dollars. Neighborhood coffee klatches to meet the candidates now come with obvious strings where highest level donors get quality face time with the candidate and perhaps a photo op. Candidates now pay lip service to public forum where issues are discussed. Instead they favor artfully created spots on TV to present their best side to the public.
Today only money talks. Hsu simply used the system to create a new persona for himself. Others have done the same before him and others will follow. If they are not ethnic Asian, they will not be noticed.
Media’s attention has focused on the scoundrel but not the system that makes such scoundrels possible. Yet it is the system that is corrupt. In America, democracy is no longer one person one vote. It is $1 million (or some amount depending on the office but increasing with every election) one vote. It is not possible to run for local city council without raising a lot of money. Small wonder, public interest and voter participation is declining.
It’s laughable to go around the world telling others to be more democratic and be more like us when our system is badly broken and not one any other country would wish to emulate.
Thursday, July 26, 2007
FBI's Fixation on China
Earlier this July, the San Francisco Chronicle reported the stir among the Chinese American community caused by FBI placing small ads in San Francisco-based Chinese language newspapers looking to recruit informants.
The ads read in part that FBI was interested in talking to individuals with information about intelligence matters with the potential to harm our country. The ad went on to say, “We especially welcome anyone with information on China’s State Security Bureau.”
Since then, sensational articles about the FBI and espionage from China have rippled across America including front page articles in USA Today. The common thread seemed to be that Chinese spies have infiltrated every walks of the American society. Yet actual cases cited to support the imagery of rampant spying were invariably less than meet the eye.
Despite running ads only in ethnic papers, FBI spokesman reassured members of the media, "This is very similar to what we do in every aspect of our operation -- identify individuals who have information." No one asked the FBI as to why their ads were not placed in the mainstream where the solicitation would reach a much larger audience.
Last summer, in a BBC interview, the FBI agent in charge of Silicon Valley had no trouble identifying China as the major threat. Don Pryzbyla was quoted as saying, “The majority are coming from China. They are using a shot-gun approach, flooding the Silicon Valley with engineers and scientists.”
"The Chinese have found success in obtaining the technology essentially through stealing. Once successful they'll send more people over to do the same thing," Pryzbyla goes on the say. Given that mindset, FBI is merely acting on their belief. Namely, they need to stop a massive network of Chinese spies running wild in Silicon Valley.
Of course, the FBI has a long history of regarding China as America’s foremost enemy dating back to J. Edgar Hoover, the founding director of the bureau. Hoover popularized the idea that China conducted espionage differently relying on the so-called “grains of sand” approach to gathering intelligence.
According to this theory, every ethnic Chinese could be a potential spy, gathering tidbits of information to send them back to Beijing where they were assembled and re-constituted into devastating secrets. (Imagine some group toiling in the basement of the Public Security Bureau patiently pasting column-inches of information collected from the transom and wham, secrets of nanotechnology unveiled.) The impracticality of this inefficient way of spying is obvious to those working in the technology industry, but apparently not to the FBI.
Whether dealing with one of its own employees or a suspect, the FBI holds the Chinese American to a different standard. To the FBI, all Chinese are perpetual foreigners and are presumed guilty until proven innocent--matters not whether the person is American born or first generation, if the person is American citizen or a foreign national from China.
Katrina Leung was FBI's highly prized asset for many years but once the bedroom romp with her handler, JJ Smith, was exposed, she was quickly branded a double agent. Code named “Parlor Maid,” she was the subject of the PBS Frontline expose on national TV but in the end, she was released from custody and all charges related to spying dismissed.
The Denise Woo case was even more remarkable. Woo was a highly commended FBI agent when she was asked by the special agent in charge, the same JJ Smith, to spy on another Chinese American.
She reported back that the suspect was an American born Chinese that spoke no Chinese and have not been any closer to China than Hawaii. But, she reported, the reliability of the informer pointing his finger at the Chinese American was shaky and may have another agenda. In response to Woo’s report, a chagrined FBI decided to indict her with 5 felony counts for allegedly abetting an enemy agent. Her case closed recently with her pleading to a misdemeanor charge to get on with her life.
Dr. Wen Ho Lee, then employed at Los Alamos, was in solitary confinement for nine months based on FBI evidence. The case blew up when the FBI agent in charge could not substantiate the charges under cross examination and had to attribute inconsistencies in his testimony to “honest mistakes.” The appalled presiding judge, in an unprecedented gesture, apologized to Lee on behalf of the United States government before dismissing the case.
The FBI will go to any length to get a conviction. Recently they caught Chi Mak red handed, ready to send back to China a CD of his own papers. Since the papers were already in the public domain, they couldn’t charge him as a master spy, as represented to the media, but for failing to register as an agent for China.
The FBI has a habit of sensationalize each case involving Chinese Americans and seemed not at all embarrassed when the outcome of their cases ends in a whimper. They just demonize the Chinese Americans further by attributing the lack of success to the slipperiness of their suspects.
A question we may well ask: Given their bias and prejudices, how much confidence do we have that the FBI possess the clear-headed objectivity to counter terrorists and protect America's homeland?
The ads read in part that FBI was interested in talking to individuals with information about intelligence matters with the potential to harm our country. The ad went on to say, “We especially welcome anyone with information on China’s State Security Bureau.”
Since then, sensational articles about the FBI and espionage from China have rippled across America including front page articles in USA Today. The common thread seemed to be that Chinese spies have infiltrated every walks of the American society. Yet actual cases cited to support the imagery of rampant spying were invariably less than meet the eye.
Despite running ads only in ethnic papers, FBI spokesman reassured members of the media, "This is very similar to what we do in every aspect of our operation -- identify individuals who have information." No one asked the FBI as to why their ads were not placed in the mainstream where the solicitation would reach a much larger audience.
Last summer, in a BBC interview, the FBI agent in charge of Silicon Valley had no trouble identifying China as the major threat. Don Pryzbyla was quoted as saying, “The majority are coming from China. They are using a shot-gun approach, flooding the Silicon Valley with engineers and scientists.”
"The Chinese have found success in obtaining the technology essentially through stealing. Once successful they'll send more people over to do the same thing," Pryzbyla goes on the say. Given that mindset, FBI is merely acting on their belief. Namely, they need to stop a massive network of Chinese spies running wild in Silicon Valley.
Of course, the FBI has a long history of regarding China as America’s foremost enemy dating back to J. Edgar Hoover, the founding director of the bureau. Hoover popularized the idea that China conducted espionage differently relying on the so-called “grains of sand” approach to gathering intelligence.
According to this theory, every ethnic Chinese could be a potential spy, gathering tidbits of information to send them back to Beijing where they were assembled and re-constituted into devastating secrets. (Imagine some group toiling in the basement of the Public Security Bureau patiently pasting column-inches of information collected from the transom and wham, secrets of nanotechnology unveiled.) The impracticality of this inefficient way of spying is obvious to those working in the technology industry, but apparently not to the FBI.
Whether dealing with one of its own employees or a suspect, the FBI holds the Chinese American to a different standard. To the FBI, all Chinese are perpetual foreigners and are presumed guilty until proven innocent--matters not whether the person is American born or first generation, if the person is American citizen or a foreign national from China.
Katrina Leung was FBI's highly prized asset for many years but once the bedroom romp with her handler, JJ Smith, was exposed, she was quickly branded a double agent. Code named “Parlor Maid,” she was the subject of the PBS Frontline expose on national TV but in the end, she was released from custody and all charges related to spying dismissed.
The Denise Woo case was even more remarkable. Woo was a highly commended FBI agent when she was asked by the special agent in charge, the same JJ Smith, to spy on another Chinese American.
She reported back that the suspect was an American born Chinese that spoke no Chinese and have not been any closer to China than Hawaii. But, she reported, the reliability of the informer pointing his finger at the Chinese American was shaky and may have another agenda. In response to Woo’s report, a chagrined FBI decided to indict her with 5 felony counts for allegedly abetting an enemy agent. Her case closed recently with her pleading to a misdemeanor charge to get on with her life.
Dr. Wen Ho Lee, then employed at Los Alamos, was in solitary confinement for nine months based on FBI evidence. The case blew up when the FBI agent in charge could not substantiate the charges under cross examination and had to attribute inconsistencies in his testimony to “honest mistakes.” The appalled presiding judge, in an unprecedented gesture, apologized to Lee on behalf of the United States government before dismissing the case.
The FBI will go to any length to get a conviction. Recently they caught Chi Mak red handed, ready to send back to China a CD of his own papers. Since the papers were already in the public domain, they couldn’t charge him as a master spy, as represented to the media, but for failing to register as an agent for China.
The FBI has a habit of sensationalize each case involving Chinese Americans and seemed not at all embarrassed when the outcome of their cases ends in a whimper. They just demonize the Chinese Americans further by attributing the lack of success to the slipperiness of their suspects.
A question we may well ask: Given their bias and prejudices, how much confidence do we have that the FBI possess the clear-headed objectivity to counter terrorists and protect America's homeland?
Friday, June 8, 2007
Tangshan promises to play a key role in China’s future
Before Shanghai （上海）, there was Tangshan （唐山）; after Pudong （浦东）, there will be Caofeidian （曹妃店）. This statement neatly encapsulates China’s past, present and future in economic development.
In the late 19th century, Li Hongzhang （李鸿璋）, a senior official of a decaying imperial court ruling a China repeatedly pummeled by the western powers, selected Tangshan as the first site for modern industrial development. Tangshan had the advantage of proximity to coal, iron ore and seaport. Organized mining began there in 1878. First locomotive engine in China was built there, first cement made there and first standard gauge railway laid there. Government leaders, including Dr. Sun Yat-sen （孙中山） who overthrew the Manchu dynasty, regularly conducted inspection tours to Tangshan. It was the place to be seen in a way Shanghai is today.
Tangshan was the site of a 7.8 Richter scale earthquake with the epic center right beneath the heart of the city in July 1976. The city was leveled. As much as one-quarter of the population perished in the pre-dawn quake. Officials told us that Beijing’s Zhongnanhai （中南海） heard about it within minutes by radio from some hero who stood by his station to continue to broadcast the disaster despite tremors and shaking buildings. Another band of men jumped onto their truck and careened their way to Beijing to report in person.
Zhongnanhai mobilized the PLA （解放军）who descended to the devastated area and rescued 450,000 dazed survivors within first 20 hours. They went to Tangshan in such haste that first arrivals did not bring shovels and dug with their bare hands. Some with fingers so raw that they saw exposed finger bones. They eventually recovered 130,000 injured which had to be divided and flown to hospitals in other city centers, some as far as Guangzhou （广州）. We actually met one survivor, now a government official, who was treated for three months in a Xian （西安） hospital. He survived by jumping out of his 2nd floor bedroom before the building came down. There were virtually no survivors who did not lose one or more members of their immediate family. Some 4300 orphans were collected and about 700 had no related kin to take them and were adopted by others in China.
Besides the rescue effort, planes repeated swooped down and disinfected the devastated area with chemicals for the next ten days. The result was that not a fly could be found and there were no case of disease outbreak. How did the living take to the exposure? One Mr. Han, a master of local shadow puppet show, said, "Look at me, I am 76 and I do not suffer from any after effects." He actually looked real young for 76. Before the shock of the earthquake hit, he told of first hearing a rumble followed by brilliant flashes of light which he called diguang（地光).
Tangshan has been rebuilt and there is nothing remain of the old Tangshan except a museum has been built to memorialize the catastrophe and one building that toppled was preserved. The building was a library of Hebei Polytechnic University （河北理工大学） just completed and had not been occupied when the earthquake struck. The building was of special interest because three different kinds of earthquake damage can be seen from one location. One part of the building flopped side ways. The second floor of another part of the building folded right on top of the first and became the ground floor. I can't recall the third kind of failure.
As we toured this display and the museum, we were making mental contrast with the Katrina experience. The key difference was that Tangshan had no warning of the devastation about to be visited on the city while New Orleans had days to brace itself. It took China about a decade to rebuild Tangshan. The relative strength of China's economy was considerably weaker than the U.S. in 2005 when Katrina struck.
At the time of Tangshan’s 19th century industrialization, Shanghai was forcibly opened wide by the Europeans and became a cosmopolitan city associated with sin and decadence. Today, of course, Shanghai is the crown jewel symbolizing the nexus of China’s miraculous economic recovery and breathtaking growth. Shanghai’s success has been in a major part due to the development of Pudong, formerly a sleepy piece of farm land across the Huangpu River （黄浦江） many times larger than the established commercial area of Puxi （浦西）across the Huangpu.
By now, Pudong’s decade-long transformation into a commercial and industrial hub is well known to the world. The latest investment is the offshore Yangshan （杨山） deepwater port facility based on islands connected to the Pudong mainland by the 20-mile long Donghai Bridge （东海桥） over open water. Spectacular as that may be, Tangshan’s Caofeidian promises to top Pudong in years to come. Caofeidian is a sandbar, visible only in low tide, which is being enlarged by fill to create a man-made island that will eventually reach the size of half of a Singapore （新加坡）. Located next to a sea trench, 30 to 60 meters in depth, Caofeidian is a natural harbor with more than twice the depth of Yangshan.
Six hundred thousand ton ships will be able to dock directly with no transfer of cargo to smaller ships needed. The facility will handle minerals, oil, coal and containers to serve as the major seaport in north China and to serve the growing steel and petrochemical complexes moving to Caofeidian. Some of the facilities are already in place and working. Huge pipes continue to spew sand from the sea to fill the land and workers are busily planting trees on land already formed.
According to official spokesperson, a total of 200 billion RMB will pour into Caofeidian by 2010. Since Caofeidian is a 25-year project, my guess is that the total investment will eventually top a trillion Yuan, or in excess of $130 billion. Not one Yuan of this investment is coming from outside of China.
Yangshan and Caofeidian are the most visible indicators of China’s confidence in its economic future and the vast internal resources at its disposal to back up that confidence. Today with Caofeidian and a newly discovered major oil field in nearby shallow waters, Tangshan is taking its place as part of the North China economic juggernaut along with Beijing and Tianjin.
Dr. Sun Yat-sen was the first to see the potential and thought Caofeidian would make an excellent depot for naval warships. Contrary to his military vision, Tangshan has become the latest example of China’s headlong plunge into economic development, an attitude not apparently understood by U.S. Department of Defense or by U.S. Congress as they continue to view China as an adversary.
In the late 19th century, Li Hongzhang （李鸿璋）, a senior official of a decaying imperial court ruling a China repeatedly pummeled by the western powers, selected Tangshan as the first site for modern industrial development. Tangshan had the advantage of proximity to coal, iron ore and seaport. Organized mining began there in 1878. First locomotive engine in China was built there, first cement made there and first standard gauge railway laid there. Government leaders, including Dr. Sun Yat-sen （孙中山） who overthrew the Manchu dynasty, regularly conducted inspection tours to Tangshan. It was the place to be seen in a way Shanghai is today.
Tangshan was the site of a 7.8 Richter scale earthquake with the epic center right beneath the heart of the city in July 1976. The city was leveled. As much as one-quarter of the population perished in the pre-dawn quake. Officials told us that Beijing’s Zhongnanhai （中南海） heard about it within minutes by radio from some hero who stood by his station to continue to broadcast the disaster despite tremors and shaking buildings. Another band of men jumped onto their truck and careened their way to Beijing to report in person.
Zhongnanhai mobilized the PLA （解放军）who descended to the devastated area and rescued 450,000 dazed survivors within first 20 hours. They went to Tangshan in such haste that first arrivals did not bring shovels and dug with their bare hands. Some with fingers so raw that they saw exposed finger bones. They eventually recovered 130,000 injured which had to be divided and flown to hospitals in other city centers, some as far as Guangzhou （广州）. We actually met one survivor, now a government official, who was treated for three months in a Xian （西安） hospital. He survived by jumping out of his 2nd floor bedroom before the building came down. There were virtually no survivors who did not lose one or more members of their immediate family. Some 4300 orphans were collected and about 700 had no related kin to take them and were adopted by others in China.
Besides the rescue effort, planes repeated swooped down and disinfected the devastated area with chemicals for the next ten days. The result was that not a fly could be found and there were no case of disease outbreak. How did the living take to the exposure? One Mr. Han, a master of local shadow puppet show, said, "Look at me, I am 76 and I do not suffer from any after effects." He actually looked real young for 76. Before the shock of the earthquake hit, he told of first hearing a rumble followed by brilliant flashes of light which he called diguang（地光).
Tangshan has been rebuilt and there is nothing remain of the old Tangshan except a museum has been built to memorialize the catastrophe and one building that toppled was preserved. The building was a library of Hebei Polytechnic University （河北理工大学） just completed and had not been occupied when the earthquake struck. The building was of special interest because three different kinds of earthquake damage can be seen from one location. One part of the building flopped side ways. The second floor of another part of the building folded right on top of the first and became the ground floor. I can't recall the third kind of failure.
As we toured this display and the museum, we were making mental contrast with the Katrina experience. The key difference was that Tangshan had no warning of the devastation about to be visited on the city while New Orleans had days to brace itself. It took China about a decade to rebuild Tangshan. The relative strength of China's economy was considerably weaker than the U.S. in 2005 when Katrina struck.
At the time of Tangshan’s 19th century industrialization, Shanghai was forcibly opened wide by the Europeans and became a cosmopolitan city associated with sin and decadence. Today, of course, Shanghai is the crown jewel symbolizing the nexus of China’s miraculous economic recovery and breathtaking growth. Shanghai’s success has been in a major part due to the development of Pudong, formerly a sleepy piece of farm land across the Huangpu River （黄浦江） many times larger than the established commercial area of Puxi （浦西）across the Huangpu.
By now, Pudong’s decade-long transformation into a commercial and industrial hub is well known to the world. The latest investment is the offshore Yangshan （杨山） deepwater port facility based on islands connected to the Pudong mainland by the 20-mile long Donghai Bridge （东海桥） over open water. Spectacular as that may be, Tangshan’s Caofeidian promises to top Pudong in years to come. Caofeidian is a sandbar, visible only in low tide, which is being enlarged by fill to create a man-made island that will eventually reach the size of half of a Singapore （新加坡）. Located next to a sea trench, 30 to 60 meters in depth, Caofeidian is a natural harbor with more than twice the depth of Yangshan.
Six hundred thousand ton ships will be able to dock directly with no transfer of cargo to smaller ships needed. The facility will handle minerals, oil, coal and containers to serve as the major seaport in north China and to serve the growing steel and petrochemical complexes moving to Caofeidian. Some of the facilities are already in place and working. Huge pipes continue to spew sand from the sea to fill the land and workers are busily planting trees on land already formed.
According to official spokesperson, a total of 200 billion RMB will pour into Caofeidian by 2010. Since Caofeidian is a 25-year project, my guess is that the total investment will eventually top a trillion Yuan, or in excess of $130 billion. Not one Yuan of this investment is coming from outside of China.
Yangshan and Caofeidian are the most visible indicators of China’s confidence in its economic future and the vast internal resources at its disposal to back up that confidence. Today with Caofeidian and a newly discovered major oil field in nearby shallow waters, Tangshan is taking its place as part of the North China economic juggernaut along with Beijing and Tianjin.
Dr. Sun Yat-sen was the first to see the potential and thought Caofeidian would make an excellent depot for naval warships. Contrary to his military vision, Tangshan has become the latest example of China’s headlong plunge into economic development, an attitude not apparently understood by U.S. Department of Defense or by U.S. Congress as they continue to view China as an adversary.
Thursday, May 17, 2007
Warning to Chinese Americans: FBI Still Obsessed With Chinese-American ‘Spies’
New America Media, Commentary, George Koo, Posted: May 17, 2007
Editor’s Note: A Chinese-American professional in Silicon Valley reviews recent federal prosecution against Chinese Americans for espionage and finds the real guilty party to be the FBI. NAM contributor Dr. George Koo has been a consultant for American companies in China for 30 years.
When a Chinese American is accused of spying for China, other Chinese Americans feel a chill, especially professionals like myself in Silicon Valley.
The May 10 conviction of Chi Mak, an electronics engineer employed by a defense contractor, is the latest case in point. Ultimately found guilty of the much lesser charge of being an unregistered foreign agent, when Mak was first arrested, he was depicted as the worst undercover agent for China the United States had ever seen.
When the defense pointed out that Mak had become a naturalized citizen who has lived quietly in his modest suburban home for 27 years, the FBI countered that this simply exposed Mak as a deep and effective mole.
Mak’s colleagues testified that the papers he copied in the CDs intended for a Chinese university were his own published work, and were already in the public domain. They posed no threat to U.S. national security.
The prosecution countered that Mak had failed to apply for an export license for the CDs, and charged him with failure to register as a foreign agent.
The prosecution also accused Mak of lying to the FBI during the initial interrogation. Somehow, the FBI failed to record this interrogation so it boiled down to a case of “we said, he said” in court.
The prosecution said Mak’s handler was a mysterious Mr. Pu in Guangzhou. Mak testified that Pu was an academic friend looking after one of his relatives. If the government knew more about Pu than Mak did, it was not disclosed in court.
The prosecution claimed a great victory in this case. According to the government, the fact that such a spectacular opening ended with a modest conviction simply demonstrates the difficulty of prosecuting Chinese spies in the United States.
Denise Woo, a former FBI agent, was assigned to conduct an undercover investigation on Jonathan Wang, another Chinese American working for a defense contractor who was suspected of spying. Woo challenged the reliability of the source who fingered Wang as a suspect.
The FBI clearly was not pleased to hear that they had been wasting taxpayer money on an investigation going nowhere. Instead of dropping the case, they charged Woo with five felony counts alleging breach of national security and abetting an enemy agent.
Woo contested the charges and was defended pro bono by Mark Holscher, the attorney who had represented Wen Ho Lee when he faced 59 counts of espionage. Woo eventually copped to a misdemeanor charge so that she could get on with her life and was fined $1,000.
Her case bears a striking similarity to Wen Ho Lee’s, whose prosecution fell apart when the FBI agent in charge admitted to lying in court.
In a move to save face, the 59 counts were reduced to one, for illegally downloading computer information, in exchange for the months of solitary confinement Lee had already served. The presiding judge apologized to Lee for unfair and inhumane treatment.
The FBI is convinced that China is a patient collector of bits and pieces of intelligence, mostly from Chinese Americans sympathetic to their homeland.
Those of us working in the technology industry find the notion ludicrous that obsolete tidbits could add up to a leading edge in military intelligence. But to the FBI, even information in the public domain points to espionage if China is involved and if the conveyor is an ethnic Chinese.
The chilling conclusion is that any Chinese American could become willing – or unsuspecting – gatherers of valuable data to Beijing.
When the FBI agent comes calling, there is only one thing to do. Get a lawyer before talking to them.
Editor’s Note: A Chinese-American professional in Silicon Valley reviews recent federal prosecution against Chinese Americans for espionage and finds the real guilty party to be the FBI. NAM contributor Dr. George Koo has been a consultant for American companies in China for 30 years.
When a Chinese American is accused of spying for China, other Chinese Americans feel a chill, especially professionals like myself in Silicon Valley.
The May 10 conviction of Chi Mak, an electronics engineer employed by a defense contractor, is the latest case in point. Ultimately found guilty of the much lesser charge of being an unregistered foreign agent, when Mak was first arrested, he was depicted as the worst undercover agent for China the United States had ever seen.
When the defense pointed out that Mak had become a naturalized citizen who has lived quietly in his modest suburban home for 27 years, the FBI countered that this simply exposed Mak as a deep and effective mole.
Mak’s colleagues testified that the papers he copied in the CDs intended for a Chinese university were his own published work, and were already in the public domain. They posed no threat to U.S. national security.
The prosecution countered that Mak had failed to apply for an export license for the CDs, and charged him with failure to register as a foreign agent.
The prosecution also accused Mak of lying to the FBI during the initial interrogation. Somehow, the FBI failed to record this interrogation so it boiled down to a case of “we said, he said” in court.
The prosecution said Mak’s handler was a mysterious Mr. Pu in Guangzhou. Mak testified that Pu was an academic friend looking after one of his relatives. If the government knew more about Pu than Mak did, it was not disclosed in court.
The prosecution claimed a great victory in this case. According to the government, the fact that such a spectacular opening ended with a modest conviction simply demonstrates the difficulty of prosecuting Chinese spies in the United States.
Denise Woo, a former FBI agent, was assigned to conduct an undercover investigation on Jonathan Wang, another Chinese American working for a defense contractor who was suspected of spying. Woo challenged the reliability of the source who fingered Wang as a suspect.
The FBI clearly was not pleased to hear that they had been wasting taxpayer money on an investigation going nowhere. Instead of dropping the case, they charged Woo with five felony counts alleging breach of national security and abetting an enemy agent.
Woo contested the charges and was defended pro bono by Mark Holscher, the attorney who had represented Wen Ho Lee when he faced 59 counts of espionage. Woo eventually copped to a misdemeanor charge so that she could get on with her life and was fined $1,000.
Her case bears a striking similarity to Wen Ho Lee’s, whose prosecution fell apart when the FBI agent in charge admitted to lying in court.
In a move to save face, the 59 counts were reduced to one, for illegally downloading computer information, in exchange for the months of solitary confinement Lee had already served. The presiding judge apologized to Lee for unfair and inhumane treatment.
The FBI is convinced that China is a patient collector of bits and pieces of intelligence, mostly from Chinese Americans sympathetic to their homeland.
Those of us working in the technology industry find the notion ludicrous that obsolete tidbits could add up to a leading edge in military intelligence. But to the FBI, even information in the public domain points to espionage if China is involved and if the conveyor is an ethnic Chinese.
The chilling conclusion is that any Chinese American could become willing – or unsuspecting – gatherers of valuable data to Beijing.
When the FBI agent comes calling, there is only one thing to do. Get a lawyer before talking to them.
Tuesday, May 15, 2007
U.S. Export Control Policy Hurts American Interests in China
American insistence on enforcing the existing export control policy can only damage the interests of the American high tech industry and not improve national security.
This is because the U.S. is no longer the sole source for much of the high technology. If other nations will not follow the U.S. on restricting exports to China, then the policy can not be effective. Unilateral control by the U.S. only shackles American high tech firms from being able to compete in China.
In 2000, China’s market for semiconductors was a mere one-fifth the size of the U.S. market. In 5 years, China has overtaken the U.S. to become the world’s largest market representing more than 21% of the market. In another five years by 2010, China will be buying $124 billion worth of integrated circuits equivalent to 40% of the world consumption.
Where is the growth coming from? The obvious answer is that China has become the preferred electronics factory of the world. Semiconductor chips are put into the laptops, camera phones, MP3 players, digital cameras, flat panel TVs, DVD players and many other consumer electronics made in China. In 2005, China exported over $137 billion worth of electronic goods, 88% of this coming from foreign invested factories.
China needs to greatly increase their semiconductor fabrication capacity in order to meet this demand, but the U.S. export control process keeps American companies from being competitive in this fastest growing market for semiconductor equipment. Everybody in China knows that they can buy equivalent equipment from European or Japanese supplier much more readily than from the American supplier.
Sam Wang, the Silicon Valley based senior executive for SMIC of Shanghai, said at a luncheon forum that for their first fab in China, they knew that if they ordered a piece of equipment from Europe, they can get it in 2 weeks; if from Japan, in two months. But if the source was from the U.S., they would not know if the order will be honored even after six months.
Washington officials have pointed out that the value of orders subject to export approval is barely 1% of the total trade deficit between China and the U.S., inferring that export control has little impact on bilateral trade. According to China’s own trade statistics, they imported $247 billion worth of high tech products in 2006. The U.S. share of China’s import was barely 8% of that total behind EU and S. Korea and well behind Japan, Taiwan and the ASEAN countries. Our success in China should not be measured by the value of orders submitted for export approval but by opportunities lost to suppliers from other countries.
Recently, the Bureau of Industry and Security of Department of Commerce has proposed to broaden control by including some 47 categories of “dual use” goods and technology. Industry responded that most of the products are available from other countries without restraint. In some cases, China has been making technologically more advanced versions than those being considered for restricted export.
The U.S. government defines dual use as any product and technology that could find military as well as civilian application. The problem with such a definition is that virtually any technology based products could conceivably have military use. A far more important but overlooked question should have been: “Is dual use relevant?” All the other countries that compete with American companies in China do not think so.
Indeed, the Government Accountability Office of Congress and experts that testified before Congress have stated on numerous occasions that dual use items do not affect China’s military prowess and are irrelevant to perceived national security of the U.S.
While the existing export control process cannot impact national security, it can hurt American firms’ ability to compete for business. The $50 billion a year semiconductor equipment industry is case in point. This is one industry created and owned by the Americans. Today, American companies’ market share in China is less than 45% and falling.
Clearly, U.S. government’s export control policy is in need of serious reform. As it currently exists, the policy and practice work against our own national interest rather than enhance national security.
___________________________________
A version of this commentary appeared in July 19, 2007 issue of Electronic Design.
This is because the U.S. is no longer the sole source for much of the high technology. If other nations will not follow the U.S. on restricting exports to China, then the policy can not be effective. Unilateral control by the U.S. only shackles American high tech firms from being able to compete in China.
In 2000, China’s market for semiconductors was a mere one-fifth the size of the U.S. market. In 5 years, China has overtaken the U.S. to become the world’s largest market representing more than 21% of the market. In another five years by 2010, China will be buying $124 billion worth of integrated circuits equivalent to 40% of the world consumption.
Where is the growth coming from? The obvious answer is that China has become the preferred electronics factory of the world. Semiconductor chips are put into the laptops, camera phones, MP3 players, digital cameras, flat panel TVs, DVD players and many other consumer electronics made in China. In 2005, China exported over $137 billion worth of electronic goods, 88% of this coming from foreign invested factories.
China needs to greatly increase their semiconductor fabrication capacity in order to meet this demand, but the U.S. export control process keeps American companies from being competitive in this fastest growing market for semiconductor equipment. Everybody in China knows that they can buy equivalent equipment from European or Japanese supplier much more readily than from the American supplier.
Sam Wang, the Silicon Valley based senior executive for SMIC of Shanghai, said at a luncheon forum that for their first fab in China, they knew that if they ordered a piece of equipment from Europe, they can get it in 2 weeks; if from Japan, in two months. But if the source was from the U.S., they would not know if the order will be honored even after six months.
Washington officials have pointed out that the value of orders subject to export approval is barely 1% of the total trade deficit between China and the U.S., inferring that export control has little impact on bilateral trade. According to China’s own trade statistics, they imported $247 billion worth of high tech products in 2006. The U.S. share of China’s import was barely 8% of that total behind EU and S. Korea and well behind Japan, Taiwan and the ASEAN countries. Our success in China should not be measured by the value of orders submitted for export approval but by opportunities lost to suppliers from other countries.
Recently, the Bureau of Industry and Security of Department of Commerce has proposed to broaden control by including some 47 categories of “dual use” goods and technology. Industry responded that most of the products are available from other countries without restraint. In some cases, China has been making technologically more advanced versions than those being considered for restricted export.
The U.S. government defines dual use as any product and technology that could find military as well as civilian application. The problem with such a definition is that virtually any technology based products could conceivably have military use. A far more important but overlooked question should have been: “Is dual use relevant?” All the other countries that compete with American companies in China do not think so.
Indeed, the Government Accountability Office of Congress and experts that testified before Congress have stated on numerous occasions that dual use items do not affect China’s military prowess and are irrelevant to perceived national security of the U.S.
While the existing export control process cannot impact national security, it can hurt American firms’ ability to compete for business. The $50 billion a year semiconductor equipment industry is case in point. This is one industry created and owned by the Americans. Today, American companies’ market share in China is less than 45% and falling.
Clearly, U.S. government’s export control policy is in need of serious reform. As it currently exists, the policy and practice work against our own national interest rather than enhance national security.
___________________________________
A version of this commentary appeared in July 19, 2007 issue of Electronic Design.
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