Friday, March 19, 2010

Senators find China Bashing easier than Policy Making

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, March 16, 2010

In doing no Evil is Google doing any Good?

Google’s very public dispute with China has everyone confused. First Google accused China of hacking into their servers but wait Google did not necessarily mean China but that hackers were from China. In fact hacking was identified as coming from servers belonging to a couple of schools in Shanghai, but wait may be not, may be some clever hacker, who could be from anywhere, has disguised their origin by commandeering those servers.

Google then announced that they are going to stop censoring the contents flowing through their servers in China and would no longer obey China’s laws related to the control of information being access by China’s netizens. Testimony before Congress seems to indicate that Google will definitely get out of China. Well, maybe not said CEO Eric Schmidt because he was confident of a positive outcome from quiet negotiation with Beijing--negotiations that Beijing has denied taking place.

Bill Gates couldn’t understand what the fuss was all about. If a company is going to operate in China, the company is expected to obey Chinese laws. That’s the way it has been for Microsoft. If you don’t wish to obey the local laws, then yes, you better get out.

Somehow the issue seems more complicated from Google’s point of view. Whether at Google’s request or not, the US government seems ready to come to Google’s aid, by threatening to file a complaint with the World Trade Organization (WTO) accusing China of protectionism. Since China’s laws on cyberspace apply to all Internet enterprises and not just against Google or just foreign companies, it is a head scratcher as to how the U.S. can make such a complaint stick.

It’s possible, I suppose, for the US to insist on China opening the Internet to the same degree that the US is open so that Google can be more successful instead of being merely a distant second in market share in China. But that would be based on a rather dubious premise that having to filter the content puts Google at a disadvantage.

Finally Kai-fu Lee, former head of Google China, spoke up and shed some light to this matter. Lee was lured away from Microsoft in 2005 to right the floundering Google ship in China. By most accounts, he was going a good job as Google was slowly gaining on Baidu, the market leader in search in China. He unexpectedly resigned in September last year.

While attending the Abu Dhabi Media Summit last week Lee was asked about China’s Internet industry. While he would not comment directly on Google in China, he said, “For an American company to succeed in China, it needs to do the following: first, you have to have an empowered local team; second, you need to humbly listen to the local user; third, you need to move fast to give users what they want; and fourth you need to have a longer-term outlook and not be too greedy in wanting to make money on day one.”

Google isn’t the only one to stumble in China. Facebook, eBay, Amazon and Yahoo all did not achieve dominant market share in China comparable to their success in the US. I suspect that all suffered from the same drawback. Namely, their not understanding the local market and not trusting their China team to seize the moment and make decisions without having to go through the corporate bureaucracy back home.

Lee was too diplomatic to ever admit that the frustration of lacking local empowerment was what caused him to seek greener pastures. But he certainly does understand the China market and potential. He has established Innovation Works to harness the energy of entrepreneurs inside China and nurture them into next generation Google’s.

Lee’s incubated start-ups will be participating in a home market of 350 million web surfers and Internet users and 680 million mobile phone users, both largest in the world and growing at double digit rates. In another 7 to 8 years, Lee expects the by then 800 million mobile phone users to access the Internet with their smart phones and that’s the market he wants to play in.

Surely CEO Schmidt has to be agonizing over the dilemma: can Google afford to dither and watch the world’s most dynamic market zip by?
After Google announced their move to Hongkong, I sent an updated commentary based on this blog to New America Media.

Google has just revealed that many countries have asked Google to remove contents. Of the countries that have asked Google to censor the contents, the United States came in 4th in frequency of requests.

Monday, March 15, 2010

Joseph Nye Swung and Missed

Many of you probably have heard of Professor Joseph Nye, now of Harvard and former U.S. assistant secretary of defense. I remember him as the very persuasive advocate of the effectiveness of the exercise of soft power in international relations. He stressed that properly applied soft power in the form of nuanced diplomacy can be far more effective than in-your-face display of raw military might.

It is therefore most disappointing that in his latest analysis of Sino-U.S. relations, which he called a "turn for the worse," that he completely missed the mark. Nye blamed China for failing to toe the U.S. line of imposing sanction on Iran. He did mention President Obama's meeting with Dalai Lama and agreeing to sell arms to Taiwan as sources of friction in the bilateral relations but he seemed to believe that with ample prior precedents, China should be accepting and not get hot and bothered.

Nye also mentioned that "many American congressmen" complain about American jobs being destroyed by China's maintenance of an artificially low yuan, but he failed to point out the ludicrous premise such complaint is based. Instead he accuse Beijing of making a serious miscalculation because the U.S. is not in decline but still ranks as the second most competitive economy in the world, after Switzerland.

I am not sure how World Economic Forum, an organization based in the West, gage economic strength, but I am not as sanguine as Nye about America's future. I fear that America is about to become a failed state.

Take the health care standoff. I do not find members of Congress talk about what's in national interest. I find members working diligently to make sure the other side do not score any popularity points.

Thanks to a protective coddling of Wall Street, we experienced a great economic meltdown and have incurred trillions in national debt. Our only prospect of getting out of debt is prayer and a pig in the poke, hope for the best some hazy years down in the future. No one has the political courage to say we need to cut spending and (gasp) raise taxes. Obviously a major cut in spending is to get out of Iraq and Afghanistan but we don't seem to know how to do that either.

Our collective aversion to paying taxes plus our preference for guns over books has led directly to a drive to bottom for our public education system, pioneered by California condemned to mediocrity with the enactment of Proposition 13. We are successful in not leaving "any child behind," instead just entire generations behind.

President Obama has said that we will pull out of the economic doldrums through an economy built on innovation. But where will future innovations come from, if we don't want immigrants, won't encourage foreign students to stay and depend on lousy schools to crank out poorly prepared graduates? On top of all that, we have a significant fraction of Americans that seriously believe the study of science is anti-Christ tantamount to devil worship.

Not to worry, some will say, because we have the strongest democracy in the world. Is that so? Thanks to the American invention known as gerrymandering (a manipulation of voting districts to favor a particular political party), members of state and national legislatures once elected are virtually guaranteed lifetime employment. To further enhance their job security, they raise money. The more the better. Once a politician wins an election, he or she immediately raises more campaign contributions because the politician knows full well that vulnerability is inversely proportional to the size of the campaign bank account.

America hasn’t been a democracy based on one person, one vote for decades. We used to go door to door campaigning for our candidates. No more, now we organize neighborhood gatherings for the purpose of collecting political contributions. America has become a democracy based on money. With rare exception, the one that raises the most money, wins. Guess what, most money come from special interest. Every politician rails against special interest—but, by the way, contributions gratefully accepted. Special interests love to make contributions because contributions get access and influence. Consequently, our politicians are not beholden to the voters, just the special interests.

Politicians are safe in their seats so long as they do not rock the boat. Thus they take the easy way out. Rather than exercise leadership and statesmanship and telling the American people of the hard tasks that lie ahead, they just blame China, for everything conceivable.

China in the meantime is building a network of high speed rail that will crisscross the country based on its own technology, i.e., not stolen from Los Alamos. They are proposing to build three trans-continental high speed rail systems: Two to Western Europe by way of Russia and central Asia and one south to Singapore.

China has the wealth to invest in infrastructure based on latest technology and they are sharing with their neighbors. The high speed rail will inevitably bring China closer to the community of nations that will share in the economic benefits. There may even come a day when bilateral relations with America will pale in importance compared to relations with rest of the world.

Nye reminded the readers that Deng Xiaoping would have “led China to the cooperative relations with the U.S. that marked the early of part of last year.” Alas, Nye did not seem to realize that it has been America that has changed from early last year and not China.