Tuesday, December 27, 2016

Is the Navarro appointment some kind of a joke?

This is piece originally appeared in Asia Times.

The Trump transition team recently announced the appointment of Peter Navarro to a newly created post as the head of newly created National Trade Council.

Apparently this appointment will not require a Senate hearing and confirmation. Thus a lightweight could be rewarded for his loyalty and not risk embarrassing the new administration.

On the other hand, Trump could be seriously considering Navarro as his point person in trade negotiations with China. Either way, the possible involvement of Navarro on the most important bilateral relations of the world deserves serious analysis.

At one time, Navarro tried his hand at politics and ran for U.S. Congress, mayor and city council. Each time he came up empty—a many times loser.

Then he became a lame pundit who concentrated his vitriol on China mixed with questionable reasoning in economics.

As one indicator, Gordon G. Chang wrote the forward to his more recent book on China’s militarism. Chang was the pundit who wrote the book that predicted the collapse of China in 2001, only to see China’s economy doubled and then doubled again.

Navarro came to Chang’s rescue by blaming the Clinton’s Administration for letting China into the WTO and thus supposedly prevented Chang’s forecast of doom from coming true.

Then Navarro expressed his unreserved admiration for Harry Wu because Wu was a willing talking head in Navarro’s video interviews. Of course, since his death Wu’s sordid past for lying, stealing other people’s money and cheating on his wife has come to light.

Until Trump’s appointment, that’s the kind of company Navarro keeps.

Apparently, he came to Trump’s attention when he said 4 to 5% GDP growth is possible under Trump’s administration even while imposing import duties on goods made in China. If that’s really so, the economic growth would have to be increasing at better than twice the historic rate associated with a good year.

The simple but erroneous idea is that import tariff will protect jobs in the domestic market. It simply doesn’t work that way and unbecoming for a Harvard PhD economist, like Navarro, to say so.

Ronald Reagan tried to protect America’s auto industry

A fairly recent example that comes to mind was when Reagan wanted to protect the American auto industry by imposing an import duty on cars made in Japan. The idea was to give the U.S. carmakers breathing space to become more competitive.

Instead of taking advantage of the import barrier to work on their competitiveness, the U.S. car companies simply took advantage of the new prices for imported Japanese cars by raising their own sticker price. It was only after the Japanese makers transferred their plants into the U.S.—and thus avoided the import duty—that the American companies began the serious task of having to compete.

In effect, the import duty “protected” by allowing the American companies to remain inefficient. Only after the Japanese carmakers built their plants in the U.S. that the American companies had to trim their workforce to compete. And by the way, the workforce that went to work for the Japanese carmakers were non-union and got lower pay.

Imposing import duty across the board on goods made in China would be wrong-headed and even more disastrous than asking the American consumer to pay more for their cars.

Most of the consumer goods made in China such as apparel, shoes, toys, and hardware haven’t been made in America in decades. There are no domestic industries to protect and the import tax would just add the daily cost of living for every American.

American companies did not establish plants in China just for low cost labor but also to serve a growing local market there. The personal computer is an illustrative example.

The PC used to be assembled in Taiwan and then the Taiwanese companies moved to the mainland because of the significant savings in labor. Economic pressures forced their component suppliers to follow them. Component suppliers for the PC came from Japan, Korea, Taiwan as well as the U.S.

Intel combined its China and U.S. manufacturing to stay competitive

One of the U.S. suppliers was Intel. They first set up an integrated circuit assembly and test plant in Chengdu to perform the final manufacturing steps on the microprocessors made in the U.S. The finished ICs were then shipped to the PC makers all over China.

Gradually as China become a major consumer of PCs, Intel expanded their operations in China, not only at Chengdu but also added a semiconductor fab operations in Dalian.

However, even today Intel continues to make 75% of their semiconductor chips in their U.S. operations even as 75% of their market is outside of the U.S.

Intel’s total U.S. manufacturing payroll is much higher than its payroll for their Chengdu operation, even though the number of workers employed in Chengdu is “orders of magnitude” bigger than the number engaged in the U.S.—according to my source inside Intel.

The explanation is that the U.S. manufacturing steps are technology intensive and highly automated. Not many workers are required but each has to be highly trained and very well paid. The Chengdu operations involving test and packaging require many workers, but each does not have to be highly technical nor highly paid.

Taking advantage of the comparative advantage (that’s jargon from Econ 101) of each place gives Intel the means to maintain their technical dominance over their competition. This is nothing to do with currency manipulation, just simple economics.

Most of the American companies that set up operations in China may have the low cost labor in mind initially but subsequently justified added investments because China had become a huge market in its own right.

In some cases, China did impose import duty on foreign made products and thus encouraged the American companies to operate inside China—just as Reagan’s import duty encourage Japan’s auto makers to move into the U.S.

In the end, the local investment benefitted the foreign investor but also China’s economy with a more skilled workforce. The same could apply in the reverse, i.e., as regards to China’s investments coming into the U.S.

Chinese companies are looking to invest in the U.S. to be closer to the major markets here. They certainly wouldn’t be looking for lower cost of labor but would be paying higher salary for more technically demanding jobs. This could only benefit the local economy in the U.S.

Xenophobia and stupidity should not discourage these investments just because they are from China.

Navarro makes no bones about demonizing China in everything he has said but is he really compatible with Donald Trump’s real personal interests?

Last month, a video of Trump’s granddaughter, Arabella Kushner, won the hearts of millions of Chinese by reciting a poem in Chinese. This suggests that Trump’s daughter, Ivanka, and her husband, Jared Kushner, understand the importance of learning Chinese in their 5-year old daughter’s future. Surely they have more influence on Ivanka’s father than Navarro?

Sheldon Adelson has been one of Trump’s major supporters. His billions of net worth is tied to majority ownership of Las Vegas Sands and more than 60% of revenue and profits of the company is derived from Macau. He could hardly be pleased if Trump were to deliberately raise the tension between the U.S. and China.

China exercises its international influence far differently from the American way of relying on military alliances. Close to 100 countries have China as their largest trading partner. Among them, some 60 plus are also members of the Asian Infrastructure Investment Bank or are recipients of AIIB investments. Their relationship with China is based on common economic interests.

The Trump Administration should also consider the merits of developing a bilateral relations based on shared economic interest.

Bilateral basis for common economic interest

Consider for example the economic benefits of tourism from China to the U.S. Last year, less than 3% of China’s total outbound tourists came to the U.S. and they spent over US$30 billion. That was the first full year when the Chinese were granted 10-year, multi-entry visas to visit the U.S.

The future impact of Chinese tourists on the American economy will continue to grow exponentially, provided of course that the U.S. and China are not engaged in some mano a mano test of military armament.

There are over 330,000 Chinese students studying in the U.S. in the academic year just past. According to the Department of Commerce, these students contributed US$11.4 billion to help prop up the finances of the U.S. universities as well as the local economy.

Not to be overlooked another benefit of these students is that as much as 75% of the graduates would prefer to stay and work in the U.S. if the U.S. would permit.

China produces many more times graduates in science, technology, engineering and mathematics than the U.S. can produce. They are just the talent pool American companies desperately need to keep their plants operating and not having to move them offshore.

Trump has to understand that America is losing jobs to automation and technological advances and not to China. Someday, for example, Uber is going to rely of self-drive cars and all the drivers will have to find another job. Amazon will use drones to deliver their packages and UPS will have to either operate the drones or else find some other line of work.

Encouraging the employment of Chinese graduates will buy Trump time to figure out how to save high paying jobs that will stay ahead of the technology evolution. America’s future lies in generating highly qualified and skilled workers and not in bringing back low paying jobs from overseas.

Thus, we hope that Trump will have the wisdom to look for the win-win approach with China. To promote Navarro’s line of military confrontation and a restart of a nuclear race can only lead to lose-lose outcome and such outcomes would be devastating beyond imagination.

Wednesday, December 21, 2016

Path to America Being Great Again Runs Through China

This first appeared in China US Focus.

Now that Donald Trump has won the U.S. election to become the 45th president, everybody is offering his/her idea of how Trump will make good on his promise to make America great again. He does have the opportunity to make policies free from the burdens of the past.During his rough and tumble campaign, he expressed some ideas worth noting. He seemed weary of having the U.S. carry the sole burden of basing troops around the world, and he said more than once that he wanted to find ways to get along with other nations.
He also reiterated on numerous occasions that he would transform America’s infrastructure into the best in the world. With careful examination, these two positions could represent real cornerstones toward making America great again.
Importance of infrastructure investments
Once the best in the world when these investments were made in the ‘50s and ‘60s, everybody now recognizes that America’s infrastructure is badly in need of repair and replacement. The question has come up many times but there has been a lack of Congressional will and consensus to allocate the necessary funds. With a Republican majority in both houses, Trump would have the best opportunity to get something done.
Lest there are any doubts, the lead-tainted drinking water of Flint Michigan and the Minneapolis bridge collapse serve as stark reminders that infrastructure improvement is a real and urgent issue. According to the EPA, the U.S. will need $384 billion investments for the drinking water treatment and distribution to remedy the situation in places like Flint and to prevent future tragedies in other economically blighted areas of America.
There are 700 bridges in the U.S. in the same category as the bridge outside of Minneapolis that collapsed that are potential candidates for retrofit or replacement in order to prevent another rush hour collapse. The bridge in Minneapolis cost well over $200 million to replace. Thus the total potential tab to assure the safety of all the bridges would be in the ballpark of $100 billion plus depending on the actual number in need of remediation.
Trump did say as part of his acceptance speech, “We are going to fix our inner cities, and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as rebuild it.”
Trump hasn’t said exactly how he will find the funds to invest. There is a real solution that does not require pulling the wool over the public’s eye and that would be via reallocation of resources by changing national priorities.
Trump’s “get along” foreign policy
Again referring to his acceptance speech, he said, “At the same time we will get along with all other nations willing to get along with us. We will have great relationships…We will deal fairly with everyone. All people and all other nations. We will seek common ground not hostility, partnership not conflict.” Taken at face value, Trump’s position could represent a sharp and refreshing departure from the disastrous foreign policy of his two predecessors.
When George W. Bush became president, he bought into the neoconservative idea of regime change to support U.S. economic and political ends. Bush got his regime change in Iraq, but ended up with an unmitigated disaster: regional instability, out-of-control worldwide insecurity, and atrocious acts of inhumanity. His inability to close the military campaign in Afghanistan and Iraq had already cost the U.S. trillions of dollars by the time Obama succeeded him.
Indeed in the televised debates as he criticized the U.S. military engagement, Trump said we’re better off spending $4 trillion—referring to the amount already spent on the military misadventure—“to fix our roads, our bridges and all of the other problems, we would’ve been a lot better off.”
Tragically, Obama, instead of making the course correction as mandated by his election, continued the mission to bring about regime changes. Obama justified his interference-based foreign on the attitude of American exceptionalism.
Secretary Clinton has been given full credit, and deservedly so, for the regime change she brought about in Libya and the rise of ISIS because the U.S. wanted regime change in Syria rather than snuffing out the beginnings of the Islamic jihadist movement. Consequently, Syria descended into chaos and became the base for ISIS. She and Obama should bear full responsibility for the refugee crisis in the Mediterranean spreading into Europe.
Unfortunately for Trump, he can’t ignore the conflagration of the Middle East that he will inherit from his predecessors. But he can avoid creating more conflicts and new regional tensions elsewhere if he sticks to the idea of getting along with everybody. The reality is that getting along is far less costly than confrontation.
He apparently has figured out how to get along with Putin and Russia. In the case of China, Trump has the opportunity depart from the past. Both Bush and Obama tried an approach of strategic ambiguity, friends sometimes, and confrontational at other times. American attitude towards China has been specifically because of the neocon idea that the U.S. needs to rule as the world hegemon and not because of any provocation from China.
The two American carrier groups that sailed into the South China Sea was a case in point. The Obama Whitehouse mobilized the flotilla to protect the “freedom of navigation.” That was a bogus non-issue and a pretense for a show of force. Navigation in South China Sea has not been in peril before or after the appearance of the American Navy.
Another example is the supply base China has established in Djibouti. When China began to send its naval ships to patrol the coast off the horn of Africa and help protect commercial ships from the pirates, everybody applauded China’s participation. Now that China has contracted with the government of Djibouti to install a support base for its naval ships, the U.S. expresses alarm. The U.S. has close to one thousand bases around the world but appears intimidated by China’s one. Go figure.
The incoming Trump Administration could find China’s relationship with Djibouti instructive. China is building a second major airport in Djibouti, expanding and improving a new port facilities for commercial shipping and will lend US$1 billion to finance other infrastructure projects in Djibouti including a water pipeline and a railway link to neighboring Ethiopia. In other words, with Djibouti as with many other countries, China is making friends through economic collaboration.
Getting leverage by collaboration with China
China’s strategy is not a win-lose scheme for the U.S. unless the U.S. chooses to view it as such. Apparently Obama did [what?] because he tried to dissuade western countries from joining the Asia Infrastructure Investment Bank that was proposed by Xi Jinping. Others saw what Obama didn’t— namely infrastructure improvements are good for not just the recipient country, but for everybody else, based on the idea that rising tide raises all boats.
Trump should realize that it’s not an advantage for the U.S. to compete with China’s way of making friends via economic cooperation Instead, the new administration should look for ways to leverage from China. For instance, China has been the largest contributor to the U.N. peacekeeping force and vowed to add to their total. The U.S. hasn’t shown much interest in working within the U.N., but Trump should like the idea of letting China pay the bills for safe guarding world security.
The U.S. defense budget, including services to the veterans, approaches $900 billion annually. When off-budget spending, such as the use of contractors, is added to the military spending, the yearly tab is well over $1 trillion. America can finally reap some of the peace dividends from the collapse of U.S.S.R. by taking the need to contain and confront China off the table. Money not spent on militarization would be funds available for the infrastructure improvements.
From his campaign rhetoric, Trump has accused China of currency manipulation, i.e., keeping its renminbi artificially weak, and taking jobs from America. As others have pointed out, lately China has been manipulating its currency to keep it from getting too weak. So much for that accusation.
As for “losing jobs to China,” this has been a favorite dead horse to beat for their votes. Informed voters know that low paying jobs, such as making shirts and sport shoes, left the U.S. decades ago for such places as Taiwan and South Korea. Now, these industries are leaving China for Bangladesh, Vietnam, and elsewhere where the cost is lower. This phenomenon is like water flowing downhill. Try to dam the flow is like imposing an import duty. It will stop the flow momentarily but the American consumer will be the ultimate loser having to pay the higher price for the goods, now made in the USA.
China has not been wasting their energy accusing Vietnam and Bangladesh of stealing their jobs. Instead, China has been concentrating on automation, domestic design, and innovation in order to make products and provide services with values higher on the economic food chain. How to profit from China’s development should be the focus for the Trump Administration, rather than trying to stop China’s effort.
Other countries prefer working with China
Chinese companies, in seeking to make higher value products, have become active investors in the U.S. seeking synergy via collaboration with American firms. Synergy works in both directions, and foreign direct investments from China into America will create high paying jobs and be good for the local economy. Finding excuses, some specious and others from xenophobia, to halt and discourage inbound investments from China will lead to lose-lose outcomes. The new administration will want to work with China and encourage a trend of collaboration instead of responding with xenophobia.
Elsewhere in the world, China has been promoting their One belt, One road (OBOR) Silk Road initiative along with AIIB. OBOR is short hand for infrastructure projects that China is interested in investing and collaborating with host countries near and far. Collaborating nations understand that these are not handouts with hidden restrictions but are risk sharing, mutually beneficial projects.
Since the financial crisis of 2008, China has invested heavily in infrastructure projects inside China. They too understood that improved infrastructure will stimulate the economy and facilitated growth in the ensuing years. A side benefit is that they have gotten really good at managing and executing highway and high-speed rail projects. This is another reason countries along the silk roads are confident of the outcome and keen to work with China.
Trump may not want to invite Chinese companies to take over infrastructure projects in the U.S., which is surely a way to draw political heat. However, China could offer material benefits in helping to manage some of these projects. Their expertise in bridges, highways, extreme tunnels, and high-speed rails could help bring in infrastructure investments within budget and on schedule.
Unfortunately, by taking an unprecedented telephone call from Taiwan’s president Tsai Ing-wen as president-elect, the Trump organization is giving a hostile signal regarding to how he will deal with China after becoming president. There can be no profit for anyone in raising the tension across the Taiwan Straits. China has apparently countered by taking an American owned underwater drone on the basis that such object would be hazardous to “freedom of navigation.”
Apparently, Trump is falling under the influence of the same set of neoconservatives that have advised Bush Jr. and Obama and created the debacle in the Middle East. They have wreaked nothing but death and destruction on the world, while caused U.S. spending to careen out of control. However, Donald Trump does not have to buy into the idea that America’s path to greatness lies in bringing about regime changes around the world, nor by raising the stakes of confrontation with China. If the new Trump Administration can stop being suspicious and hostile and find ways to work with China, he would be taking a major step to making America great again.

Thursday, December 1, 2016

The Yin and Yang of Management Practices

A book review: "From the Great Wall to Wall Street" by Wei Yen.

The author has made a valiant attempt to explain why the business executive from China thinks and acts differently from his/her counterparts in the U.S. or the West. He does so by comparing the legacy of Confucius, Laotzu and other sages from the Chinese culture to Socrates and other western philosophers. He calls the Chinese approach wholistic and the American approach direct and rational. Each has its strengths and weaknesses and the author suggests that some combined methodology to management may be the optimum.

Author Yen also attributes the Chinese concept of yin and yang as a cause of misunderstanding and mistrust between the Chinese executives and the American. Readers might find some of his discussion of the contrasting philosophies esoteric and not grasp the relevance to modern practices. I find his comparison of Clausewitz and Sun Tzu particularly relevant and insightful.

Von Clausewitz promoted the idea of striking where the enemy was most concentrated in order to annihilate the enemy forces and achieve total victory. Whereas Sun Tzu's Art of War stressed winning the war without having to fight even one battle as the best of all possible outcome. He considered not just the physical conflict but also the psychological aspects of warfare. If deception, psychology and persuasion can convince the enemy to surrender, so much the better. Clausewitz's idea is direct, logical and analytical. Sun Tzu's is nuanced and looks at the whole picture.

The author used taichi, a form of martial arts also known as Chinese shadow boxing, and weiqi, a subtle Chinese board game, as metaphors for the Chinese style of management. Thus while the American manager takes a direct and rational approach to solving problems and does not consider consequences of human emotions, the Chinese manager looks for solutions that preserve harmony and minimize hurt feelings. He also explained the importance of quanxi and face in the Chinese way of doing things.

This is a book that I wish I could have written to promote the mutual understanding of East and West. I deduct a star from this review because the book could have benefitted from professional editing to tighten some of the prose and reorganize the chapters to make them more uniformly even. A simple spell check would have eliminated some annoying typos, which I am surprised that the publisher apparently did not do.