The rise of East Asia and an epochal threat to American freedoms

By Eamonn Fingleton

(This article appears in the January-February 2022 issue of The American Conservative. To read it in pdf form,  please click here.)

In April 1998 Sony Corporation chairman Norio Ohga made world headlines with this comment: “The Japanese economy is on the verge of collapsing.”

In reality nothing in Sony’s own experience supported such an assessment. On the contrary, Sony’s business actually boomed right through the 1990s. More generally Japanese industrial corporations continued strongly to gain share from American rivals. Yet they all talked as if Japan was a hopeless basket case.

Even the president of Toyota Motor Hiroshi Okuda joined in, suggesting Japan could cause a “world-wide financial crash.” This despite the fact that Toyota’s sales soared fully 95 percent in the 1990s. Between 1989 and 2019, moreover, Toyota went from little more than one-quarter of General Motors’s revenues to nearly twice as large.

As for Sony’s Ohga, his talk was even more puzzling. In the quarterly accounting  period of his remark, Sony’s sales  in the Japanese market actually increased by 14.7 per cent. The wider picture  was also  impressive: measured against 1989 (the last year of Japan’s 1980s boom), Sony’s profits in 1998 were up fully 131 percent! As if that wasn’t enough, the 1990s counted as the decade when  Sony finally buried such once formidable American rivals as Motorola, RCA, and Zenith.

This is cognitive dissonance on a vast scale. So what was really going on? In truth Japan’s alleged economic disaster of the 1990s was a fake funk:  Japanese leaders just pretended their economy was collapsing. There was method in their madness: they desperately wanted  Washington to cut Tokyo some slack in trade negotiations. This was at a time when Americans had never been more incandescent with rage about Japan’s closed markets. The gambit worked in spades. Not only did Washington back off trying to open Japan but it has never subsequently tried any further market opening efforts.

I have explained more about Japan’s 1990s fake funk in a New York Times commentary. (https://www.nytimes.com/2012/01/08/opinion/sunday/the-true-story-of-japans-economic-success.html)

For now let’s note that the issue of Japan’s true performance is of first order historic importance because of its implications for (1) the rise of China, and (2) for the coming triumph of authoritarianism around the world. Both China and Japan  operate essentially the same authoritarian — and almost universally misunderstood and underestimated — economic model. Let’s call this the Confucian model.

China runs about twenty years behind Japan, as is obvious in, for instance, the global car industry. This means it has a lot of technologically easy catchup growth ahead of it. Combine this with the fact that China boasts four times America’s population (and eleven times Japan’s) and it is hard to exaggerate how dominant Beijing will be by 2050.

Invented in the desperately poor circumstances of early-1950s Japan (and thus a  memorable  instance of necessity playing mother to invention!), the Confucian model has long been powerfully shaping economic outcomes in South Korea and Taiwan as well as, of course, in China and Japan.

The model’s key function is to force-feed  the  growth process. Admittedly in the case of Japan,  growth lately has been lower than it was in the 1980s. But this reflects factors external to the model: in particular, as economists like Paul Krugman and William Cline have pointed out, Japan’s growth has been greatly curtailed by a uniquely jolting demographic switchback (the echo of a major effort begun in 1948 to reduce the population).

Of course, those in the West who cling to the belief  that the model failed Japan see little reason to worry about a rising China.

On the other hand, for those who realize that the model greatly alleviated Japan’s uniquely difficult demographic problems, it is clear that the Confucian model presents a devastating challenge to the United States. Japan never lost its mojo in recent decades and the prospect is that China will not either.

We will discuss some of the Confucian model’s key features  in a moment. First though let’s note that  this model is fundamentally incompatible with America’s hopes for a global rollout of free markets. There are two immediate problems:

1. The Confucian model is not only protectionist but is unalterably so. Other aspects of the model cannot work without a protected home market.

2. The Confucian model features a complex lattice-work of corporate structures that clearly conflicts with American free-market capitalism. Not the least of these structures is cartels, which are, of course, strictly forbidden under U.S. law. Another problem is Japan’s keiretsus and other similar corporate groupings (these latter are known  as chaebols in South  Korea,  qiye jituans in China, and  quangxi jituans in Taiwan).  As we will see,  such structures are undoubtedly on balance helpful in improving East Asian productivity.

Let’s be clear: the Confucian system makes considerable use of markets and this, of course, encourages hopes in Washington for a general  trend towards greater freedom in East Asia. In reality, however, top officials throughout the region claim the right to overrule market forces almost at will. Moreover they often use cartels and keiretsus as power vectors that help them reach deeply into the system’s  internal workings. “Undesirable elements” quickly discover there is nowhere to hide.

A key difference is in how corporate executives see their responsibilities. Whereas in the United States they focus on profits almost to the exclusion of everything else, in East Asia worker productivity gets priority.

To understand the Confucian system the best starting point is its savings strategy. If a nation’s savers save more, corporations can invest more. If corporations invest more, workers can produce more. Equipped with the most advanced production machinery (robots, for instance, in the car industry), nations can  quickly leap to the forefront   in productivity. Economic growth is thereby stimulated.

Of course, savers need a return and here is where protectionism is so important. Corporations earn super-high profits in the home market and these are then applied to looking after the various sources of  capital. Meanwhile producers can aggressively cut prices in export markets.

For an economy to keep growing, savers must keep  saving. This is where the Confucian model really comes into its own again. The model’s most important — and most counterintuitive — feature is its savings process.

With few exceptions, American observers assume that culture is sufficient to explain the region’s super-high savings rates. Supposedly Confucianism instills in everyone a powerful tendency to frugality.

This, however, does not fit the facts. In former times when East Asian nations seemed  more Confucian than they are today, they were often notably weak savers. Japan’s savings rate remained low well into the 1950s. Singapore,South Korea, and China followed a similar pattern, with low savings rates as late as the 1960s, 1970s, and 1980s respectively.

In reality it is only when East Asian nations begin to adopt other aspects of the Confucian model — in particular the model’s aggressively mercantilist trade policy — that their savings rates take off.

Behind all this is a policy virtually unheard of in latter day America: suppressed consumption. By discouraging consumption, top officials ensure that an economy’s savings rate is strongly stimulated.

To anyone tutored in modern American economic thought, the idea of suppressing consumption may seem to be bordering on insanity. But that is not how things look  in modern East Asia. Nor is it how  things looked to U.S. economic planners in former times. Soon  after Pearl Harbor, the United States began  tightly suppressing  consumption. The program started with rubber tires and in April 1942, rationing was extended to cars, sugar, typewriters, and gasoline. By the end of the war, the program also included coffee, shoes, stoves, meats, processed foods, and bicycles.  Lo and behold, the result was a preternatural increase in the savings rate: according to the economist Laura Nicolae, U.S. households’ excess savings during the war totaled nearly 40 percent of national income.

In modern East Asia, the effort to suppress consumption is less direct but it is equally effective. For a start East Asian governments restrict the import of key consumer products. Another important strategy is to minimize consumer credit. Mortgage finance  is largely or totally unavailable in many parts of the region. Credit cards are also hard to come by. This  point is often missed  because American correspondents tend to  conflate debit cards with credit cards. According to Fitch Ratings recently, fewer than 30 percent of Chinese adults had at least one credit card, compared to 79 percent in the United States.

Meanwhile in many East Asian nations, zoning is so tight that housing is rendered stunningly expensive. Restricted living space means consumers consume less electricity and gas. They also buy fewer appliances and items of furniture.

According to the Australia-based statistical website Finder.com, of the ten nations with the world’s most  expensive city-center housing  recently, six were in East Asia. In descending order they were Hong Kong, Singapore, South Korea, Japan, Taiwan, and China.

One further point needs to be noted: much of East Asia’s saving takes the form of corporate profits. Certain special corporations make huge profits through  oligopolistic control of, for instance, urban land.

Now let’s consider the Confucian model’s approach to employment. This is perhaps the area where the East Asian model diverges most obviously from American capitalism.

As a matter of employer etiquette, major East Asian employers do not hire from direct competitors. Moreover they rarely resort to lay-offs, even in the worst recessions. This creates by default a rather settled system of long-term employment.

Orthodox American economists regard East Asia’s no-layoffs policy as “inefficient.” But the region’s passionately patriotic government officials see things differently: any calculation of the benefits to society from American-style hire-and-fire should, they believe, be netted for the cost to the public purse of unemployment benefit.

The psychological advantages that accrue to employers from a no-layoffs policy are a lot more beneficial than is understood in modern America. For a start East Asian workforces feature a far greater degree of long-term accountability. They are also impressively long on teamwork. Because the  East Asian employment system expects employees to commit for the long term, there are rarely second chances for employees who fall out with their first employer. That means that workers are considerably more cooperative in taking on tough assignments.  Certainly East Asian employers enjoy the observed advantage that at all times they have at their disposal  battalions of hard-working employees willing to be sent anywhere and do anything to further their employer’s agenda.

Another advantage of the East Asian system is that it provides employers with a much greater incentive to invest in worker skills. By contrast American employers have to worry that any workers they train may be quickly  hired away by rival employers.

In recessions, East Asian employers beat the bushes to find other work for their workers. They will even go to the extent of inventing “busywork” but generally things don’t get that bad and even in a recession East Asian corporations rarely run out of useful work to do.

Moreover the degree to which  East Asian corporations can cut export prices and still come out ahead is greater than Americans typically understand. A key point  is that  there is a big  difference in the way that labor costs necessarily must be accounted for.  In the terminology of the accounting profession, wage costs count  as a fixed cost for East Asian employers, whereas they are a variable one for American employers. This has crucial implications because so long as variable costs are covered, East Asian corporations can keep discounting their prices. Hence in large part the reason why in a recession  East Asian corporations can quote almost preternaturally low prices.

Faced with the never-undersold nature  of East Asian competition, American employers often enter a process of terminal shrinkage. They slash jobs in a recession but rarely fully restore these in a recovery. Instead they may resort to outsourcing, which they consider to  make  particular sense in the early, tentative stages of a recovery. A  devastating ratchet effect is therefore at work in which over the long haul the Americans keep losing market share.

All that said, even East Asian corporations hardly emerge unscathed from a global recession. In withstanding the strains, however, they have an important cushion in undervalued home currencies. Put another way, the U.S. dollar has long been  massively overvalued. Just how overvalued is suggested when you consider America’s forty-year record of huge trade deficits. How low would the dollar have to go before we might see a real revival in industrial investment in the United States?  A reasonable guess is that even a devaluation of as much as 75 or 80 percent would not have an appreciable effect. Yet a revaluation on that scale would  imply that total U.S. gross domestic product  would at a stroke be cut to less  than China’s and even Japan’s. No U.S. Presidential administration is likely to contemplate such a haircut. Meanwhile the big exporting nations — including Germany, as well as China and Japan — will probably for several years to come continue to prop up  the dollar as a quid pro quo for continued  access to the American market. Remember that these nations’ top priority is not financial but rather industrial and they therefore aspire to  continue to hone their production skills. The super-long production runs provided by an open American market are an important help in this regard.

Let’s briefly consider some other features of the Confucian system.  Perhaps the most troublesome from an American point of view is cartels.

The one thing every American  first-year economics student seems to know is that cartels are bad! They not only cheat  consumers but featherbed inefficient industrial processes. Or so orthodox American thinkers vociferously proclaim.

In East Asia the view is  different. East Asian cartels are quasi-regulated institutions answerable at all times to the national interest. Yes, members of such cartels fix prices but, no, they don’t necessarily shut down all forms of competition. Rather cartel members are generally encouraged  to  compete on quality and service.  As for unrestrained free-market pricing, this is seen as wasteful because this diverts executive attention away from the weightier matter of delivering ever higher quality at ever lower production cost. The problem of gimmicky pricing incidentally can be particularly acute in the most capital-intensive industries, which are precisely the industries with the best prospects of creating well-paid rank-and-file jobs going forward.

Another advantage of cartels is in standard setting. In former times, industrial standards typically originated in the United States. Not anymore. Most standards these days emerge from East Asia. This is important because those who set standards tend to favor their own interests.

Then there is perhaps  the most important advantage of  East Asian-style cartels: they reduce the cost of  research and development. This is because they divide up  research projects among cartel members and thus minimize duplication. This feature alone may make all the difference, as it is not unusual for leading  manufacturing corporations elsewhere in the world to spend as much as 5 percent of sales on research and development.  East Asian cartels get far more innovation for their money and this benefit is passed on to each member.

Much, much could be said but already it should be clear that the United States desperately needs to take a closer look at the Confucian model. The conclusion is epochal: a system that rivals Soviet communism in its grim suppression of individualism is now powerfully outperforming American free-market capitalism. The outperformance  is most obvious in international trade but on closer  examination the Confucian system’s superior wealth-creating capabilities are evident almost right across the board.

In short we are witnessing a fundamental revolution in the human condition. The world is transitioning from an era when free societies did well precisely because they were free, to a new era in which authoritarian societies are doing well precisely because they are authoritarian.

In one sentence, authoritarianism is set to inherit the earth.

Eamonn Fingleton is the author of In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony (New York: St. Martin’s Press, 2008).

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The long arm of Japanese industrial policy: Northern Ireland’s experience

In Dublin, Ireland, where I have lived in recent years, many observers view East Asian economics as a remote issue of little interest in Western Europe. As I discovered the other day, it is an attitude shared even by some of Ireland’s most prominent and widely travelled politicians.

Yet it is so misguided. The truth is that for decades now, East Asian economic policies have deeply influenced Western Europe.

Take, for instance, Japan’s role in the troubles in Northern Ireland.  You can be forgiven your ignorance if you are not aware of such a role: as in many other aspects of the East Asian economic phenomenon,  the English-language press has been asleep at the switch on this story.

Japanese industrial policy began to influence  Northern Ireland as far back as the 1950s.  And Northern Ireland has come off  consistently the worse from the encounter.

The truth is that soon after Japan began its post-war recovery it “targeted” shipbuilding.  Targeting in this sense is a highly controversial technique that was effectively a death sentence for most of the UK shipbuilding industry, not least the once-huge Harland & Wolff shipyard in Belfast.

More about targeting in a moment. First let’s consider the wider context. Harland & Wolff had emerged from World War II at the top of its game, having contributed disproportionately to the Allies’ victory as the builder of more than half of British aircraft carriers. The shipyard had long been Northern Ireland’s largest employer and as late as the 1950s, its direct workforce alone totaled more than 30,000 workers.  Various associated businesses in the Belfast area moreover  provided perhaps as many as 10,000 further jobs. This made the shipyard by far the largest employer on the island of Ireland (it towered over even  the famous Guinness brewing business  in Dublin).

Harland & Wolff was in fact one of the UK’s most successful exporters  —  no small statement given that at that time the UK still dominated many world markets (as late as the early 1950s the UK was the world’s largest exporter of cars, for instance). By virtue of its export success, Harland & Wolff was the cornerstone of Northern Ireland’s then remarkable prosperity.

The impact of Japanese targeting, however, was soon felt.  By the late 1960s, the company was struggling and by the mid-1970s it was already a dead man walking. And soon things were to get even worse as the Koreans, using similar tactics to the Japanese and accessing much of Japan’s manufacturing knowhow, began making serious inroads in the world shipbuilding industry.

The most obvious consequence in Northern Ireland was that tens of thousands of once proud upper working class Loyalist workers found themselves permanently on the dole. Many of them sought a purpose in life by participating in increasingly vicious  tit-for-tat terrorism. This was all a remarkable contrast to an earlier period of IRA provocation in the 1950s. Most Loyalists then were gainfully employed and were happy to leave it to the established forces to round up IRA discontents. With no resentful unemployed Loyalists to be provoked, the troubles of the 1950s soon petered out.

Harland & Wolff launched its last ship as far back as 2003. But still today the gaping hole left by the company’s collapse has not been filled. It is hard to exaggerate the  consequences.  With no major industries left and no world-beating shipyard to keep the Admiralty interested, Northern Ireland’s days as a constituent nation of the United Kingdom seem numbered. This is clearly implicit in UK Prime Minister Boris Johnson’s  take-it-or-leave-it attitude to the Democratic Unionists on Brexit. He evidently is confident of considerable support on  the British mainland. After all, it has long been no secret that the Northern Ireland economy has been a major drain on the British Exchequer.

The mainland is increasingly signalling it has had enough. A fair guess is that by the 2050s, if not before, London will have thrown Northern Ireland overboard . The consequences for the Irish Republic, and for the Irish taxpayer in particular, are not clear. Neither are the prospects for continuing peace on the island of Ireland.

What does Japanese “targeting” mean? The term refers to a pattern for the Japanese state to make common cause with Japanese corporations in a no-holds-barred effort to seize leadership in important global  industries. Some tactics are more covert than others and not infrequently they are completely unethical. But we needn’t  dwell on this  as in reality one of the most effective Japanese tactics was the relatively mentionable one of keeping the yen massively undervalued. To that end Japanese officials organised  cast-of-thousands pantomimes aimed at convincing visiting foreigners that Japan was a Third World country and thus posed no threat to the advanced industries on which the  West’s economic success was based. Thus although worker productivity in the Japanese shipbuilding industry was  broadly on a par with the UK industry, London acquiesced in a hugely undervalued yen.  This meant that the wage bills Japanese shipbuilders had to pay were little more than half of UK levels. With a cost advantage on that scale, the Japanese soon had the entire UK shipbuilding industry on the run. Cities like Newcastle, Glasgow, and Liverpool soon felt the impact but nowhere were the consequences more lamentable than in Belfast.

Yet no one in London lifted a finger. The pound was kept permanently overvalued in a manoeuvre that suited a callous and blinkered City of London.  Meanwhile London elites rejoiced in the fact that an overvalued pound meant their money went further when they travelled abroad on holiday.

It is worth considering the might-have-beens. Had successive British governments stood up to Japanese targeting, the outcome could have been very different. Just how different is apparent from a look at the trajectories of Harland & Wolff’s once puny Japanese challengers. Take, for instance, Mitsubishi Heavy Industries (MHI). In the 1950s it was broadly as advanced as Harland & Wolff. Today it is a manufacturing colossus that leads the world in a host of super-advanced industries. MHI’s products include space launch vehicles, missiles, aircraft, machine tools, hydraulic equipment, and aerospace components (it is a major supplier to Boeing of components so advanced that Boeing can’t make them for itself).

MHI’s achievement can be summed up in one number: it recently employed more than 81,000 workers. As for Harland & Wolff, the yard that built the Titanic survives, sort of,  doing marine engineering odd jobs.  According to Wikipedia, at last count it employed just 79 workers — little more than, say, a successful suburban car servicing workshop.

 

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On VJ Day, a hard look at an atom bomb apologist

By Eamonn Fingleton

If you Google “Laurens van der Post” and “Hiroshima”, you’ll turn up hundreds of thousands of results. This confirms something that some observers have known for years: that though the South African-born author Laurens van der Post was little known in the United States, he  nonetheless has played an outsized role in how Americans see the atomic bombing of Japan in 1945.

We’ll have more to say about this role in a moment but first let’s note something else: if you Google “Laurens van der Post” and “liar” you will also get hundreds of thousands of results.

It is fair to say that van der Post is a controversial figure — so controversial indeed that it is more than surprising that he might be considered a trusted source on anything, let alone on something as epochal and politically charged as the atomic bombing of Japan.

According to his biographer J.D.F. Jones, van der Post was a “compulsive fantasist”. Writing in Teller of Many Tales: The Lives of Laurens Van Der Post (London: Carroll & Graf, 2001), Jones explained: “Time after time, the storyteller’s tales about himself were inaccurate, embellished, exaggerated, distorted or invented. Put more bluntly, he was a constant liar.”

Little was known about van der Post’s character defects in his lifetime and indeed towards the end of his life he came to be revered as something of a secular saint and was even embraced as a close friend by such dignitaries as  Margaret Thatcher and Prince Charles. Soon after his death in 1996, however, an avalanche of allegations emerged that completely demolished his reputation. Not the least of the disclosures was that in the early 1950s when he was already well into his forties van der Post had seduced and made pregnant a fourteen-year-old South African girl who had been entrusted to his care.

All this notwithstanding, commentators and historians who seek to justify the bombing of Hiroshima and Nagasaki often cite his testimony as clinching evidence for their case. Meanwhile nothing is mentioned of his tendency to make up the facts, let alone various other character issues that have called his credibility into question.

Yet it is now amply clear — and indeed undisputed — that van der Post’s life story was one of the most scandalous of any influential author in modern times.

Born on a farm in South Africa in 1906, he was hired in 1925 as a trainee journalist by a newspaper in Durban. By the 1930s he had moved to the UK where he quickly made several useful literary contacts.

Then at the outbreak of World War II, he volunteered for the British Army and in 1942 was captured by the Japanese in Java. Thus began more than three years of brutal captivity in which he suffered greatly and was witness to the torture and murder of many of his fellow prisoners.

He went on in 1970 to publish The Night of the New Moon, a book about his wartime experiences. This aired a sensational allegation that in the last weeks of the war Hisaichi Terauchi, a senior Japanese military officer, planned as a parting shot to order the massacre of hundreds of thousands of Allied POWs under his control in South-East Asia. Terauchi, who seems to have been based in Vietnam at the time, was allegedly intent on perpetrating this massacre  even though this flouted the express wishes of top military leaders in Tokyo. According to van der Post, it was only because of the shock of the Hiroshima and Nagasaki bombings that Terauchi was dissuaded from this plan. Thus, in van der Post’s account, on a net basis America’s resort to atomic weapons saved many more lives than it sacrificed.

For acute observers there have always been problems with this story — problems that for the most part were apparent long before van der Post’s general credibility was torched by J.D.F. Jones and others.

In assessing van der Post’s story, let’s  first note that Japan’s very different and rigid we’re-all-in-this-together culture makes the Terauchi story inherently unlikely. Although there is no doubt that Terauchi was one of Japan’s most brutal war criminals (he was responsible for among other things the deaths of more than 15,000 Allied POWs in the construction of the Burma Railway alone), the fact is that the Japanese are not noted for breaking ranks. And certainly the idea that someone in Terauchi’s position — he was a field marshal — would have defied higher-ups on something as epochal as the endgame of a world war seems a stretch.

Another problem with the story is that as a matter of historical record Terauchi had suffered a devastating stroke in May 1945. Thus in August 1945, when according to the van der Post version  Terauchi was supposedly planning one of the biggest war crimes in history, Terauchi was actually a semi-invalid. In the event Terauchi went on to die of cardio-vascular complications in 1946 and thus was never tried for his crimes.

Another problem with van der Post’s story is why did it take so long to be made public. If in the immediate aftermath of the war van der Post really had the goods on the “Terauchi plan” (at a time when key witnesses were still very much alive and major media organisations were still massively concerned with the war),  he would have been sitting on a major world scoop. Indeed had he promptly sold his story to a top media organisation, he would instantly have won both fame and fortune. Yet we are asked to believe that he made no attempt to sell his scoop but instead  chose to return to South Africa to a dead-end job with a regional newspaper. More than two decades were to elapse before he went public with his allegation and even then he did so in a half-baked way that was amazingly lacking in substantiation.

What evidence did he have? He cited only a single named source. This was Ronald Penney, a senior British Army officer who served as the Allies’ military intelligence chief in South-East Asia in the final months of the war. Here is how van der Post put it: “General Penney assured me that, among the staff records captured at Terauchi’s headquarters, evidence was found of plans to kill all prisoners and internees.”

At first sight this may sound like it clinches the argument in van der Post’s favour.  Actually it does the opposite: it devastatingly undermines his story.  Why? Because had records of this sort really been found, Penney would have passed them on posthaste to one or more of the several major public  tribunals the Allies had set up to investigate Japanese war crimes. Once in the hands of any such tribunal such documents would have been effectively in the public domain and it is certainly inconceivable that their existence would have remained hidden for long. (Remember that hundreds of top American,  British, Canadian and Australian press reporters had followed the Allied forces to post-surrender Japan and their most urgent concern was to uncover evidence of Japanese war crimes.)

A question remains: what did  Penney make of van der Post’s allegations? We don’t know because, conveniently for van der Post’s case, Penney had been long dead by the time the book came out. It is fair to say that it was typical of van der Post’s style to build his case on the basis of  quotes from sources who were untraceable or dead.

In closing let’s briefly consider the wider controversy surrounding van der Post. Some prominent people came to van der Post’s defence at the time of  the publication of the late  J.D.F. Jones’s stunning biography. It is clear that in several cases such people were friends of van der Post’s or at least friends of the family.  But while their attacks  were long on rhetoric they did little to question Jones’s  factual accuracy. Quite the contrary: because van der Post’s defenders have tended to tip-toe around Jones’s most devastating allegations, they have implicitly admitted they had nothing to say in rebuttal.

In  answer to the charge that van der Post had been guilty of statutory rape, the best his defenders have been able to do in rejoinder has been to suggest that Jones’s account was  “prurient”.

I ought to declare an interest here. As a journalist who worked in London in the 1970s, I happen to have known J.D.F. Jones. Actually in Jones’s then capacity as managing editor of the Financial Times, he hired me in 1978 as editor of the paper’s Saturday savings pages. For the sake of completeness I should perhaps add  that I never knew van der Post.

As one of  Jones’s former colleagues, I find it more than surprising to see him denounced as “prurient”. He was actually one of the wisest and most decent journalists of his generation and he is widely credited with playing a major role in  turning the Financial Times into a globally influential institution.

In recording van der Post’s scandalous love life, was Jones being prurient? Hardly. It was actually incumbent on Jones to investigate van der Post’s character defects.  Not to put too fine a point on it, authors like van der Post who present themselves as arbiters on controversial issues had damned well make sure they suffer from no significant character defects. Otherwise they have little or no ability to stand up to any vested interests that might seek to influence their work. Might the fact that van der Post had guilty secrets help explain how he wrote about the atomic bombing of Japan?  Maybe.  But my guess is that the real explanation is probably more mundane (e.g. by making up a story about the Terauchi plan van der Post may have hoped to improve the publishing value of his work in the United States).

One thing is certain: the fact that such a flawed character came to be accepted as a trusted friend by top British dignitaries sheds an interesting light on the quality of the UK’s intelligence services in the last half century.

Eamonn Fingleton is the author of In the Jaws of the Dragon: America’s Fate in  the Coming Era of Chinese Hegemony (New York: St. Martin’s Press, 2008).

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Was the Hiroshima bomb justified?

By Eamonn Fingleton

It is a question that comes up every year: was the atomic bombing of Hiroshima justified? This year — the 75th anniversary of the attack — the question seems more pertinent than ever.

The bombing, which took place on August 6th 1945, killed perhaps 80,000 people. A second atomic bomb dropped on Nagasaki three days later may have claimed as many as 50,000 more lives.

The decision to use nuclear weapons ultimately lay with then U.S. President Harry Truman, and to the end of his days he was to insist not only that his decision was morally justified but that it saved more lives than it sacrificed. His version quickly became conventional wisdom not only in the United States but to a lesser extent in much of the rest of the English-speaking world. In some retellings moreover the decision to go nuclear has even been cast as a net benefit to the Japanese people. The idea is that by hastening the collapse of the Japanese military government, it obviated the need for a massive American military invasion of the home islands of Japan, an initiative that undoubtedly would have proved profusely bloody.

As a journalist and author who lived 27 years in Tokyo, I have long been aware that this “Truman version” conceals as much as it reveals. All the evidence is not only that Truman’s resort to nuclear weapons was morally highly questionable but that it greatly compounded America’s subsequent problems in achieving a sincere meeting of minds with the Japanese people in the post-1945 era.

A fundamental weakness of the Truman version is that it posits a false choice. Supposedly Truman had only two options: either he reached for the bomb or he ordered a massive conventional military invasion of Japan. This latter was already being planned by U.S. generals in the summer of 1945 and had tentatively been scheduled to begin in November of that year.

But were these the only choices available? Hardly. An obvious third choice would have been simply to have imposed a naval embargo on Japan. All the evidence is that, by cutting Japan off from vital sources of food and other necessities, an embargo would have proved almost as quick and efficient as atomic bombs in breaking the Japanese militarists’ will (and that’s not even counting the devastating effect that the  Soviet Union’s entry into the war on August 8 1945 was to have — more about that later).

The fact is that Japan was uniquely vulnerable. Already it was one of the world’s most densely populated nations, and in those days, before the rise of factory farming, densely populated nations had no alternative but to rely on imports for the vast bulk of their food. As an island nation moreover, Japan was remarkably dependent on ships to transport such imports. Yet by the summer of 1945 about four fifths of its military and civilian shipping had already been sunk. And had the Allies devoted enough of their submarines to embargoing Japan, they could have sunk much of what remained of Japanese shipping within weeks.

Proponents of the Truman version suggest that a naval blockade would have been almost as cruel as the atomic bomb. Perhaps — but this follows only if you assume that Japanese leaders would have persisted with the war indefinitely. Responsibility for any deaths from starvation in the meantime moreover would have lain in the first instance with Tokyo and not with Washington. After all, at any point, the starvation could have been quickly alleviated if Japan surrendered, something that since Germany had surrendered unconditionally in May 1945, all senior Japanese leaders knew would be the inevitable outcome in any case. To add to the pressure, Washington could have arranged a special demonstration of a nuclear explosion to be witnessed from a safe distance by the militarists’ representatives. Such a demonstration would have been almost as powerful as the bombing of Hiroshima and Nagasaki in concentrating minds among Japanese leaders (particularly if there was an implied threat that Tokyo would be next).

Proponents of the Truman version often insist that, without the unique shock of the Hiroshima and Nagasaki bombs, the Japanese would indeed have persisted with the war indefinitely. But this assumes a degree of irrational intransigence that anyone who knows the Japanese knows is a figment of Western imaginations. The truth is that while the Japanese often appear remarkably irrational, this is almost invariably no more than a facade or a negotiating tactic. If you look underneath the surface, the Japanese are generally found to be behaving perfectly rationally. It is worth pointing out that in the latter half of the nineteenth century, when the West first came into extensive contact with the Japanese, the pattern for the Japanese to speak irrationally (in a remarkable cultural phenomenon known in Japanese as tatemae) was widely commented upon. It was wittily satirized, for instance, in W.S. Gilbert’s portrayal of Poobah in The Mikado. In subsequent times, however, under American influence, the West largely lost sight of the tatemae phenomenon, and has tended more and more earnestly to take the Japanese at face value and overlook the Japanese capacity for “nonsense speak”.

But surely, you might suggest, the fighting pattern of Japanese troops in World War II provides conclusive evidence of a culture of extreme irrationality. After all, with remarkably few exceptions, Japanese fighting men never allowed themselves to be taken alive. At first sight this certainly suggests a degree of fanaticism almost unique in the history of war. But it hardly seems so irrational if viewed in context. The truth is that Japan’s fighting men were indoctrinated to believe that if they were taken alive they would be subjected to torture even more extreme than that which they routinely saw visited on countless American troops who had had the misfortune to be taken alive. In other words in opting to kill themselves, Japanese fighters believed they were choosing the lesser of two evils. And in the meantime because they could be expected to fight to the death, they represented a uniquely dangerous threat.

Some commentators have argued that had not Truman resorted to atomic weapons,  hundreds of thousands of Allied prisoners of war would have been massacred by the Japanese in the final weeks of the war. This argument was presented most notably in a book in 1970 by Laurens van der Post, a South African-born British Army officer who had himself been held prisoner by the Japanese for more than three years. There are several weaknesses in  van der Post’s argument, not least that it assumes that the Japanese would have persisted for many more months with a war that, even before the Hiroshima bombing, the Tokyo leadership knew was doomed. It overlooks in particular the fact that for many weeks before August 6, Russia was clearly planning to attack Japan (it had previously been neutral in East Asia). In the end it declared war on Japan on August 8.  It is hard to exaggerate how profoundly this event alone transformed the situation. The truth is that as the East Asian war entered its final stages after Germany’s surrender, nothing terrified Japan more than the threat of a Soviet invasion. The reality is that irrespective of whether Truman dropped the bomb or not, the Japanese would have chosen prompt surrender to the Americans as by far the more acceptable of two evils.  To have continued to resist would have resulted in much of their country coming under Soviet domination.

One aspect of the conventional account that cries out for particular attention is the way Truman chose to present his decision. In a radio address after the first bomb, he suggested that Hiroshima had been chosen because it was a military base. He commented: “We wished in this first attack to avoid, insofar as possible, the killing of civilians.” The truth is that though there was indeed a military base in the Hiroshima area, it was NOT the target. Rather the target was the city’s residential and commercial districts. Evidence recently cited by the political scientists Katherine E. McKinney, Scott D. Sagan and Allen S. Weiner suggests that fewer than 10 percent of those who died on August 6th 1945 were military personnel. Writing in Bulletin of the Atomic Scientists, McKinney and her co-authors added that the Americans “deliberately chose to maximize the number of civilians who succumbed in the attack.”

This seems to settle the matter. It is past time to call a spade a spade. Truman’s decision was driven primarily by a desire for vengeance. The circumstances of August 1945 were certainly extenuating but the desire for vengeance never brings out the best in the human spirit.

Eamonn Fingleton is the author of In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony (New York: St. Martin’s Press, 2008).

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Some of my Forbes commentaries

 

If you click through on the headings below, you can get to the articles concerned. Most of them focus on international trade or American decline or both. For my first item, however, I chose something different — partly because it is of more general interest and partly because the response to it was particularly memorable. Not the least aspect of that was response was that Mayer Brown dropped the lawsuit like a hot brick. Another aspect was that Yoshiko Sakurai, a veteran Japanese broadcaster, was moved to describe it as “in extremely poor taste.” See whether you agree!

‘Disgusting!,’ Cry Legal Experts: Is This The Lowest A Top U.S. Law Firm Has Ever Stooped?

Now They Tell Us: The Story Of Japan’s ‘Lost Decades’ Was Just One Big Hoax

 

Super Tuesday Post-Mortem: If Hillary Thinks America Is Still Great, She Needs To Get Out More

 

Memo To Benighted U.S. Economists: The Importance Of Being Irish — Or Danish, Or Swedish

 

China Knows Something You Don’t: U.S. Economists Are History’s Biggest Patsies

 

If You Trust The American Press, Here’s A Thought Experiment

 

Even Martians Know What The Press Won’t Say: Disastrous China Trade Policy Drove Trump/Sanders Wins

 

Like 1950s Detroit, Boeing Is Underestimating Emerging Japanese Competition

 

Reports Of America’s Manufacturing Renaissance Are Just A Cruel Political Hoax

 

Where It Counts, ‘Basket-Case Japan’ Is Beating The Pants Off The United States

 

American Decline: More Wishful Thinking from the Naysayers

 

Henry Kissinger Says American Decline Is A Myth: What Are You Smokin’, Dude?

 

U.S. Decline: An Open Letter to a Closed Mind

 

American Decline: Is It for Real?

 

Here are some other articles that may be of interest:

 

After the Financial Times buyout, let’s stop belittling Japan’s success

(The Guardian, London)

Japan Eyes Trump: Why the Media’s Silence on Japanese Protectionism Gives Trump Another Priceless Opening

(The Unz Review, Palo Alto)

Boeing Goes to Pieces

(The American Conservative, Washington)

The Myth of Japan’s Failure

(The New York Times)

 

 

 

 

 

 

 

 

Posted in American decline, China, Global economy, History, Japan, Manufacturing, Press, Service economy, Sino-Japanese relations, Trade | Tagged , , | Leave a comment

Now Blogging at Forbes

I am now blogging at Forbes – you can find my most recent articles here.

The RSS Feed for my Forbes blog is here.

Posted in American decline, Global economy, Japan, Manufacturing, Trade | Leave a comment

Boeing Goes To Pieces

This article was first published in the January-February 2014 issue of The American Conservative.

At a welcoming banquet in Japan in the 1980s, Ford Motor chairman Philip Caldwell received a memorably double-edged compliment. “There is no secret about how we learned to do what we do, Mr. Caldwell,” said the head of Toyota Motor, Eiji Toyoda. “We learned it at the Rouge.”

Toyoda was referring to the Ford’s fabled River Rouge production complex in Dearborn, Michigan.

In the early days of Japan’s rise, the Detroit companies had been famously helpful to information-gathering Japanese auto engineers. Knowhow gleaned at the Rouge evidently proved particularly valuable.

Similar stories can be told about the preternatural complacency of other U.S. industries in the face of emerging Japanese competition. Where Japanese industrial “targeting” is concerned, America never seems to learn.

Now another industry is being targeted – this time America’s last remaining crown jewel, aerospace. The Boeing corporation in particular has long been in Japan’s crosshairs. Yet, although the scale of Japan’s agenda is well understood in the industry, American aerospace executives have chosen not to raise the alarm. In what amounts to one of the most outrageous sellouts in modern business history, the U.S. industry is consciously cooperating in its own demise. Swayed by stock options, top U.S. aerospace executives are increasingly prioritizing short-term profits and outright financial finagling over the long-term health of their industry.

Although the details of U.S.-Japan aerospace deals are rarely disclosed, it is clear that a key dynamic is that, in return for transfers of American technology and manufacturing knowhow, the Japanese low-ball their prices in supplying an ever widening and more sophisticated array of components and materials. In many cases, Japan’s state-controlled airlines further sweeten the pot by paying top dollar for U.S. airframes and jet engines. All this boosts the American industry’s short term profits. In the long term, of course, the current crop of top executives will have long retired – and in the meantime they are crying all the way to the bank.

For the Japanese the seemingly steep upfront costs are a steal given the enormous amount of learning-by-doing that would otherwise be required to reinvent American knowhow and production technology. As for the American national interest, the most obvious consequence is an endless stream of layoffs of American blue-collar workers. Less obviously but equally debilitating, the U.S. aerospace industry’s dependence on Japanese and other foreign suppliers has greatly exacerbated U.S. trade imbalances. By extension the U.S. Treasury has become ever more dependent on East Asia, not least Japan, to fund the trade deficits.

Already Japan’s successes reach into the industry’s every nook and cranny. Here are a few examples:

Jet engines. Both Pratt & Whitney and GE Aviation now rely heavily on Japan for engine components. A key supplier is Ishikawajima Harima Heavy Industries (IHI), a little-known Tokyo-based corporation that now ranks as one of the world’s most advanced aerospace players. (In common with several other leading Japanese aerospace companies, IHI got its start in ship-building. Hence the seemingly incongruous reference to “heavy industries” in its name.)

Avionics. This is the term of art for a huge array of sensors, controls, flight-deck instruments and displays, and communications equipment essential to modern aviation. The field used to be the preserve of U.S. companies like Honeywell, Hughes, and Raytheon, but increasingly the serious manufacturing is done in Japan by corporations like Panasonic, Sony, and Toshiba. The Japanese have also assumed leadership in critical avionics materials. An example is gallium arsenide, a superfast semiconducting material vital in advanced computer chips. The supply of gallium arsenide is dominated by Japanese companies like Hitachi Cable and Furukawa Electric.

Aircraft wings. Companies like Kawasaki Heavy Industries and Mitsubishi Heavy Industries are now world leaders in wing-making, a specialty long considered one of the aircraft industry’s greatest manufacturing challenges. In partnership with the world’s leading carbon fiber producer Tokyo-based Toray, Mitsubishi has pioneered the manufacture of carbon-fiber wings for passenger planes. Such wings are claimed to reduce fuel consumption by up to 20 percent per seat-mile.

To be sure, the Japanese have so far confined themselves almost entirely to components and materials, leaving Americans and Europeans proudly to affix their logos to completed engines and airframes. But past precedent suggests the Japanese may not be content to play second fiddle forever. In fact Mitsubishi is already working on a 90-seat regional jet scheduled to enter commercial service in 2017. Although this plane will not present much direct competition for the American airframe industry, it will stand in much the same position to that industry as, say, the Honda Accord did to the U.S. auto industry in the 1970s – the thin edge of a wedge.

Although global market share figures are hard to come by, Japan is arguably already the world’s largest aerospace player. Certainly it is the ultimate source of a vastly larger share of the industry’s most sophisticated value added than a reading of the English-language press would suggest. Boeing in particular is deeply hollowed out. Given that Boeing now subsumes most of the erstwhile independent companies that put Neil Armstrong on the moon, its eclipse constitutes a major part of a larger story of American decline.

As Robert Scott of the Washington-based Economic Policy Institute, points out, little more than a generation ago, Boeing planes were still almost entirely American-made. In the 1980s, however, Boeing came under increasing pressure to enter into “work-share” agreements with various technology-hungry foreign partners, most notably the Japanese.

The trend intensified as Boeing planned the 777, which entered service in 1995. On Boeing’s numbers, various Japanese companies took on in aggregate about 21 percent of the 777’s airframe, up from about 16 percent for the Boeing 767, which had been launched in 1982. Boeing allocated much of the 777’s fuselage to a government-led Japanese consortium.

Then came the 787, Boeing’s newest passenger plane which entered commercial service in 2011 in the livery of All Nippon Airways. For several reasons the 787 constitutes a watershed not only for Boeing but for the entire global aerospace industry. Otherwise known as the Dreamliner, it is the most technologically advanced passenger jet ever built. It is also the first progeny of a portentously redefined relationship between Boeing and Japan. On the company’s own figures, the Japanese account for a stunning 35 percent of the 787 – and that may be an underestimate. Much of the rest of the plane is also manufactured abroad, not least in Italy, Germany, South Korea, France, and the United Kingdom.

The 787 story began more than a decade ago when, in the manner of a man undergoing a mid-life crisis, Boeing suddenly embraced a New Age redefinition of itself: it aspired to be primarily a “systems integrator,” not a manufacturer. According to one online dictionary, the term systems integrator connotes “an individual or company that specializes in building complete computer systems by putting together components from different vendors.” As the commentator Mark Tatge has pointed out, the term suggests a largely service-oriented role similar to Dell Computer’s in the personal computer industry (Dell confines itself to the design and marketing of products assembled in East Asia from bought-in components).

Evidently wearying of trying to stay ahead of Airbus, already then in the passing lane, Boeing would henceforth delegate many of its most technologically challenging manufacturing tasks to a consortium of three Japanese “Heavies” – Mitsubishi Heavy Industries, Kawasaki Heavy Industries, and Fuji Heavy Industries. These rank first among equals as Boeing’s so-called Tier 1 suppliers and have been the recipients of much of Boeing’s most advanced knowhow.

Boeing’s retreat from manufacturing was powerfully symbolized also by its decision to move its headquarters from Seattle to Chicago. Executed in 2001, that decision seems to have been made during the wild dot.com stock bubble of the late 1990s. It is tempting to imagine that the directors of America’s most Olympian manufacturing company talked themselves into a shift to postindustrialism at the height of one of the most ludicrous outbreaks of crowd madness in American economic history.

What is clear is that Boeing’s changing view of itself nicely dovetailed with Tokyo’s agenda. For decades Japan had identified aerospace as one of the most crucial of all targeted industries. At a stroke Boeing’s transition to systems integration put the ultimate prize of global leadership in aerospace within Japan’s grasp.

Of course, on a superficial view, Boeing’s strategy seems like just any other case of outsourcing – and, to mainstream economists if not to blue-collar American workers, outsourcing is a good thing in that it helps nations allocate their capabilities more efficiently.

There is, however, another side to this story, as Ralph Gomory points out. A former director of research at IBM who is better known these days for his mathematical debunking of the traditional case for free trade, comments: “If the world economy were working in textbook fashion, Boeing’s technology transfer policy would not make sense. The Dreamliner story illustrates in high relief a fundamental, hitherto generally unnoticed, flaw in the theoretical case for globalism.”

For a start, in contrast to the standard case for outsourcing, Boeing’s increasing reliance on Japan can’t be explained as a search for cheap labor. The fact is that Japanese wages are notably high – probably, when all is said and done, higher than American levels. By the same token labor costs in several other nations where key Boeing suppliers hang their hats (Germany, France, and South Korea, for instance) are also high.

Even more anomalous is Boeing’s acquiescence in other nations’ requests for technology transfers. As Gomory points out, there is no place for such transfers in the standard case for free trade. After all if American corporations have a comparative advantage in plane-making, they should keep it. By transferring production knowhow to overseas partners, the American aerospace industry is cutting its own throat – and why would anyone do that?

As Dick Nolan, an emeritus professor of Harvard Business School, has pointed out, Boeing’s traditional policy had been to use foreign suppliers merely to do so-called “build-to-print.” The term signifies that they supplied components and subcomponents made to Boeing’s detailed specifications, an arrangement that enabled Boeing to keep to itself much, if not all, of its serious aeronautical and manufacturing knowhow.

Even before Boeing redefined itself as a systems integrator, keen observers had noticed a weakening in its resolve to resist Japanese pressure for technology transfers. As recorded by the British author Karl Sabbagh, already by the early 1990s Boeing’s willingness to reveal previously closely held manufacturing secrets to the Japanese became so notorious that Boeing employees vulgarly referred to it as the “open kimono” policy. The erstwhile Leviathan of the global aerospace industry was the one in the kimono.

As for the Dreamliner, not the least surprising aspect of its work-share arrangements is that the foreign-made sections arrive in Boeing’s final assembly plant in Seattle not only fully “stuffed” with systems and sub-components (a radical departure from previous arrangements) but already certified and tested. Certification and testing had previously been considered core functions that should never be delegated to foreign partners. Noting this in a Harvard Business Review blog, Dick Nolan has acerbically commented: “Boeing effectively gave Tier 1 suppliers a large part of its proprietary manual, How to Build a Commercial Airplane, a book that its aeronautical engineers have been writing over the last 50 years.”

Perhaps the single most controversial aspect of Boeing’s partnership with Japan is that the 787 flies on Mitsubishi wings. To add insult to injury these are no ordinary wings. They constitute the first extensive use of carbon fiber in the wings of a full-size passenger plane. In the view of many experts, in outsourcing the wings, Boeing has crossed a red line. For a start, as Stan Sorscher points out, the strategy has required the transfer to Mitsubishi of much of Boeing’s vaunted wing-making technology. Sorscher, a former physicist at Boeing and now an executive of Boeing’s main white-collar union, comments: “The value of the technology and knowhow transferred is probably around $500 million – that is what we call in the business a scientific wild-ass guess. Boeing built the tooling for a full-scale prototype of the 787 wings in Seattle and then gave all of that to Mitsubishi. It was a huge boost to Mitsubishi.”

He adds: “Boeing gave Mitsubishi the materials technology and the manufacturing processes – the layup processes, temperature and pressure conditions for the autoclaves, for instance. Boeing also transferred its tooling and assembly expertise and there is a lot of expertise in assembling a wing.”

Sorscher notes that previously Boeing had regarded wing-making as its ultimate core competency. By keeping the wings largely or totally in-house, Boeing minimized the risk that the Japanese consortium could ever become a viable future competitor. As recorded in the late 1980s by Louis Uchitelle of the New York Times, a security-conscious Boeing had previously gone to great lengths to keep Japanese visitors away from its wing-making operations.

The assumption in the industry is that carbon-fiber wings will become standard in future passenger jets. By engaging the Japanese to lead the move to carbon-fiber, Boeing may therefore be committing the industrial equivalent of assisted suicide. As Richard D’Aveni of the Tuck Management School points out, the risk is not only that Boeing will lose the ability to make state-of-the-art wings but that, as it loses touch with manufacturing, its ability even to conduct design and systems integration will gradually atrophy.

His concerns seem to be being belatedly heeded inside Boeing. In recent months, the company has indicated that it wants to bring more manufacturing back in-house. This is implied, for instance, in plans for the new so-called 777X, a stretched version of the 777 which is expected to enter service around 2020.

The question is whether Boeing is closing the barn-door after the horse has bolted. Certainly, as William Lazonick, head of the University of Massachusetts Center for Industrial Competitiveness, points out, the Japanese are looking increasingly formidable. He explains: “I don’t think Boeing will ever make a composite wing for a large passenger jet. Japan’s competitive advantage is its deep expertise in machining, its knowhow with advanced materials, and its capital goods. Where you are looking for very high-quality engineering, and labor that maintains its capabilities over long periods, the Japanese are superior.

“This sort of work has been abandoned in the United States because the Japanese are there to do it. They have tremendous expertise in precision engineering using complex materials – materials that have to be dealt with in a particular way such as getting the weight down to a minimum. They will low-ball their prices to get work because they know they will keep it.”

Going forward a major problem for a systems integrator is that technological progress is so rapid. Richard McCormack, editor of Manufacturing & Technology News, explains: “Once you fall behind in advanced manufacturing, the costs of catch-up are just too great, and a chief executive aiming to maintain quarterly earnings cannot afford to incur them. The story in advanced manufacturing is that once foreign suppliers gain a foothold, they rapidly descend the cost curve and can quote prices far lower than a U.S. corporation can match in-house.”

Why is wing-making so crucial? Wings must weigh next to nothing, yet withstand occasional extreme buffeting. They must respond instantly and smoothly as a plane takes off or lands. Imprecise machining means drag and, where components do not fit snugly, wear increases exponentially and, with it, the risk of catastrophic failure in flight.

Wings for large passenger jets pose unique challenges because the larger a part is the greater the difficulty in machining its surfaces to required tolerances. Given that some wing parts these days can be as long as 100 feet, only a few factories in the world have the massively expensive machinery and rich endowment of tacit knowledge to meet the challenge.

In the case of carbon fiber wings, the challenges are further compounded because carbon fiber is a notoriously fickle material. Extremely strong in normal aeronautical use, it can also be extremely brittle if mishandled. A few tiny cracks invisible to the naked eye can doom a plane.

In outsourcing so much of the Dreamliner, Boeing has flouted the opinion of its own top engineers. The company received a particularly well-argued caution at an in-house conference as far back as 2001. One of Boeing’s senior engineers, John Hart-Smith, delivered a paper on the dangers of excessive reliance on outside partners – a paper that subsequently went “viral.”

Referring to the American aerospace industry’s pattern of ever increasing outsourcing, Hart-Smith asked: “Is it really all that difficult to comprehend that, along with the work involved, the revenue and profit associated with it have also been outsourced?” He added: “One must be able to contribute in some way to products one sells to avoid becoming merely a retailer of other people’s products.”

Although Hart-Smith’s stand was widely applauded by his fellow engineers, a top Boeing executive immediately gave an unscheduled response in support of outsourcing.

Hart-Smith’s views were probably shaped in part by the fact that he had previously worked for McDonnell Douglas, a once brilliant company that flamed out after decades of increasing reliance on foreign partners. It eventually succumbed to a merger with Boeing in 1997. Hart-Smith had joined McDonnell Douglas at the height of its success in the 1960s, when in many ways it still overshadowed Boeing. He had subsequently watched its commercial aircraft business outsource itself to death. A key problem was that designers became so out of touch that they no longer understood basic manufacturing realities.

Hart-Smith’s message should have packed a special significance for one higher-up in particular: Boeing’s future chief executive Harry Stonecipher. A classic “numbers guy” who had come out of Jack Welch’s General Electric, Stonecipher had served as chairman of McDonnell Douglas and in that capacity had presided over a particularly toxic outsourcing fiasco involving technology transfer to China. By 2003 he was chairman of Boeing and oversaw the early stages of the 787’s development.

How does Boeing justify its retreat from manufacturing? The company is not saying and requests for interviews were refused. A spokesman said that all questions are answered at the company’s website. In reality the site is so difficult to navigate that it is virtually useless. Asked to comment on information gleaned from other sources, the spokesman declined, saying that he would not “fact-check” this article. Meanwhile independent sources who had been helpful for a previous article in 2005 inexplicably refused to cooperate this time. A pattern of self-censorship also seemed to extend to the U.S. Senate: one outspokenly pro-manufacturing Senator, a Democrat from the Mid-West, at first ignored this writer’s requests for comment and then, after repeated reminders, offered a few irrelevant platitudes that carefully avoided any criticism of Boeing.

All in all, as the prominent Washington-based aerospace analyst Richard Aboulafia has suggested, interpreting developments at Boeing these days “resembles Kremlinology.”

That said, Boeing does have some excuses, albeit weak ones. A key factor is so-called offsets, which are requirements by foreign air-forces and government-controlled foreign airlines to favor their nations’ manufacturers in outsourcing key aerospace contracts. No nation has benefited more from offsets than Japan, and the Tokyo government’s ability to manipulate the U.S. aerospace industry is legendary.

But this does not mean that Boeing had to roll over. The fact is that it has at all stages held the high ground. In buying full-size passenger jets, the Japanese have had only two choices, Boeing or Airbus, and Airbus, as a key manifestation of German-French industrial policy, has had no agenda to transfer either technology or jobs to Japan. Meanwhile, as Matthew Lynn, author of Birds of Prey, has pointed out, the Japanese have long been under a strong geopolitical obligation to buy Boeing to help reduce their nation’s chronically large bilateral surpluses with the United States.

In the circumstances it should have been easy for Boeing executives to hold the line. In reality there is no evidence that they even tried. Their failure seems all the more surprising for the fact that Japan’s work share in Boeing planes has long been far greater than the proportion of final sales accounted for by Japanese airlines.

As Barry Lynn, a senior fellow of the New America Foundation, points out, not the least controversial aspect of this story is that Boeing’s policies seem at odds with its communitarian obligations. On the one hand Boeing has received considerable government support over the years. Meanwhile though the company claims that nearly 500,000 workers worldwide participate in its programs, most of those jobs are outside the United States. Certainly jobs in the company’s civilian jet division have been cut by more than 20,000 in the last three decades.

Lynn comments: “Much of the technology that Boeing has transferred abroad was subsidized by the U.S. taxpayer and it was entrusted to Boeing to look after. Instead Boeing has sold it off. There has been a substantial amount of cashing out and top executives have treated themselves extremely well.”

On one estimate, in the three decades to the mid-1980s, more than 70 percent of the U.S. aircraft industry’s development funding came from Washington, D.C., mainly thanks to spinoffs from military and space projects. More recently Boeing benefited greatly from low-interest finance from the U.S. government. According to the industrial geographers David Pritchard and Alan MacPherson, Boeing received a $3.2 billion subsidy package from Washington State in support of the Dreamliner program. Earlier there had been a $1.8 billion hand-out from NASA earmarked to develop America’s industrial base in preparation for the so-called High Speed Civil Transport, a proposed American-made supersonic airliner. Although the plane was later cancelled, there seems to have been no record that Boeing returned any of the money.

Another factor often mentioned in mitigation of Boeing’s outsourcing is a perceived need to enlist financial partners who can help fund the development of new planes. In the case of the Dreamliner, the Japanese Heavies provided much of the funding. But did Boeing need such help? As William Lazonick points out, Boeing had plenty of in-house financial muscle. It chose instead to use its cash to reward shareholders via hefty dividend increases and, even more irresponsibly, huge buybacks of its own shares.

“Most of the buybacks came in two periods, first between 1998 and 2001, and then between 2004 and 2008,” says Lazonick. “Boeing’s buybacks cost more than $20 billion in total. And it is not as if they were not paying dividends. They were paying substantial dividends. I reckon between the beginning of 1996 and the end of 2007 their dividends totaled $8 billion. When you add it all up, buybacks plus dividend payments totaled $29 billion.”

He adds: “This is not atypical for major U.S. companies these days. They are looking for every way to cut what they spend on investment. Boeing could have done all the investment they wanted. Boeing’s buyback policy is a big difference with Japan. Companies there do very little buying back of their stock. They reinvest in their businesses.”

What is clear is that Boeing’s stock price has done well. Measured from end-1997 it is up more than 170 percent. Not bad compared to a cost of living increase of just 47 percent. The rising stock price has in turn powerfully boosted executive stock options. Hence in large measure the fact that Boeing’s current chairman Jim McNerney made $27.5 million in 2012. This compares with a total of $1,725,000 for then chairman Phil Condit in 1997 – and Condit’s package was probably rich by previous Boeing standards.

Let’s sum up. The Boeing story strongly suggests that America’s defense base has become dangerously eroded. In this sense it is further evidence of a trend identified in a little noticed report in 2005 by the Defense Science Board. The board’s focus was mainly on the electronics industry and it found that even among suppliers who served mainly or solely the U.S. defense industry, hollowing out had already then reached shocking levels. “There is no longer a diverse base of U. S. integrated circuit fabricators capable of meeting trusted and classified chip needs,” the report said. “From a U.S. national security view, the potential effects of this restructuring are so perverse and far reaching and have such opportunities for mischief that, had the United States not significantly contributed to this migration, it would have been considered a major triumph of an adversary nation’s strategy to undermine U.S. military capabilities.”

In discussions of the unintended consequences of globalism, the leakage abroad of valuable production technology is the elephant in the room. It is consistently ignored in all standard theoretical accounts of free trade. In an era when information can move around the world at light speed, this is an oversight of epochal importance. Almost everyone, it seems, assumes that no matter how fast American industrial knowhow leaks abroad, an abundance of new production methods and new industries will keep bubbling up to provide additional sources of prosperity. Not only do people not stop to consider whether this assumption is valid, they don’t even realize they are making an assumption. As Ralph Gomory points out, overconfidence about the U.S. economy’s capacity for economically valuable innovation is a major error, and it goes a long way towards explaining why, despite constant assurances from economic theoreticians that global free trade would boost American competitiveness, the opposite has consistently been the case.

Gomory notes that a fundamental problem is that many of America’s most sophisticated competitors do not run their trade policy on a free market basis. By intelligent use of trade barriers, among other things, they can hope to winkle advanced production technologies out of the United States. By the same token, employers in such nations are often under considerable pressure – political, economic, and societal – to keep their most advanced production technologies at home, and well away from the risk of theft by foreign rivals.

In short, a historic ratchet effect is at work. With high-value jobs disappearing never to return, America’s imports and current account deficits rise with each succeeding economic cycle. The deficits have to be financed – and this means ever greater reliance on major creditor nations, not least China and Japan, but also Saudi Arabia, Russia, and Germany. On present policies, the United States is destined to continue on a downward spiral of indebtedness similar to that of the late-era Ottoman empire.

Posted in American decline, Global economy, Japan, Manufacturing, Trade | Tagged , , | Leave a comment

The myth of Japan’s “lost decades”: An invitation to Ambassador John Roos

Why do Americans keep misunderstanding Japan? Much of the blame must be placed at the door of the State Department. And that is why last week I extended an unusual offer  to  the current U.S. ambassador to Tokyo.

As part of a continuing effort to improve understanding of the Japanese economy, I have issued an invitation to the U.S. ambassador to Japan, John Roos: I will make a donation of $10,000 to his favorite good cause if he will nominate one of his State Department advisers to join me for a discussion in Washington of the contradictions of the “lost decades” story.

There is much to talk about. It is only a slight exaggeration to say that the essence of U.S.-Japan economic relations since the 1960s has been that Japanese officials have pretended to open the Japanese market, and the State Department has pretended to believe them. The Americans have been intent on keeping Japan “on side” in providing largely hortatory support for various U.S. foreign policy initiatives, most notably in relations with the old Soviet bloc and more recently with such problem states as Iraq, Iran, and North Korea. Continue reading

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The Japanese Electronics Industry: A Rebuttal

A message for Richard Katz and other Japan declinists: Look at the big picture.

Probably no commentator has been more outspoken in proclaiming the demise of the Japanese economic model than Richard Katz, author of The System that Soured. While many of his erstwhile comrades in the “collapsing Japan” school have long since quietly acknowledged that their previous extreme views were overdone, Katz keeps on keeping on.

In his latest salvo, Katz has portrayed the Japanese electronics industry as a basket case. “Japanese High Tech’s Five Circles of Hell” is how Business Week’s Brian Bremner sums up Katz’s findings.

Sounds pretty serious. But anyone who checks the facts finds that Japan continues to lengthen its lead over the United States. Continue reading

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