February 26, 2008
REVISED PRESS RELEASE: In the Jaws of the Dragon
Publication Date: March 4, 2008
Contact: Joe Rinaldi, Director of Publicity, Thomas Dunne Books
646-307-5565 or [email protected]
Barbara Monteiro, Monteiro & Company
212-832-8183 or [email protected]
STEP ASIDE, TOM FRIEDMAN
A fact-based wake-up call to complacent China trade optimists
IN THE JAWS OF THE DRAGON
America’s Fate in the Coming Era of Chinese Hegemony
By Eamonn Fingleton
“We borrow from the Chinese to buy oil from the Saudis. That’s not a
winning strategy.” So says Democratic Presidential candidate Hillary
Clinton in one of her favorite cracks against the Bush administration.
It never fails to hit home. Whatever the rights and wrongs of
America’s dependence on Saudi oil (and short of drastically choking
back consumption, there seems to be little alternative), ordinary
Americans know in their bones that their nation’s soaring indebtedness
to a not-overly-simpatico China betokens devastating policy failures
in Washington.
The rising popular alarm is amply borne out by the facts. Foreigners
now own a staggering $13 trillion worth of American assets. Equal to
roughly the total annual output of the U.S. economy, this represents
a rise of nearly 30 percent since President George W. Bush took
office.
From a negligible position fifteen years ago, China has now emerged as
America’s largest creditor. It is not an exaggeration to say that
without constant massive Chinese purchases of U.S. Treasury bonds and
other American assets, the U.S. dollar would long ago have collapsed,
U.S. interest rates would have gone through the roof, and the federal
government would be more or less bankrupt.
In truth, as former Forbes writer and editor Eamonn Fingleton argues
in his new book In the Jaws of the Dragon: America’s Fate in the
Coming Era of Chinese Hegemony, America’s increasingly abject
dependence on one of the world’s most authoritarian nations
constitutes one of the great turning points in world history.
America’s fast rising foreign indebtedness stems from an inexorably
weakening trade performance. Every dollar of current account deficit
the United States incurs constitutes one more dollar that has to be
borrowed abroad. As far back as the late 1980s the U.S. trade deficits
were already so high that they caused a firestorm in American
politics. Yet they have multiplied sixfold since then (and fully
three-fold just since George W. Bush took office). Fingleton reports
that, expressed as a percentage of gross domestic product, America’s
current account deficits in the last two years have been the worst of
any great power since the huge deficits incurred by the devastated
economies of Japan, Germany, and Britain in the immediate wake of
World War II.
Compared to the plight of these nations in the late 1940s, America’s
trade problem today may not seem so troubling but actually it is far
less easily remedied. The ultimate source of the problem is the rise
of a fundamentally incompatible, aggressively mercantilist new
economic model in East Asia. Drawing on more than two decades of
on-the-spot research, Fingleton traces the origin of this disturbing
new model to radical economic experiments conducted by imperial Japan
in Manchuria in the 1930s. Perfected in Japan proper in the 1940s, the
Manchurian ideas were embraced by South Korea and Taiwan in the 1960s
and, more portentously, by Communist China in the 1970s.
The key to this model is a policy of ruthlessly suppressing
consumption and thereby artifically boosting a nation’s savings rate.
Just the most obvious manifestation of this policy is that high
barriers are imposed against imports of foreign luxury goods. The
resulting torrential savings flows are channeled via
government-controlled banks into a super-fast pace of investment in
key industries, particularly export industries. As Fingleton points
out, the ability of nations to boost their savings at will through
suppressed consumption constitutes the most momentous development in
economics since Adam Smith and David Ricardo laid down the fundamental
principles of market economics early in the Industrial Revolution.
Ominously for the future of the existing world order, the East Asian
model works best in such harshly authoritarian nations as China where
top officials enjoy huge unaccountable powers to bend the economy to
their will.
In Fingleton’s words, suppressed consumption is to economics roughly
what steroids are to sport and thus is fundamentally incompatible with
Western ideas of fair global competition. It is reinforced by an
Orwellian system of political control that utilizes an ancient East
Asian bureaucratic tool called selective enforcement—a form of
blackmail that instills a silent reign of terror throughout Chinese
society. The idea is that laws are written strictly but are generally
enforced laxly. The authorities tighten up enforcement selectively
against those who for whatever reason are deemed to be getting in the
way of the larger government agenda. Chinese society moreover is
structured so that corporations cannot succeed without breaking many
laws, not least (in a country where bribery is a pandemic cost of
doing business) anti-corruption laws. To get on, corporations must do
business “the Chinese way,” which is to say they must explicitly
compromise themselves. They thereby risk potentially large,
selectively enforced penalties (stiff jail sentences are standard in
bribery cases, for instance). For American policymakers the big worry
is that selective enforcement can readily, if virtually invisibly,
be used to discipline any American corporation with interests in
China—which is to say just about every member of the Fortune 500.
Hence a pattern in which the Chinese tail is increasingly seen to wag
the American corporate dog.
The conclusion is that while the Chinese people’s rising affluence is,
of course, an occasion for wholehearted rejoicing, Uncle Sam is wrong
to assume that prosperity will bring political liberalization in
Beijing. Still less should he assume that China is converging to
American values. Quite the opposite: if there is to be convergence, it
will be the United States that will do the converging. In Fingleton’s
words, the two systems are not so much chalk and cheese as matter and
antimatter. Absent robust firewalls to keep Chinese influence out
of corporate America, U.S. sovereignty will come under increasingly
serious trheat in the years ahead.
A prescient former editor for Forbes and the Financial Times, EAMONN
FINGLETON has been monitoring East Asian economics since he met
supreme leader Deng Xiaoping in 1986 as a member of a top U.S.
financial delegation. The following year he predicted the Tokyo
banking crash and went on in Blindside, a controversial 1995 analysis
that was praised by J.K. Galbraith and Bill Clinton, to show that a
heedless America was fast losing to the Japanese its formerly vaunted
dominance in advanced manufacturing. His 1999 book In Praise of Hard
Industries: Why Manufacturing, Not the Information Economy, Is the Key
to Future Prosperity brilliantly anticipated the American Internet
stock crash of 2000. His books have been read into the U.S. Senate
record and named among the ten best business books of the year by
Business Week and Amazon.com.
Bullet points
1. Americans are competing with a Chinese system that they do not
understand — and that, under present extremely one-sided rules, they
cannot beat.
2. China’s manipulative system of political control is highly
exportable and can readily be extended into American society. As China
moves to displace the United States as the world’s premier superpower,
the implications for American sovereignty and American values are
devastating.
3. For more than two decades Washington has been deceived into
pursuing policies that have powerfully boosted China’s interests at
the expense of America’s economic health and ultimately its national
security.
4. The deception has been carried out principally by a host of
China-friendly American corporations whose names are familiar the
world over. In their efforts to make profits in China’s controlled
markets, top American corporate executives have entered a Faustian
bargain in which they act as agents for Beijing’s deception program.
5. Not only has corporate America systematically hidden from the
American public the downside of Sino-American relations but it has
actively boosted the careers of elected representatives and
commentators who promote China’s agenda in the United States. Many of
these latter know that the fastest way to the top is to espouse
policies that promote China’s interests. Some are so desperate to get
ahead that they act as stooges who promote China’s agenda even at the
expense of the American national interest.
6. At the top of the list of things Americans don’t understand about
China is a secret policy known as suppressed consumption. Chinese
officials use a host of contrivances to block Chinese consumers from
consuming. Home loans and credit cards are virtually unknown. Imports
of foreign-consumer goods are blocked by a wall of non-tariff
barriers. Highly constricting zoning laws keep people cooped up in
tiny living spaces. The net effect is a torrent of savings surpluses
and an “economy on steroids” in which a super-high level of
investment has rapidly built up China’s exporting muscle.
7. Another of Beijing’s biggest secrets is a draconian system of
people control called selective enforcement. Unreasonably strict or
overly extensive regulation makes it virtually impossible for citizens
to do anything without breaking some law or other. Most of the time
the authorities turn a blind eye but they reserve the right to crack
down hard on anyone who displeases them. It is, for instance,
impossible in China to become wealthy without breaking rules on tax
evasion and bribery — thus China’s wealthy are deeply in thrall to
the authorities and cannot function as independent political actors
without risking jail or worse under selectively enforced regulations.
8. American corporations cannot succeed in China without breaking many
Chinese laws, most notably those on bribery (because bribes need to be
paid to get anything done). Once Americans break the law they are
subject to selective enforcement and become vassals of the Chinese
Communist Party.
9. Far from China converging to American values, America is converging
to Chinese values. In this new era of reverse convergence, American
individuals and corporations who have done business in China are
increasingly being blackmailed to serve Beijing’s political and
economic interests.
10. If the U.S. does not immediately and dramatically improve its
trade performance, it can expect to be passed by China within twenty
years as the world’s largest economy.
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