When there is an elephant in the room, it is best to acknowledge it. For the United States, the next four years will be Obama. For China, the next 10 years will be Xi.
An established power and an emerging power, sharing a world stage without a script.
Both leaders face pressing internal as well as external issues. For the United States, it is uncertain economic times and a bitterly divided electorate separated by ideology, class and race.
For China, it is how a socialist society, with growing income disparities under Communist Party rule, can deal with the social and environmental fallout of its rapid economic expansion.
Both face the difficulty of controlling and directing ever-larger corporate and government bureaucracies, dealing with difficult international relationships and steering their way through troubled economic waters.
As China is adjusting to a larger world role, we in the United States are trying to extricate and recover from our Afghan and Iraq adventures. Unfortunately, against this backdrop of political and economic uncertainty, things will be less rather than more clear for business.
Below are some global economic observations as we go forward.
Domestically, neither the United States nor the European Union have dwelt much on the fundamental economic changes and their meanings, which have seen the creation of a critical mass of production capabilities in India and China. As our economies search for their sine qua non, high levels of debt will continue to plague both the United States and the E.U. One wonders if the governments will be tempted to use inflation to downsize their liabilities.
The rise of the Chinese Yuan as a reserve currency will dilute the dollar’s strength, but may also increase our competitiveness in the Chinese markets (Interestingly, it took the dollar only 20 years to become a reserve currency and displace the British Pound). The difficulty is that our E.U. competitors will probably enjoy the same advantage, if our respective currencies race to the bottom.
In terms of the E.U., while Europe and China continue to build their economic and political ties with trade and debt diplomacy, it is still not clear how the E.U. will emerge from its current financial crisis. Economic and fiscal union may be the only answer, but is it politically viable?
The weakness of our main economic rival may sound good, but the same forces are working against us as well. For China, the E.U. is an alternate source of technology and process knowledge that it needs to get to a tertiary economic level. The E.U. has fewer technology transfer restrictions than we do and more ways of circumventing existing ones.
In Africa, China will continue to face challenges in its trading relationships. Political instability and a belief that there will always be someone else interested in its resources, will create a no-win situation for Beijing. Africa is now overrun by competing Chinese construction firms looking to build the infrastructure China is bartering for resources. The friction between the Chinese engineering companies, who bring hundreds of workers and even their own cooks, and the locals, who want day jobs but not careers, is palpable. To understand it, see “Empire of Dust,” a documentary which follows a Chinese engineering firm on their African adventure.
In the Middle East, when Israel bombs Iran’s nuclear facilities, it will cause upheaval in the oil and commodity markets and drive production costs higher in China (China now imports 57 percent of its oil consumption). This could help U.S. manufacturers slightly, but the resulting worldwide economic meltdown could put an economic recovery many years down the road. How the rest of the Mideast feels about this, and whether this will overcome the religious antipathy between Persian and Arabs, will have to be seen.
China has bet on a status quo, non-interference approach, betting with the house – always good, unless the house loses.
Russia’s Putin will drive hard bargains, meaning Russian resources will not come cheap. The question is, will a weakened economic situation fan the fires of Russian nationalism to the point where it tries to reassemble the U.S.S.R.? In terms of China, Russia and China have found themselves on the same side on a number of political issues, like Syria, and they should be symbiotic partners. Russia has resources, and China has production, but there is little warmth in the relationship. For example, many in China admire Putin’s strength, but I have heard no one here say they want to visit or live there.
India will continue to struggle with an unworkable democracy, out of control population growth, religious differences and substandard infrastructure. India’s trade with China is relatively small. In 2010, it was $73.9 billion. In 2011, it dropped to $55.6 billion. Most notably, India’s trade deficit grew to $23 billion in 2011, as Chinese steel companies stopped importing Indian iron ore. It is doubtful these two manufacturing rivals will ever be close given their history of territorial disputes.
Japan will continue to wallow economically, its financial position threatened by its need to import food and energy and historical enmities with neighboring countries. Every night for the last month, the Chinese TV is dominated by wartime soap operas and movies. Most of them are about the Chinese civil war, but China’s liberation was tied to the anti-Japanese war. Many here believe that the Chinese will return to Sony and Toyota, but it is doubtful that they will forgive and forget any time soon.
So what is the good news?
China is forecasting its middle class will grow to 600 million by 2020, and that economic growth will be in the 7 to 8 percent range. Another 200 million rural migrant workers over the next 10 years are expected to move to urban areas. This should help with unskilled labor rates. The added population is expected to result in another 40 trillion RMB ($6.3 trillion in U.S. dollars) in investments by 2020. By 2016 the combined residential consumption should jump from 16 trillion in 2011, to 30 trillion RMB ($2.6 trillion to $4.8 trillion in U.S. dollars).
The issue is, as China switches to a domestic consumption growth model and deemphasizes its export economy, will they keep the door open to foreigners or try to encourage domestic firms? The answer should be obvious. This means if you are thinking about doing business in China for the long term, you need to either figure a way to make yourself either look domestic or bring something they cannot do without. And as you look at our domestic and China’s international situation, make sure all the pieces fit.
Einar Tangen, formerly from Milwaukee, now lives and works in Beijing, China. He is an adviser to Heilongjiang Province, Hebei Province QEDTZ, China.org.cn, China International Publishing Group, Beijing Baotong and DGI DESIGN. He is also a weekly public affairs commentator for CCTV News’ Dialogue and the author of “The Kunshan Way,” an economic development history of China’s leading county level city. While in Milwaukee, he was a partner at Jackson, Morgan and Tangen, president of E-Tech and a senior vice president at Stifel Nicolaus. He chaired various boards in Milwaukee and was a member of the Federal Home Loan Bank of Chicago. Readers who would like to submit questions or suggest areas of interest can send an e-mail to steve.jagler@biztimes.com.
