Monday, June 27, 2005
China and Krugman
Today's NYTimes Krugman Op-Ed: "The Chinese Challenge"
For a liberal, I must admit I'm not the biggest Krugman fan. The fact is that I'm fairly economically conservative, although I stop far short of the sell-out-to-the-business lobby so characteristic of Bush and DeLay.
My first reaction to his column was that either 1) he didn't put much heart into it, and covered it really because it is an extremely important yet underreported issue, or 2) he knows from the get-go that it's not an issue he can really rally progressives around. Because of this, he was fairly matter-of-fact, and the piece can be read in its entirely by Krugman haters without getting too pissed off, with one key exception ("Buying a company is a lot cheaper, in lives and money, than invading an oil-producing country.", random jabs like this don't do enough to appease his base but are just enough to convince dissenters to stop reading, which is probably why he placed it in the 2nd to last paragraph). Now, like Krugman I guess, I can't get anyone riled up on this topic. Since few people will find this post due to the recent hiatus, I'll place the blame on something other than the subject matter.
First Krugman takes his usual bragging rights:
Fifteen years ago, when Japanese companies were busily buying up chunks of corporate America, I was one of those urging Americans not to panic. You might therefore expect me to offer similar soothing words now that the Chinese are doing the same thing. But the Chinese challenge - highlighted by the bids for Maytag and Unocal - looks a lot more serious than the Japanese challenge ever did.Second, some obvious facts:
There's nothing shocking per se about the fact that Chinese buyers are now seeking control over some American companies. After all, there's no natural law that says Americans will always be in charge. Power usually ends up in the hands of those who hold the purse strings. America, which imports far more than it exports, has been living for years on borrowed funds, and lately China has been buying many of our I.O.U.'s.He skipped the most important fact: Supply and Demand. Here's what I mean (thank you, Google):
US Population = 295,734,134 (July 2005 est.)
China's Population = 1,306,313,812 (July 2005 est.) (almost 4.5 times ours)
World GDP = $55.5 trillion (2004 est.)
US GDP = $11.75 trillion (2004 est.)
China GDP = $ 7,262,000,000,000 (almost 62% of ours)
Work out the math, and under a perfect equilibrium, China's GDP should be 7.28 times what it is today, or $52 Trillion. I don't think China will ever have a per capita GDP that the US has, that's just the reality of a socialistic system, but don't expect the trend to stop anytime soon. Barring a major economic crisis, China is going to pass us within a couple years.
The question with China is how much of American Industry will they buy up (thus hurting, long term) our own growth. Krugman does a remarkably good job of this, comparing the Chinese buy-up to Japan's in the 80's:
The Japanese, back in the day, tended to go for prestige investments - Rockefeller Center, movie studios - that transferred lots of money to the American sellers, but never generated much return for the buyers. The result was, in effect, a subsidy to the United States.Sure, but Krugman doesn't really offer an explanation. I do. Japan, as a reflection of its people, embodied a "new money" economy. Similar to South Korea, Japanese, due to their culture, are drawn to fascinating investments. Since China's investment comes from a fairly centralized scope (and from groups of individuals used to a structured communist lifestyle), they're a lot less likely to invest in some jazzy Manhattan building or high-profile entertainment company.
The Chinese seem shrewder than that. Although Maytag is a piece of American business history, it isn't a prestige buy for Haier, the Chinese appliance manufacturer. Instead, it's a reasonable way to acquire a brand name and a distribution network to serve Haier's growing manufacturing capability.
Krugman then rightfully so sleazes China's investment choices:
The China National Offshore Oil Corporation, a company that is 70 percent owned by the Chinese government, is seeking to acquire control of Unocal, an energy company with global reach. In particular, Unocal has a history - oddly ignored in much reporting on the Chinese offer - of doing business with problematic regimes in difficult places, including the Burmese junta and the Taliban. One indication of Unocal's reach: Zalmay Khalilzad, who was U.S. ambassador to Afghanistan for 18 months and was just confirmed as ambassador to Iraq, was a Unocal consultant.China, if you recall, is the major hindrance in Darfur. Most of Sudan's oil goes China's way, and China's UN veto power is a major roadblock to any international action.
I ultimately am not sure whether this is a dangerous sign. I was really too young while the Japanese were buying up American companies and property. But this certainly could be a huge issue. Chinese control over T-Bills and other bonds mean they have little to no control over their investment. But when parts of oil companies are bought out, it does worry mean about the power China may have over us. Imagine Unocal turning around and shipping all their oil to China, thus driving our own energy prices up and China's down.