Is this Western ‘humility’ or a flanking move on China? (Cartoonist – Mike Keefe, The Denver Post; courtesy – caglecartoons.com.).
During Obama’s visit, China secured everything it wanted – the political dividends of funding $800 billion debt to an ailing US economy. Having locked the US into economic inter-dependence, it also used American vulnerability to legitimise a much larger role for itself. Hitherto China was the greatest champion of “national sovereignty” which it deftly contrasted to the West’s intrusiveness. The seemingly innocuous reference to India and Pakistan marks a new willingness to step into an emerging void. China is not going to flex its muscles in a hurry. It has set the markers for a new, global architecture of power that will follow its inevitable emergence as the world’s biggest economy. India has reason to worry. (via China has tamed India with help from Obama – The Times Of India).
The US strategy
Most ‘future-of-China’ debates are incomplete as they miss a very important element – the American template for co-opting client states. Let us call this as US-Client-Acquisition Programme (USCAP). China’s economic future will be decided by access to US markets, capital, technology, businesses – very closely.
After WWII, as British, French and Dutch colonialists were being thrown out of Asia, in country after country, the West was in real danger of losing markets and raw material sources. Fueled by a growing migrant population, USA, took the place of tired, old powers – Britain, France and the Dutch. Instead of the openly exploitative system of European powers directly running colonial governments in these Asian countries, the US installed an opaque system – which is equally exploitative. To impose its writ on the newly independent Asian countries, the US simply destroyed their economies by war.
The USA, then instituted the innovative US-Client-Acquisition-Programme USCAP Program and ‘helped’ these countries. These countries (Taiwan, Singapore, Japan, South Korea, Indonesia, Malaysia, et al) were now ruled by overtly independent regimes – but covertly, client states of the USA.
US multinationals and home-grown oligarchs (keiretsus, chaebols, etc.) took over the economy – and sidelined British, French and Dutch companies. To impose this economic model, US armies, using nearly 1 million troops, killed 50 lakh Asians. The takeover of European colonial possessions by the USA was handled over 3 regimes of Eisenhower-Kennedy-Johnson seamlessly.
Club de USA. (Cartoonist – Gary Varvel; publication date – 30-10-2008; source and courtesy – thedailynews.com). Click for larger image.
Apart from war, conflict, by using economic levers, it has successfully created client states across Europe, SE Asia, Japan, etc. Some economies have taken the bait, used US incentives and become ‘successful’ client states.
Some prospective clients states have fallen by the wayside. South American failures, the Middle East, Pakistan, post-Gorbachev Russian reluctance have been signal failures of American recruitment.
The strategy has 5 five corner-stones: -
- High dollar value – vis-à-vis the client state currency.
- Export led growth
- US multinational corporate investments
- US soft-power is allowed unimpeded run (Hollywood, Rock & Roll, Coca Cola, McDonald’s, etc.)
- US enemies are the enemies of the client states
The most ambitious target and the biggest challenge in the execution of this strategy is China. But before we look at China, we need to see the US pattern of recruitment and involvement.
In the aftermath of the WW2
After nearly 6 years of WW2, Europe was prostate, with more than 25 million killed (including the Holocaust). European economies were shattered. 10 years after WW2, Europe lost most of its colonies. In the midst of this, the US stepped in with the Marshall Plan and IBRD. Most European currencies were set at a low exchange rate, exports to the USA were boosted, and Europe made a comeback.
Money makes the world go round … (Illustration by KAL | Feb 5th 2009 | Source and courtesy – economist.com). Click for a larger image.
During the 1950s and 1960s, Europeans amassed a huge stash of US treasury bills to keep up fixed exchange-rate pegs, much as China has done today. But the purchasing power of Europe’s dollars shrivelled during the 1970s, when the costs of waging the Vietnam war and a surge in oil prices contributed to a calamitous inflation. (from China’s Dollar Dilemma By Kenneth Rogoff)
In return for US aid, Europe agreed to be a junior partner in the NATO alliance. Unlike most overlords and masters of the past, the USCAP allowed significant leeway to their European client states in matters of culture, language, political, economic and religious freedom. The US yoke around the European necks was never too heavy or irksome. Mostly.
Italy, Germany, France, Austria, Sweden, Denmark, The Netherlands made a brilliant recovery. The only laggard was Britain – living on past glory and trying to unwind the past, at the same time. As European economies stabilized, the US ‘allowed’ European currencies to appreciate against the dollar, triggering 40 years of low-growth /economic stagnation in Europe.
The end of the Japanese miracle
As European success stabilized, US turned its attention to Japan. The Japanese star started ascending in the 70s. From the 80s, right upto the 90’s, the business and economic world were agog with the coming of the Japanese. The ‘Japan-MITI-keiretsu-Quality management system’ combination seemed unstoppable. The world waited with bated breath for the Japan to rail-road everyone else. Every businessman, first tried to learn Japanese etiquette.
Hollywood made films showcasing Japanese business and economic systems – like Black Rain (Michael Douglas teaches a few things to the Japanese Yakuza and the Tokyo Police); Die Hard (Bruce Willis fights terrorists in Nakatomi Plaza), Rising Sun (Sean Connery, Wesley Snipes investigate murder in an American subsidiary of a Japanese company).
1973-1985. The Japanese were strutting on the world stage. In their hubris, one Japanese businessman declared that the only world-class product made in USA was maple syrup.
From ‘The myths of Japanese quality; By Ray E. Eberts, Cindelyn G. Eberts’, Page 141
In business schools, Japanese management was the first lesson and the last word. American corporate icons like Xerox, FedEx, Motorola adopted various ‘QIP’ systems – quality improvement processes. The miracle of European Reconstruction and EU was not even in the consideration set any more. The USSR was still a power to reckon with. Berlin Wall looked like a permanent fixture across the heart of the Western world. And the Japanese manufacturing juggernaut seemed unstoppable.
Falling cherry blossoms
Finally, the Americans decided to bell the cat – and the yen-dollar exchange rate was rejigged. The American government put pressure on Japan’s politicians and central banking officials to raise the value of the yen against the dollar. Some U.S. industries, anxious about their eroding share of world markets, put political pressure on American politicians. With some support from academic economists, American producers argued that a higher-valued yen would help their products sell better in competition with Japanese products and therefore reduce the American trade deficit.
In 1985, the US worked out a deal, whereby the US dollar was devalued, without a formal devaluation. The dollar was allowed to sink against the Japanese Yen – only it was not called a devaluation, but was called the Plaza Accord. Whereby the dollar would be allowed to depreciate against other currencies – especially the Japanese Yen. Intense negotiations spread over nearly a decade followed. During crucial and intense negotiation with Japan, in 1992, George Bush Sr., vomited and fainted.
Endaka – and the end of the Japanese run
After the Plaza Accord, the Japanese team went back home and prepared their industry for endaka – high yen prices. Between August 1971 through April 1995, the yen’s value ratcheted up from 360 to 80 for a dollar. In 1993, for the first time, a non LDP Government was formed in Japan – The Shinseito (Japan Renewal Party) came to power.
And the Japanese goose was truly cooked.
Net outcome, by the mid 1990s, the Japanese juggernaut was halted. Japan had to remain contented with being the world’s second largest economy. George Soros thought,
the prospect of Japan’s emerging as the dominant financial power in the world is very disturbing, not only from the point of view of the United States but also from that of the entire Western civilization
For the next 10 years, the Japanese economy stagnated, investments stagnated. Their dream of supplanting the US as the world’s largest economy were over – for now at least.
After Japan, the 90s was decade of the Asian Tigers – Korea, Malaysia, Thailand, Indonesia, Singapore were all set to replace Japan as the ‘new axis’ of world economy. India especially came out as a clumsy plodder against these countries. Lee Kuan Yew, held forth on the Indian character as faulty – and could not compete with the Chinese-Confucian value-set. Commentators tripped over themselves, predicting an Asian century.
Then followed the Asian Crisis. Significantly affected, Mahathir Mohammed claimed that the 1997 Asian Crisis was a foreign conspiracy. Specifically, he named George Soros as the master mind behind the Asian Crisis. Nine years later, Mahathir made up with George Soros – and at a joint press conference, retracted his charge. (Note: This story got a fresh lease of life during the pre-election campaign in Malaysia. Purportedly, George Soros funded some political parties and websites, with some new stories and fresh charges targetting Mahathir Mohammed.).
Has It Come To This? (Cartoon by David Horsey; publication date – 19th May 2008; source and courtesy – sanfranciscosentinel.com). Click for larger image.
The ostensible reason for the Asian crisis was that investors in the Asian Tigers were funding long-term investments from short-term borrowings – a classic mismatch. The rapid withdrawal of foreign funds impacted development of these economies to the extent of a decade.
The real reason possibly was in the scheme of USCAP things, the US had turned its attention to the Chinese recruitment.
The 2 trillion trap
Similar to the success of the Europeans, the Japanese, Koreans and the Asian Tigers, China too has embraced the US-client state model. Booming exports to the US, massive FDI by the US in the Chinese economy, has put China in the earlier position of Japan and Korea – prime sub-contractors to the US economy. Where the Chinese economy seems to ‘partially different’ is the military side. On foreign policy and ‘American’ culture, the Chinese have been ‘superficially’ resistant and nominally ‘assertive’.
The Chinese miracle, much like the ASEAN, Japanese and European miracles before, is using exports to the USA as a stepping stone. Chinese growth and expansion depends on access to the US markets and a devalued currency. For how long will the US allow the Chinese to do that? Another 5 years – or is it 10 years. Was Obama’s China visit, the first round – in a 50 round bout, spread over the next 7 years?
What is China’s future …
The US dollar-renminbi tango will continue over the next 5-7 years. US pressures will be steadily increasing pressure on the Chinese. After the Asian crisis, China was in a better position to resist American pressure for renminbi revaluation. That resistance to renminbi revaluation, in turn, caught China, in another trap. China has US$ 2 trillion worth of rapidly depreciating foreign reserves.
Which brings us to India!
What will it be
What are the threats to the Indian economy! Will it be a ‘sudden’ collapse in software and outsourcing? Or will it be a severe contraction in gems and jewellery exports? Can it be a 3 year drought due to global warming? Many in India are panting for the day, when the US will deign to look India-wards and make India also into a client state. Most recently, we had the privilege of Shashi Tharoor, our Honourable Minister, who sees India replacing Israel in the US camp!
Without including factors like self-respect, national pride et al, two things make this scenario unlikely. India’s vast entrepreneurial class is unlikely to play second fiddle to American companies. More importantly, with declining US pre-eminence, it is late in the day to become an American client. A more equitable partnership may yet be possible for India.
- China has regained roughly 45% in the last 17 years. The USCAP will need another 10%-20% upward revaluation before the US economy regains traction. StPTBarnum twitter message on 14th January, 2011.
China’s yuan at 13 year high. Close to 45% devaluation on 27th December 1993. Will China go the Japan way?: http://is.gd/Yr2ANG
- In the last 9 months, after this post, debates, analysis posts along similar logic, parallel lines and tangential orbits started appearing.You can’t go wrong, going with Quicktake!
I list below a selection: -
1. First of the block was a BBC itself. Roland Buerk from BBC News, Tokyo who asked
Is Japan’s economy a warning for China?
Japan’s workers have an air of purpose about them, even if their economy is no longer the rising giant it once was.
2. Then came a post by blogger, David Houle. He was sure that
As Japan Has Gone, So Will China?
wrote David Houle for the MediaBizBloggers group.
3. A littler while later, seekingalpha.com author Edward Harrison started wondering if
Is China Repeating Japan’s Mistakes?
4. In June, Deepak Lal started unravelling Chinese economy
Chinese Puzzle-I – Economy
China’s forex reserves look like going the way Japan’s did in the 1980s. Therefore, all talks of a G2 dominating the world economy are premature.
5. Most recently, we then had Huffington Post linking to a story from Foreign Policy, asking
Is China Turning Japanese?
6. Most recently, Businessweek, actually wished that
If Only China Were More Like Japan
China is heading toward a Japanese-style economic debacle, says columnist John Lee, who warns that the process won’t be as gradual or peaceful