China As An Echo Of Japan

Many Americans worry today about China much the way they worried about Japan over a quarter century ago. Then, Harvard scholar Ezra Vogel’s Japan As Number One: Lessons for America, extolled the virtues of a controlled economy in a tightly-wound bureaucracy. Vogel exhorted Americans to copy Japan, whose students recorded higher scores on standardized tests, whose companies exported the larger part of their production with ever better quality, whose economy seemed to be growing exponentially as the economy in the United States was suffering stagflation. Japan loved Vogel’s message. The Japanese translation of his book is still the best-selling non-fiction work in Japanese history. Yet, of course, he was wrong.

Japan’s controlled economy and centralized Ministry of International Trade and Industry triggered much of the philosophy and design behind changes in the countervailing duty laws to account for predatory targeting of foreign markets. The trade remedy tools for antidumping did not seem adequate to take on the wealth and power of the Japanese government. American concerns had focused on semiconductors and steel, but there were many other products ranging from portable typewriters to the most sophisticated computers. The slogan was that American companies could compete with any foreign private enterprise, but not with foreign governments. The perceived solution was to concentrate on challenging Japanese subsidies that were intended to put foreign (American) competition out of business.

Ironically, American producers rarely took advantage of these new tools under the countervailing duty laws to address concerns about imports from Japan. Instead, they continued to rely almost exclusively on the antidumping law, using these countervailing duty tools, originally created with Japan in mind, against other countries, most recently China. The sloganeering, however, remains the same – that it is one thing to compete with foreign private enterprise, and quite another to compete with a foreign government.

Japan was determined to move up the production value chain, from the manufacture and export of cheap knick-knacks to the premier rungs of automobiles and electronics. Generally, Japan succeeded under state direction, but the move up led to offshoring jobs for assembling and finishing sophisticated goods, and to the loss of jobs related to lower-cost production in textiles, transistor radios, and other items that had contributed to the reputation of “Made in Japan.”

There were many congressional calls in the United States for tough enforcement of the trade laws in order to guarantee a “level playing field” for American manufacturers. It was not the retaliatory trade laws, however, that slowed the Japanese engine. Instead, it was the stultifying bureaucracy, the government’s replacement of the market to pick winners and losers, the dominance of imitation over innovation favored by the students with high standardized test scores. It was the cost associated with graduating from cheap to more expensive and sophisticated goods. The robust economy turned stagnant, and lost years became lost decades. No one today in the United States would want to have been emulating Japan, even before the devastation of the 2011 earthquake and tsunami.

There are echoes from Japan in today’s global response to China, whose astonishing growth and achievement during the very period when Japan’s economy was failing has challenged some American beliefs in the free private enterprise system. China’s major producers are state-owned enterprises; the economy is subject to central control and management. China has proved Milton Friedman as wrong as Vogel: democracy is not a sine qua non for successful capitalism. An authoritarian state with a centralized economy can, at least under some circumstances and for some period of time, prosper.

Some, including many Chinese, argue that Americans should be learning from China how to recover from recession and manage an economy. Many Chinese are as enamored of the image of a surging China as the Japanese had been with the Vogel version of Japan. Two years of aggressive foreign policy at the end of the last decade meant, at least in part, to suggest to the United States that China had plenty of muscle of its own, a new self-confidence and independence.

Japan Not Then And China Not Now

Exponential extrapolation has always been seductive to social scientists. Uri Dadush and William Shaw, in Juggernaut: How Emerging Markets Are Reshaping Globalization, project annual 5 percent growth for China for the next forty years, neglecting the exercise of looking back forty years to ask whether anything predicted then would make sense now. China in 1970, in a Cultural Revolution banishing intellectuals and celebrating peasants, becoming the world’s leading exporter of manufactured goods, with more than 300 million people lifted out of poverty and expanding cities? The Soviet Union, instead of the great nuclear rival and threat to western capitalism, going out of business altogether? The type of predictions in Juggernaut rightly scare Americans. Some, who think they must compete with the juggernaut, consider imitation more than flattery.

Americans should no more consider imitating China today than they should have been learning many lessons from Japan in the 1970s and 1980s. It does not diminish the Chinese accomplishment to conclude that it should not be emulated, and that it will not last, in this form and this way, forever (nor even forty years). Japan’s great growth and achievement was a sustained progression from the devastation of World War II. It took around thirty years. China’s growth follows the Cultural Revolution. Once launched by Deng Xiao Ping it, too, took around thirty years. This assessment does not mean that China has run its course, but it does mean that there is much that should (and does) worry China. There is much that is not right in the economy, and many warning signs immediately ahead.

Fragile China

There has been much commentary about China’s fears of instability. The Government reports tens of thousands of protests around the country every year, many violent and involving masses of people. Such protests seem surprising in an authoritarian state with a growing middle class and manifest materialism. From the outside looking in, the Chinese government is in control and the state is not legitimately threatened. The Chinese Government, however, does not see the protests that way.

China is on the precipice of a demographic challenge unlike any ever seen on such a scale by any country before, especially one induced by government policy. While the population is graying rapidly, there are few replacement workers because the one-child policy formalized in 1980 still applies. Its enforcement has been fitful, and there have been tens of thousands of breaches, but China estimates having prevented as many as 400 million births. Less apparent to authorities, however, are the consequences.

The Chinese population between 15 and 24 years old has been falling precipitously since 2000, to barely 12 percent of the population in 2011. The population over 65 is only 8 percent in 2011, but it will rise to 20 percent by 2040 while the population between 15 and 24 will be just over 10 percent. In a state that provides almost no social welfare net -- no pensions, no health care – the growing prosperity that is producing an aging population will evaporate for the elderly, who will depend on a diminishing population to care for and support them.

There are economic forces that will compound this demographic challenge. China is determined to move up the value chain in production, just as Japan did in the 1960s and 1970s. Such movement, however, carries at least two consequences: wages rise, and the number of jobs declines. It already is well-known that Chinese enterprises, and foreign enterprises operating in China, have been offshoring jobs to Bangladesh and Indonesia and Malaysia and Vietnam because of soaring labor costs. The growing middle class is expanding a gap leaving the poor behind, making it more difficult for China to raise the next 100 million from poverty, and the rate of enterprises opening or expanding in China in order to benefit from cheap labor is in decline.

To keep the economy growing and an increasing population (despite the one-child policy) housed and fed, China is becoming the leading consumer of energy and the leading producer of carbon emissions on the planet. It will take a long time for China to catch up to the United States as a per capita consumer and polluter, but not to be the leader in both in sheer volumes and values. The Chinese Government is very aware of the dangers presented by this twin challenge. It is addressing the carbon emissions problem aggressively by subsidizing the development of alternative fuels and power, but for the medium if not long term it cannot escape a dependence on coal for which there seems to be no technical fix as a source of significant pollution. China, like most other countries, has been discouraged by events in Japan from pursuing nuclear alternatives.

The energy challenge has been the focus of Chinese foreign direct investment. China is using accumulated foreign reserves to buy natural resources around the globe and ship them back to China. Not a small amount of resentment is building, however, against this raid on the rest of the world’s natural resources.

China faces a revolution of rising expectations that requires ever-growing quantities of energy, and a permanent challenge to create more jobs and increase wages simultaneously, another feat that appears impossible to sustain. The numbers of protests inevitably will rise in this environment that puts a premium on jobs and private responsibility.

There is also a fear of international contagion. The revolutions of colors (orange, lavender) have bled into seasons (the Arab spring). While outsiders may see no palpable threat to China, Chinese authorities are taking no chances. There is instability all around the Chinese neighborhood, from Chechnya to North Korea to Thailand to Pakistan. There are potential challenges on the peripheries (Tibet, Uighurs); there is a domestic Moslem population. There are daily battles over the seizure of land from peasants for speculation and development, all conditions that, Chinese authorities fear, could ignite something beyond control. And control is important in a country whose history in the absence of central control has been tragic.

The situation in China is inherently unstable because of the unyielding need to keep the economy expanding, employment and the middle class growing. World circumstances do not help. China has suppressed speech and responded forcefully to protests, but has delivered economically. Now, Chinese authorities must deliver economically lest more attention be drawn to the limitations on speech and the prevalence of protest. More individual freedoms surely will come with more prosperity and more international travel and global exposure, but authorities reasonably worry that they cannot maintain the breakneck speed that has produced the greatest improvement in living standards for the greatest number of people in the shortest period of time in the history of the world.

The Fragile China Doll

China has become a power in the world economy. It wants to be recognized for its economic importance, but forgiven as a new and developing country. It wants a place at every table, but not necessarily the burdens of responsibility that others at the table think it should share. It wants to project accomplishment and confidence (the Beijing Olympic ceremonies and the Shanghai Expo being the most outward indications), but it wants to be relieved of pressure. It is, domestically and internationally, layers of paradox.

China dolls are to be admired but not much handled, appreciated but not loved because they are too fragile to hold. Some Chinese authorities seem to perceive China now as a China doll, admirable but fragile, durable only as long as it is not handled. China dolls, however, are finished products, and China is a power in the making with a long way to being admired on a shelf. It will remain fragile, but must be ready for rough handling ahead.