A Realistic Look at China
China’s aggressive military buildup, unholy alliances with radical Islam, infiltration of Latin America to control natural resources, and cyber-warfare against U.S. defense and commercial interests are dangerous but largely ignored threats to national security. China is building its first viable Navy in the modern era. In October 2006, a Chinese submarine stalked a U.S. battle group and surfaced within torpedo firing range before being detected. China now has a Russian-origin wake homing torpedo (Shkval-2 or Squall) that goes over 235 mph under water in addition to high-precision, anti-ship ballistic missiles that make the U.S. fleet floating targets.
The Department of Defense, however, has not successfully addressed these problems because there is no simple answer that is politically acceptable. (Also recognize that military people who do not pilot weapons of war or who are “boat rockers” never get to lead the pack.) China now has over 1,300 long-range precision-strike weapons, ground-launched cruise and anti-ship ballistic missiles available for war. China has a decisive military edge in this arena and is a threat to U.S. national security. Further, it is known that the Chinese military has plans and the capability to mount cyber attacks to cripple the American electricity distribution grid within minutes.
However, this is not an article on military vulnerabilities. It is more about our country’s issues as they apply to readers’ industrial interests. So let me introduce connections between U.S. national security interest and industry, especially about frictions in U.S.-China relations. Let us first get a current and historical look at reality.
Until the current recession, U.S. manufacturing sectors were setting performance records. Manufacturing as a share of the economy peaked in 1953 but has shrunk annually as a part of the total, due only to the rise of the services sectors. America still makes high-value products (machinery, airplanes, medical devices, pharmaceuticals and biotech items) accounting for 21.4% of global manufacturing compared to 13.4% from China.
Most Americans are not aware that one-third to half of the reported value of imports from China ignores value added by U.S. industry, overstating the Chinese “value content” by 100-200%. A metric that is politically important and widely mentioned in the media is the number of U.S. jobs lost – manufacturing jobs peaked in 1979 at 19.4 million and have trended downward ever since. Between 1995 and 2004, China lost over 15 million manufacturing jobs; the U.S. lost two million. However, politicians and the media neglect to report that the two national manufacturing sectors are highly complementary. U.S. inputs tend to occur early in the manufacturing cycle with product conception, branding and engineering, while the Chinese do the mid stages of fabrication and assembly. Americans finish the cycle with logistics, retailing and after-sale service.
A major complaint is that currency manipulation undervalues the renminbi (RMB), but evidence indicates that the large U.S. trade deficits would not be reduced with RMB appreciation. In the three years between 2005 and 2008 the RMB appreciated 21% against the dollar, but U.S. trade deficits increased 33%. It must also be recognized that making an artificial RMB appreciation reduces U.S. relative real incomes. More importantly, there is no way to know how to assess RMB value. American economists and politicians cannot truly equilibrate the RMB and dollar.
The U.S. has been the major power against officially accepting China as a market economy. U.S. policy roles ignore the fact that half to two-thirds of Chinese exports are tied to mostly imported materials and, further, that another 20-25% RMB appreciation would diminish the value of the near $1 trillion debt held by China, something the U.S. government has encouraged China to provide to finance America’s reckless spending.
Finally, remember that China only has $1.2 billion in direct U.S. investments. The U.S., meanwhile, has direct foreign investments including $454 billion in the U.K., $260 billion in Japan, $259 billion in the Netherlands, $221 billion in Canada, $211 billion in Germany, $64 billion in Australia, $16 billion in Korea and $1.7 billion in Russia. China is not trying to buy an equity position in America.
It is obvious to me that U.S. policy makers and industry, who express a selfish interest to “level the playing field” (as is often expressed), have a lot to learn. American interests are best served by maintaining an industrial trading partner in China while keeping a clear eye on what that relationship means regarding national security and our self-made financial debacle. America cannot have it both ways. China is a security and economic threat now, but they are not an industrial adversary.
The U.S. should accept China as an equivalent industrial and trading partner while remembering they are a national-security threat to America. Have a nice day. IH