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This article by Patrick Walsh was prepared for the April 9, 2008 issue of U.S. 1 Newspaper. All rights reserved. For the complete calendar of business meetings and arts events in central New Jersey, go to
China Rules: 1821-2008
For some time now, the notion of trade with China has danced like the proverbial sugar plum in the heads of both corporate and private American investors. The crude calculus of selling one-dollar widgets to a billion Chinese customers makes many a venture capitalist salivate.
It also makes them don blinders. Below the happy hype of Beijing’s upcoming Olympics runs an undercurrent of sinister news: neighborhoods razed wholesale to make way for events facilities; censorship sweeps of journalists and Internet users; Tibetan protesters rounded up and mowed down. In China’s redoubling of its perpetual clampdown, any criticism of the government can land one in a windowless cell. Disapproval of official policy creates disharmony and, as everyone knows, China is one big harmonious society. When the world’s eyes turn to China’s capital in August they’ll see nothing but harmony. The word on the street is harmony – harmony or your head kicked in.
These kinds of reports are nothing new. You might say it’s business as usual. Equally routine is how these reports get brushed under the carpet. But if you think that Middle Kingdom-mania is a recent fad, that it’s only 21st century investors who ignore their conscience while slobbering over China’s potential pot of gold, you would be very wrong. And no chapter in American history better illustrates how far both business interests and government have been willing to go to preserve the mere promise of an elusive China payoff than the Terranova Incident.
In 1821 the American merchant ship Emily was anchored on the Pearl River in Guangzhou, known then as Canton. As was common, sampans, or Chinese river boats, pulled alongside ships to trade, mainly with sailors. One night, a sailor aboard the Emily dropped a pot over the side and it landed on the head of a Chinese woman. The woman, presumably knocked unconscious, fell overboard and drowned. The American consul offered the deceased woman’s family a large payment, but Chinese authorities demanded the culprit be turned over to them.
Naturally, the Emily’s captain, as sole arbitrator of justice aboard his ship, itself an extension of U.S. territory, refused. The Chinese countered by threatening to rescind American trading privileges in Canton, an ultimatum that made the American merchant community in China quiver and which quickly reached Washington. The Emily’s captain was ordered to hand over a prisoner. It was never determined who actually tossed the fatal crock overboard, but Francis Terranova, an illiterate seaman emigrated from Italy, ended up drawing the short straw. Despite the fact that manslaughter was punishable by a small fine under Chinese law at the time, the hapless Terranova was strangled a few days later. Trade resumed.1
Entrepreneurs, venture capitalists, investors, and many of our political leaders may dismiss the Terranova Incident as ancient history. Inconveniently for all of them, nothing has changed. The authoritarian Qing dynasty of the 19th century has merely been replaced with an equally dictatorial Communist government. What may shock business pundits more is how little has really changed economically between the U.S. and China since the Terranova Incident.
In 1821 China accounted for 2 percent of America’s total exports.2 According to foreign trade statistics compiled by the U.S. Census Bureau and the World Trade Organization (WTO), that percentage remained essentially the same as late as 2000. Since China entered the WTO in December of 2001, American exports to China have risen slightly. Last year’s exports to China comprised 5.6 percent of our exports in total. That percentage placed China third in the top 15 countries importing our goods, but far behind Canada, in first place, which received 21.4%, and Mexico at 11.7 percent. Japan, at roughly a 10th of China’s ever-touted population, placed fourth, taking in 5.4 percent of our total exports. More astoundingly, diminutive Deutschland and Lilliputian Great Britain tied for fifth at 4.3 percent.3
Alas for Terranova, it’s never been about selling goods in China. What’s changed in Sino-American economics is how much China sells to us. China ranks first among all countries, having provided 16.5 percent of America’s imports last year. Our addiction to cheap goods from China is a national vice. Look around your home: the dish rack and towels, the ironing board, the chintzy flip-flops you wear one summer and then toss, the clock-radio on the nightstand – probably even the nightstand.
Bet you a year’s supply of batteries that the remote controllers for your TV as well as your DVD and CD players are made in China. Then again, who would want to risk winning a year’s supply of batteries when it’s likely that they were made in China too?
But American consumers rarely question why Chinese goods are inexpensive, nor should they. A single mother shopping for cleaning supplies doesn’t weigh sociopolitical ramifications of her purchase, she weighs her pocketbook. Call it "domestic economics." Who wants to shell out three extra dollars for a mop made in America – it’s just a mop!
Besides, China is not the only sweatshop in Asia, it’s just the biggest, an overwhelming economy of scale that chain stores like Kmart and Wal-Mart have profited from for decades. Wal-Mart, the biggest U.S. importer of Chinese goods, is China’s eighth largest trading partner. Sam Walton, that all-American self-made man, publicly preached "Buy American" while dispatching his purchasing agents eastward with orders to "Buy Asian." Anyway, Wal-Mart’s 100 million weekly domestic customers can’t afford to complain; the average Wal-Mart shopper has an income below the national average and one recent study estimated that more than a fifth of them lack a bank account .4
As for what China practices, we can peruse their human rights record, consistently among the world’s worst. The U.S. Department of State’s findings usually look rosier than those of organizations whose primary task it is to monitor such things, such as Human Rights Watch or Amnesty International. Nevertheless, the State Department’s 2007 Report on Human Rights Practices for China makes for grim reading: Arbitrary or Unlawful Deprivation of Life; Torture and Other Cruel, Inhuman, or Degrading Treatment or Punishment; Arbitrary Arrest or Detention; Denial of Fair Public Trial; and Arbitrary Interference with Privacy, Family, Home, or Correspondence.5
Think they like to execute people in Texas? According to Amnesty International’s (AI) 2007 report on human rights abuses in China, 1,010 people were executed. Since that number is based on public reports, AI believes the actual total to be much higher. Always keen for new business opportunities, China’s government announced in November that the majority of its transplanted organs came from executed prisoners .6
As AI’s report states, approximately 68 crimes are punishable by death in China, "including economic and non-violent crimes." A chilling example of these latter categories came last summer in the case of Zheng Xiaoyu, the former director of China’s State Food and Drug Administration. Mr. Zheng confessed to accepting bribes from eight pharmaceutical companies courting his agency’s approval of their products. The 62-year-old father of one was promptly executed. China literally told the world: we mean business, as in big business. While the story undoubtedly pleased a few mercenary analysts who saw it as a gesture of China’s ongoing commitment to fair trade practices, it horrified most Americans, who automatically imagined how sinister it would be to read that the U.S. government had executed the head of our FDA for the same crimes. But the hardhearted prognosticators were right: Zheng Xiaoyu was China’s Francis Terranova, a human sacrifice to demonstrate fiduciary resolve.
And yet, for all of China’s draconian gesturing as a law-abiding nation, government corruption remains at perennially notorious levels. In its 2007 assessment of China, the U.S. State Department- deft wielders of the soft touch-described the situation by saying: "Corruption remains an endemic problem." Yet another great reason to set up shop in the "People’s Republic."
So why do business with China? That imminent mega-market, that vast sea of future consumers, of course! At least that’s what Sino- sympathizers have been promising us for the last 200 years or so. But some parts of the financial community are questioning this unfulfilled prophecy. In 2003 Goldman Sachs issued a "Long-term Industry View" on China’s automobile market. In a section called "Could history repeat itself in China?", they noted the similarities between yesteryear’s economic clarion calls and today’s, citing Henry Cabot Lodge in 1890, a Massachusetts senator championing the textile industry, and Carlos Ghosn, Nissan’s CEO, in 2003. First Lodge:
"All Europe is seizing on China, and if we do not establish ourselves in the east, then that vast trade, from which we must draw our future prosperity, and in the great region in which we alone can hope to find the new markets so essential to us, will be practically closed to us for ever."
And now Ghosn over a hundred years later:
"If we go in [to China] and we are wrong [about China’s growth prospects], then everyone will be wrong, we will not lose any competitive position. But if we stay out, and China works, then we will miss out."
Ghosn’s clever mitigation of his possibly being wrong – if everyone else is wrong it’s not as big a mistake – didn’t persuade the Goldman Sachs analysts, who speculated that China’s auto market could tank much like Brazil’s did in the 1990s. Their conclusion was really an old one long delayed: "We fear that many of the auto industry’s growth assumptions are based more on hope than fact."7
It’s clear, though, that no amount of history, current events, or salient statistics will dissuade most investors from the perception of endless riches in China – never mind moral appeals. The moth-eaten argument that Western goods will create a Western lifestyle continues to make the rounds even as it frays further with each passing decade.
Indeed, China will be a tyranny whose repressed citizens tote Louis Vuitton handbags, drink Coca-Cola, and chat on state-monitored cellphones – that is, the sliver of repressed citizens who can afford such things. (For a definitive refutation of the fallacy that prosperity coupled with international free-trade prevents conflict, read about World Wars I and II.) But let’s not harp on that now. Come August, we’re going to see lots of happy, harmonious faces . . . similar to the faces that filled Berlin’s Olympic Stadium in 1936.
From the Terranova Incident to the Berlin Olympics, hindsight makes unflatteringly crystal the folly of our blunders (for its part, Germany has announced that its leaders will not attend the Beijing Olympics opening ceremony.) It’s quite likely that the future will look on America’s latest wave of profit-pandering in China and ask: "What were they thinking?"
1. Tyler Dennett, Americans in Eastern Asia: A Critical Study of the Policy of the United States with Reference to China, Japan and Korea in the 19th Century, The Macmillan Company, New York, 1922, pp. 86-88; and Lester H. Brune, Chronological History of U.S. Foreign Relations, Vol. 1607-1932, Routledge publishers, 2003, p. 97.
2. Robert Kagan, "Money Trap," (a book review of The Coming Conflict With China by Richard Bernstein and Ross H. Munro), The New Republic, April 7, 1997.
3. U.S. Census Bureau, Foreign Trade Statistics, "Top Trading Partners-Total Trade, Exports, Imports, Year-to-date," December 2007. www.census.gov/foreign-trade/statistics/highlights/top/ top0712.html World Trade Organization, Table III 15, "Merchandise trade of the United States by region and economy, 1999," p.46. [China = 1.9% of U.S. total exports.] http://www.wto.org/english/res_e/statis_e/chp_3_e.pdf
4. Liz Pulliam Weston, "The Basics: National Bank of Wal-Mart?", MSN Money [Website], September 26, 2005. moneycentral.msn.com/content/Banking/Betterbanking/P109171.asp
5. U.S. Department of State, Country Reports on Human Rights Practices, 2007: China, March 11, 2008. www.state.gov/g/drl/rls/hrrpt/2007/100518.htm
6. Amnesty International Report 2007: China. http:// thereport.amnesty.org/eng/Regions/Asia-Pacific/China
7. Goldman Sachs, Long-term Industry View, "Global Automobiles: The Chinese Auto Industry," February 21, 2003, pp. 1, 33. www2.goldmansachs.com/hkchina/insight/research/pdf/ chinese_auto_industry.pdf
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