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THE COMING TRADE WAR, Part
3
Trade in the age of
overcapacity
By Henry C K Liu
(For other parts in the series, click here)
Neo-liberals have created a false
dichotomy between so-called command economies and
market economies. The spurious distinction is
propagated by ideologue free-traders in order to
give market fundamentalism an aura of truth beyond
reality.
Market fundamentalism is the
belief that the optimum common interest is only
achievable through a market equilibrium created by
the effect of countless individual decisions of
all market participants each seeking to maximize
his own private gain, and that such market
equilibrium should not be distorted by any  collective measures
in the name of the common good. It is summed up by
Margaret Thatcher's infamous declaration that
there is no such thing as society.
The
fact is that in a world of sovereign states, all
economies are command economies. The United
States, the mecca of market fundamentalism,
commands its alleged market economy in the name of
national security. While the US tirelessly
advocates free trade, foreign trade is a declared
instrument of US foreign policy. President George
W Bush declares that "open trade is a moral
imperative" to spread democracy around the world.
The White House Council of Economic Advisers is
organizationally subservient to the National
Security Council. National-security concerns
dictate trade policies the US adopts for its
economic relations with different foreign
countries. World trade today is free only to the
extent of being free to support US unilateralism.
For the US imperium, the line between foreign
policy and domestic policy is disappearing to make
room for global policy. The sole superpower views
the world as its oyster, and global trade is to
replace foreign trade in a global economy the
rules for which are set by a World Trade
Organization dominated by the sole superpower.
Free trade and national
security
US trade policy with regard to
China, the world's fastest-growing and most
populous economy, is a case in point.
The
US is undecided on whether China is a strategic
partner or a strategic competitor, or a potential
foe. National-security concerns envelop the
current controversy over the bid from a Chinese
70% state-owned enterprise, China National
Offshore Oil Corp (CNOOC), to acquire Unocal, a
US-based independent oil company, even though 70%
of Unocal assets and operations are located in
Asia. The proposed deal is subject to review and
approval by the secretive Committee on Foreign
Investment in the United States (CFIUS), a federal
multi-agency group chaired by the treasury
secretary that rules on foreign investment on
national-security grounds. In 1988, Congress
enacted the Exon-Florio legislation authorizing
the president of the United States to suspend or
prohibit foreign acquisitions, mergers or
takeovers of US companies when there is credible
evidence that a foreign controlling interest might
threaten national security and when other
legislation cannot provide adequate protection.
The president of the day, Ronald Reagan, delegated
authority to review foreign investment
transactions to an interagency group, the CFIUS.
Some members of Congress have publicly
served notice to the White House that they expect
the proposed deal by CNOOC to be dealt with as one
with serious geopolitical dimensions that directly
impact US national security. The CNOOC/Unocal deal
is precedent-setting because it moves the CFIUS
beyond its normal high-tech concerns into
strategic commodities. It is also a signal of a
trend of more to come.
In 1989, president
George H W Bush ordered China National
Aero-Technology Import and Export Corp, a People's
Republic of China aerospace company, to divest
from MAMCO, which involved a US aircraft-parts
manufacturer. This was the only case blocked out
of 1,500 CFIUS notifications in 15 years.
In 2003, a negative review by the CFIUS
caused Hong Kong-based Hutchison-Whampoa Ltd
(HWL), a publicly traded multinational
corporation, to withdraw from a joint bid in
partnership with Singapore Technologies Telemedia
Ltd (STT) for Global Crossing (GC), a distressed
telecom carrier in bankruptcy, leaving STT as the
sole acquirer of GC. STT was allowed to acquire GC
because Singapore is considered an ally of the US.
Richard Perle, assistant secretary of
defense for international security policy under
Reagan, and later one of the key architects of the
"war on terrorism" and the Iraq war, had to resign
from the chair of the US Defense Policy Board
after it became known that he was lobbying on
behalf of GC. Perle was reported to be helping to
make it possible for HWL to overcome US
national-security concerns in order to buy the
bankrupt GC. The Federal Bureau of Investigation
found at the time that selling GC to HWL would
give it control of the world's largest fiber-optic
network, and allow it to oversee existing
contracts for secure Pentagon communications.
Perle was to receive a total payment of US$725,000
for his advisory work, $650,000 of which would be
contingent on the sale going through. The
neo-conservatives in the current US
administration, while aggressively militant toward
China on security issues, are solidly in bed with
the neo-liberals in the US business community with
regard to trade with China.
According to
New York Times columnist Maureen Dowd, Perle might
have had a conflict of interest in that he was
chairman of the Pentagon's Defense Advisory Board.
Perle defended himself: "Maureen Dowd's view of
this is very misleading. Ms Dowd's recent
editorial suggested that I was retained to 'help
overcome Pentagon resistance' to the proposed sale
of Global Crossing to Hutchison Whampoa. That is
not why I was retained." Perle asserted: "I have
not been retained by Hutchison Whampoa, nor have I
been retained by Global Crossing to represent them
in any way with the US government. I have been
retained by Global Crossing to help them put
together a security arrangement that is acceptable
to the US government." In March 2003, an expose in
The New Yorker by Seymour Hersh reported that
Perle had improperly represented Saudi interests.
Perle, in turn, vowed to sue Hersh and The New
Yorker for libel. The suit was never filed.
In an effort to address national-security
concerns, the prospective purchasers offered to
place GC's US assets within a "secure" domestic
subsidiary staffed by US persons. When that
proposal did not persuade CFIUS, the parties
withdrew their application and re-filed after
formulating a new plan whereby HWL's ownership
interest in GC would be held in trust by a proxy
group of four distinguished US citizens who would
exercise HWL's voting and corporation governance
rights. This arrangement would reduce HWL to a
mere passive investor in GC, an option that caused
many foreign investors in previous deals to
abandon their proposed acquisitions. Usually, such
concessions have been sufficient to garner CFIUS
approval. However, CFIUS decided to conduct a full
45-day investigation of the GC transaction, which
implies that CFIUS was not satisfied with the
latest arrangements. After this announcement, HWL
dropped its bid, leaving STT to proceed alone.
HWL, a venerable century-old China trade
firm dating back to the British Empire, is now
controlled by Hong Kong tycoon Li Ka-shing, who
has just donated $40 million to the University of
California at Berkeley. HWL is a leading
international corporation with businesses spanning
the globe. Its diverse array of holdings ranges
from some of the world's biggest retailers to
property development and infrastructure to the
most technologically advanced and market-savvy
telecommunications operators. HWL reported
consolidated revenue of $23 billion for 2004. With
operations in 52 countries and about 200,000
employees worldwide, Hutchison has five core
businesses: ports and related services,
telecommunications, property hotels, retail and
manufacturing, and energy and infrastructure.
In 1991, HWL acquired the United Kingdom's
busiest port, the Port of Felixstowe, without
political opposition. Reflecting its global
expansion and internationalization, Hutchison Port
Holdings (HPH) was formally set up in 1994 to hold
and manage HWL's ports and related services
worldwide. Since 1994, HPH has expanded globally
to strategic locations in 19 countries throughout
Asia, the Middle East, Africa, Europe and the
Americas. Today, HPH operates a total of 219
berths in 39 ports along with a number of
transportation-related service companies. In 2004,
HPH handled 47.8 million TEUs
(twenty-foot-equivalent-unit containers).
HWL is a leading global telecommunications
and data-services provider operating with a high
growth strategy in 17 countries and territories.
Hutchison Telecommunications International Ltd
(Hutchison Telecom) has been listed on the Hong
Kong and New York stock exchanges since last
October, but not on any Chinese exchanges.
Hutchison Telecom has a significant presence, and
in many cases is a market leader, in developed or
rapidly growing markets in eight countries and
territories, operating mobile networks in Hong
Kong and Macau, Ghana, India, Israel, Paraguay,
Sri Lanka, Thailand and Vietnam. HWL sold 1
billion euros ($1.19 billion) in 10-year bonds on
June 22, making it the largest euro-denominated
bond from Asia this year.
When the United
States gave Panama full control of the canal on
December 31, 1999, critics raised concerns about
foreign influence and control over the canal's
operation, particularly during an international
crisis. Republican Congressman John Mica gave a
speech on April 27, 1999, titled: "China's
Interest in the Panama Canal" in which he
asserted: "Hutchison has worked closely with the
China Ocean Shipping Co, COSCO ... [which] you may
remember is the PLA, and the PLA is the Chinese
army, PLA-controlled company that almost succeeded
in gaining control of the abandoned naval station
in Long Beach, California." The offer by HWL and
COSCO to purchase the decommissioned military port
of Long Beach failed after the US Department of
Defense raised national-security concerns over the
proposed sale.
A June 1997 Rand report,
"Chinese Military Commerce and US National
Security", stated: "Hutchison Whampoa of Hong
Kong, controlled by Hong Kong billionaire Li
Ka-shing, is also negotiating for PLA
wireless-system contracts, which would build upon
his equity interest in PLA arms company Poly
Tech-owned Yangpu Land Development Co, which is
building infrastructure on China's Hainan Island."
Prompting the national-security concern
was the alleged potential strategic reach of the
Chinese military through the financial interests
of Li Ka-shing, whose fortune and power were
inaccurately linked by misinformed US politicians
to the Chinese government. Panama Ports Co, a
subsidiary of Hutchison Port Holdings of HWL,
began a 25-year lease (with a 25-year renewal
option) in 1999 to operate port facilities at
Balboa (the Pacific end of the canal) and
Cristobal (the Atlantic end). This arrangement
produces more efficient handling of shipping that
benefits all shipping nations, including China,
which is the third-largest user of the canal and
sells more than $1 billion in goods a year through
the Colon Free Zone.
A headline in the
Miami Herald on August 25, 1999 read: "Canal deal
gives strategic edge to China, critics charge
China-Panama Canal deal draws scrutiny". According
to the Herald, "Li and his business empire are
linked to several companies known as fronts for
Chinese military and intelligence agencies. One of
the companies has been indicted for smuggling
automatic weapons into the United States ... Li
has also been accused of helping to finance
several deals in which military technology was
transferred from American companies to the Chinese
army."
All these accusations were
subsequently proved baseless by official US
investigations. Anyone with knowledge about the
history of the business world in Hong Kong knows
that Li was a favorite son of British colonialism
long before his cozying up to China. Li got his
start in business exporting plastic flowers from
Hong Kong to the United States in the 1950s and
later became a real-estate tycoon in Hong Kong
with the help of the British-owned Hong Kong and
Shanghai Bank (HSBC), which saw Li as a promising
leader of a new generation of the comprador class
the British were looking to nurture in postwar
colonial Hong Kong. Li's friendly overture to
China was embarrassingly belated and undeniably
opportunistic, and his sympathy for communism
totally non-existent even today. Following the
mode of many other successful international
businessmen, Li has donated more than $100 million
to medical research institutions in the United
States, Canada and the United Kingdom.
In
October 1999, the Bill Clinton White House
publicly denied that Li Ka-shing was "working for
the communists in Beijing". The White house press
secretary labeled such accusations "silly" and
dismissed them as "the kind of thing you see
around here from time to time". Most US
corporations active in China are working hard to
develop the same degree of cooperative
relationship with the Chinese government and its
state-owned enterprises. This includes IBM,
General Electric, General Motors, Microsoft,
United Technology, Boeing and many other big-name
defense and space contractors. Nevertheless, the
propaganda effect on a US public long conditioned
to view China with hostility has lingered.
Taiwan also has a container-handling
operation at Coca Solo, at the Caribbean end of
the Panama Canal, and the Evergreen Group of
Taiwan, which runs it, also has construction, port
and hotel projects there. Ten Taiwanese companies
are installed in the Fort Davis industrial park,
and the Taiwanese construction company King Hsin
submitted a bid to build a second bridge over the
canal, at a cost of $270 million. But the US is
not concerned with Taiwan because it is a virtual
US protectorate.
In reality, HWL
investment in the canal is reflective of its
attraction to commercial opportunities in Panama,
rather than a threat from China to control the
operations of the waterway. Besides, the
constitution of Panama reserves direct authority
and control over the canal. Chinese officials
dismissed the idea that China is attempting to
influence or take over the Panama Canal as "sheer
fabrication with ulterior motives". Chinese
residents in Panama are descendants of immigrants
who originally formed the main source of forced
labor on the trans-isthmian railroad. They now
represent between 4% and 8% of the local
population, depending on the definition of
ethnicity, as much integration has occurred
through inter-ethnic marriages. This is about the
same number of citizens as Panama's indigenous
peoples of the Kuna, Guaymie and Chocoe tribes.
There are more US citizens living and working in
China than there are Chinese citizens in Panama.
With a history of being a main target of US
embargo for more than three decades, China's
interest in Latin America is unrestricted access
to trade and natural resources for all countries.
From a Panamanian point of view, intervention by
the United States is a more credible threat than a
Chinese takeover.
No free trade for
oil
While the current rise in oil prices
reflects systemic dynamics in oil economics (see
The
real problem of $50 oil, May 26),
many in US political circles find it convenient to
blame it on a single component of increased demand
by China and India. On April 26, President George
W Bush, meeting at his ranch in Crawford, Texas,
with Saudi Crown Prince Abdullah, told the press
that "the price of crude is up because not only is
our economy growing, but economies such as India
and China's economies are growing as well",
notwithstanding that the announced purpose of the
US-Saudi summit was to get Saudi Arabia to
increase production, the shortfall of which was
driving oil prices up.
The vice chairman
of Chevron, the rival bidder for Unocal, publicly
suggested that "this is sort of geopolitics we are
playing here, not commercial business". He
explained that Chevron would put oil on the market
for sale to the highest bidder whereas
Chinese-owned CNOOC would use the oil it produces
for domestic consumption that would yield "less
oil on the world market, which meant higher prices
for US consumers". Yet CNOOC's interest in Unocal
is mainly in its natural-gas reserves in Asia,
which pose no national-security threat to the
United States. The North American gas supply,
counting both the US and Canada, faces no
shortage. Both the US and China are rich in coal,
which generates more than half of the electricity
in both economies. In a public statement, Fu
Chengyu, chairman and chief executive officer of
CNOOC, reaffirmed that substantially all of the
oil and gas produced by Unocal in the US will
continue to be sold in the US, and the development
of properties in the Gulf of Mexico will provide
further supplies of oil and gas for US markets. Fu
also repeated the commitment on behalf of CNOOC to
retain the jobs of substantially all Unocal
employees, as opposed to Chevron's plan to lay off
redundant employees after the merger, especially
in the United States. Secretary of State
Condoleezza Rice was a director of Chevron for a
decade before joining the Bush team, and even had
a Chevron tanker named for her.
It's a
toss-up how the CFI will eventually rule, assuming
CNOOC can put together the winning financials to
request a CFI ruling. There are reservations in
China that CNOOC may be forced to pay too much for
a company that is worth less than $1 billion even
at high current energy prices. But the
CNOOC/Unocal deal is an early signal of a rising
trend, which has already ignited a visible split
between anti-China forces in some factions in the
US political establishment and the pro-trade
forces in the US business community that view
China as a great market the US cannot afford to
pass up. To China, a negative ruling will look as
if the US will welcome China to buy as much oil as
it needs at market prices, but will not welcome it
to own any oil resources even if such resources
are not critical to US national security. Yet the
history of the US using the supply of oil as a
geopolitical weapon is long and obvious. Further,
even on a commercial basis, the US for decades has
restricted the export of domestic oil to keep
domestic prices lower than world prices. Now it is
trying to prevent China from doing the same.
In the two decades since China began to
integrate its economy into the global economy,
China has received far more foreign direct
investment (FDI) than it has made overseas. In
2004, China received $61 billion of FDI, while
Chinese companies invested only $3.6 billion
overseas, even when China has become the world's
second-largest creditor nation, with
foreign-exchange reserves of more than $660
billion by the end of March 2005. The US Congress
is heading toward a vote to impose a 27.5% tariff
on Chinese goods if China does not revalue the
yuan at the command of the US, despite Federal
Reserve chairman Alan Greenspan's public warning
that the yuan's revaluation would have no
significant impact on the US trade deficit and job
loss and that protectionism against China would
put the US economy at risk for no discernable
purpose or advantage.
There are those who
argue that Chinese companies would be welcome to
participate freely in the US market if they were
not state-owned enterprises (SOEs) controlled by
the Chinese government. The counter-argument is
that allowing Chinese SOEs to invest abroad would
accelerate the withdrawal of government control
over commerce in China. Besides, European and
OPEC-member state-owned enterprises routinely
participate in international mergers and
acquisition. Every US oil company, including
Chevron, is also eyeing business opportunities in
the development of Chinese offshore oil
exploration. Many major US corporations are
aggressively trying to invest and acquire Chinese
government-owned companies in China. It is hard to
argue that Chinese government-owned companies
should not be allowed to acquire US corporations.
Thus the argument of a two-way street is a strong
one.
British Nuclear Fuels plc (BNFL),
owned by the British government, acquired without
controversy Westinghouse Electric Co, the
commercial nuclear-power business of CBS, in 1999.
(Westinghouse acquired CBS in 1995.) Britain is of
course an ally of the US.
On a trip to
China last April to discuss high-stakes issues of
terrorism and North Korea nuclear proliferation,
US Vice President Dick Cheney made a pitch for
Westinghouse's nuclear-power technology. At stake
could be billions of dollars in business in coming
years and thousands of jobs in the US. The initial
installment of four reactors, costing $1.5 billion
apiece, would also help narrow the huge US trade
deficit with China. China's latest economic plan
anticipates more than doubling its electricity
output by 2020 and the Chinese government, facing
enormous air-pollution problems, is looking to
shift some of that away from coal-burning plants.
Its plan calls for building as many as 32 large
1,000-megawatt reactors over the next 16 years.
The US Department of Energy reported this
March that Chinese industries were
energy-intensive with significant economy-wide
waste. The country uses three times as much energy
per dollar of its gross domestic product (GDP) as
the global average and 4.7 times as much the
United States. Westinghouse faces French and
Russian competition in contracts for
third-generation China National Nuclear Corp
(CNNC) plants at Sanmen, Zhejiang, and Yanjiang,
Guangdong, to be awarded this year. Recognizing
that nuclear technology sales to China would help
address massive US trade imbalance with China, the
US Nuclear Regulatory Commission has cleared the
transfer of technology, while the US Export-Import
Bank has approved $5 billion in loan guarantees
for the Westinghouse bid. Domestic political
opposition to US participation in the China
nuclear power program is mounting to stop the
pending deal. Meanwhile, Chinese planners are
warning investor to exercise caution to avoid
blindly over-investing in the Chinese energy
sector.
The reason the United States never
gets excited about Japanese and German acquisition
of US assets is that these countries, as
once-defeated nations and now-subservient allies,
know their place in the pecking order in
geopolitics enough to restrict their acquisitions
voluntarily to non-strategic real estate, and stay
clear of strategic sectors such as oil. The
Japanese and Germans have dutifully kept
themselves restricted to oil trading and refrained
from aspiring to be owners of oil assets, a sector
reserved exclusively for Anglo-US interests as war
trophies. But the Chinese, encouraged by US
neo-liberal advisers to imitate the US model of
globalized business strategy, are beginning to
accept the propaganda of free trade to the extent
of assuming the audacity of daring to buy into US
strategic assets with the fiat dollars they earned
in their trade surpluses with the United States.
China appears to be tired of merely holding US
papers, and want some real assets for a change in
return for shipping real wealth created by cheap
Chinese labor to the US. The zealous convert who
has become a fervent believer in the god of free
trade is challenging the pope. US policymakers are
beginning to realize that a capitalist China in a
neo-liberal world order is by far more of a threat
to US national interests as a superpower than a
communist China in the Cold War.
The June
24 Wall Street Journal reported that celebrated
economist Kenneth Courtis, vice chairman of
Goldman Sachs Asia and outside director of CNOOC,
caused a postponement of the initial planned $16.7
billion offer in April. The delay opened the way
for Chevron to strike a deal to buy Unocal
instead, causing CNOOC to have to bid in June $2
billion more than it had contemplated in its
initial offer in April. Courtis, an expert on
Asian economies, had been humbled by facts
divergent from his optimistic pronouncements on
the Japanese economy at its strongest in 1989 with
regard to strong future prospects, which promptly
began a downhill slide in which it has been ever
since. His bullish projections on the continuing
growth of Asia just before the Asian financial
crisis of 1997 proved to be another embarrassment.
But economists are like cats with nine lives who
can afford to leave clients who followed their bad
advice to perish while they themselves move on to
new theories.
Courtis, the free-trade
enthusiast, resurrected his tarnished reputation
by playing a revisionist role against market
fundamentalism in the decision of the Hong Kong
government to make a defensive "market incursion"
to ward off manipulative speculation of the Hong
Kong market by overseas hedge funds. The Hong Kong
Monetary Authority, with a war chest of more than
$100 billion, easily demolished the hedge funds by
using $18 billion in three days to stabilize the
Hong Kong equity market, where the normal daily
trading volume was only about $1 billion. For
three days, Hong Kong, consistently voted by the
Heritage Foundation as the world's freest market
economy, reverted to a command economy to protect
its stock market from the destructive effects of
manipulation by hedge funds on the fixed exchange
rate of its currency.
While no outsider
knows why Courtis recused himself on the CNOOC
decision, it would not be unreasonable to suspect
that geopolitics was part of the consideration.
For a Chinese state-owned enterprise to buy a US
oil company might have been a bridge too far at
this time of rising hostility in US domestic
politics toward China. After all, do the Chinese,
with thousands of years of sophisticated political
culture, and decades of exposure to Marxist
theories, not know that free trade is merely a
slogan in US policy? Or is China, advised by US
neo-liberals, simply making the US face its own
music?
General Motors and
China
China has also become something of a
whipping boy in the US debate about job loss to
nations with super-low wages, based on a misguided
conclusion springing from the recent growth of
China's trade surplus with the United States to
$124 billion in 2004. Total US trade deficit for
2004 with all countries was $666.2 billion, $164
billion of which was in oil imports at an average
price of $32 per barrel. What has happened is that
other Asian exporting economies, notably Japan,
South Korea, Taiwan and Hong Kong, have moved much
production to mainland China on products destined
for export to the United States. So China's trade
surplus with the US has soared while the US
balance of trade with other Asian economies has
flattened or dipped slightly.
The chairman
of Toyota Motor Corp, Hiroshi Okuda, is urging
Japanese auto makers to raise prices or find other
ways to level the playing field for ailing US
rivals General Motors and Ford in hopes of heading
off a possible protectionist backlash in the
crucial North American market. The world's largest
auto maker, General Motors, had $52.6 billion in
cash and marketable securities on its balance
sheet at the end of the first quarter 2005, even
as it reported a $1.1 billion net loss for the
quarter. The GM finance unit, GMAC, made $729
million profit in the first quarter. And even
though GMAC commercial paper was cut to junk-bond
status along with the debts of the rest of the
company, the finance unit still has sufficient
access to cheap capital to keep posting strong
profits going forward. But GM has serious enough
problems that its executives would not even
project when it might return to profitability. The
downgrade to junk-bond status is one warning sign.
Another is its market capitalization sliding below
$19 billion, well below its cash on hand of $52
billion, with a debt of $300 billion. This means
investors are saying that the company has negative
value if its cash is taken out. By contrast, and
as an indication of a bubble economy, Google's
market capitalization, less than 11 months since
its initial public offering (IPO), has topped $81
billion, trading at 50 times estimated earnings,
compared with 22 times for Time Warner, 21 times
for Disney and 19 times for Viacom. Google sales
in 2004 totaled just $3.2 billion, while Time
Warner stood at $42 billion. GM sales in 2004
totaled $193.5 billion with net income of $2.8
billion, yielding a market capitalization of only
6.8 times earnings.
The problem is that
GM's key products - its gas-guzzling sport-utility
vehicles (SUVs) - are seeing declining demand that
has forced the company to step up the cash-back
offers needed to maintain sales. That should not
have been a surprise, given rising gasoline prices
that, because of a shortage of refining capacity,
are not expected to moderate. But GM has not
responded effectively to sudden market changes.
Instead of introducing new vehicles to fit new
market conditions, it has tried to keep sales of
unpopular vehicles strong through ever-increasing
financial incentives. It is very unwise for a
high-cost producer to lead a price war. The result
was financial loss accompanying market-share loss
to more cost-effective foreign competitors.
GM is in talks with the United Auto
Workers union (UAW) over its health-care costs,
which cost GM an average of $1,500 more per
vehicle than those of foreign competitors, even on
cars and trucks made at the Japanese auto makers'
US plants. Some observers think the best
alternative could be to file for bankruptcy
protection, and try to have the court force
health-care savings and other cutbacks on the UAW.
Another alternative is that only the auto
operations file for bankruptcy, thus preserving
the corporation's finance unit and other assets,
such as its horde of cash. The rating agencies and
stock market are sending a clear message that they
think GM will continue to lose money for the
foreseeable future and eventually go bankrupt.
Bankruptcy is a defensive strategic option or an
unavoidable eventuality.
But even the
profitability of GMAC, the finance unit, will be
under threat as the Fed raises short-term interest
rates. The rising cost of funds will make it more
difficult for GMAC to offer attractive financial
incentives to sell unpopular GM cars. GM has been
following the strategy of GE, to try to turn
itself into a global finance company that
incidentally also manufactures, selling its
uncompetitive manufactured products with
aggressive compensatory vendor financing. This
finance game has overtaken the entire US economy,
where all the profit is being made by the
financial sector, while its manufacturing base in
the US falls into decay through outsourcing to
low-wage locations overseas. GM's strategy now is
to be the finance and marketing arm of an auto
sector in the process of being relocated from
Detroit to China, while maintaining its profit
margin from finance.
When the outspoken
Toyota chairman said he feared the possibility
that US policy could turn against Japanese auto
makers if domestic giants such as GM and Ford were
to collapse, he was not being truly outspoken.
"Many people say the car industry wouldn't revisit
the kind of trade friction we saw in the past
because Japanese auto makers are increasing local
production in the United States, but I don't think
it's that simple," Okuda said in a press
conference. "General Motors Corp and Ford Motor Co
are symbols of US industry, and if they were to
crumble it could fan nationalistic sentiment. I
always have a fear that that in turn could
manifest itself in policy decisions," he said,
speaking as the head of the nation's biggest
business lobby, the Japan Business Federation. But
what was not said was that Toyota has a more
serious hidden apprehension than a revival of US
protectionism from the collapse of GM or Ford.
What Toyota really wants is to keep GM
manufacturing in the US, where it can never
achieve cost competitiveness, and not move its
manufacturing to China with a new business
paradigm to compete with Japanese auto makers
there.
Okuda raised eyebrows and invited
criticism on both sides of the Pacific with his
call for fraternal aid to US auto makers, such as
by raising Japanese product prices, as US
producers reel under massive health-care costs and
sliding sales. It is a call for price-signaling if
not outright price-fixing. According to US
anti-trust laws, inviting competitors to match
your price increases can be illegal
price-signaling, says lawyer Jim Weiss, former
head of an antitrust unit at the Justice
Department.
GM has announce plans to cut
at least 25,000 manufacturing jobs and close more
US assembly and component plants over the next few
years. Both GM and Ford have been cutting back
output as they lose sales to Asian brands led by
Toyota, which now controls 13.4% of the US car
market, the world's biggest to date. But the
Chinese market is looming large as a new
opportunity for GM, which ended 2004 with a market
share of 9.3% in China. The GM China Group
includes seven joint ventures and two wholly owned
enterprises in China. In 2004, GM's vehicle sales
in China grew 27.2% on an annual basis to 492,014
units, an all-time high. China's market is still
in its infancy, with less than 5% of the
population able to afford even a tiny car. GM
chairman and CEO Rick Wagoner predicts China will
overtake Japan as the world's second-largest car
market within five years.
Detroit Free
Press columnist Tom Walsh reports that in 2003, GM
and its Chinese partners made $2,267 per car sold
in China while in North America, GM made about
$145 per vehicle. GM and its Chinese partners had
a combined net profit of nearly $875 million. In
North America, GM's net profit last year was only
$811 million on sales of 5.6 million cars and
trucks in the United States, Canada and Mexico.
That means GM China was nearly 15 times as
profitable, per vehicle sold, as GM North America.
GM, for example, is selling Buick Regal models in
China for more than $40,000 each that are less
powerful than a 3.8-liter Regal four-door sedan
that costs about $24,000 in the US.
"GM is
making money hand over fist in China, selling cars
as fast as they can make them, at very attractive
prices," said Kenneth Lieberthal, a University of
Michigan professor and China expert who was senior
director for Asian affairs on the US National
Security Council under president Bill Clinton.
"Most of the jobs lost to Asia were lost years
ago. Now they're moving around Asia," said
Lieberthal. "If what's good for General Motors is
good for America, as former GM president Charlie
Wilson once said, China's emergence as an economic
powerhouse can't be all bad," writes columnist
Walsh.
Okuda told the press: "If you think
about GM's current output volume and vehicle
lineup, laying off 25,000-30,000 employees is
inevitable." But within a decade, GM could be
again the world's largest profitable car producer
if its China strategy is successful. And its
success is dependent on whether it can become a
truly multinational corporation instead of merely
a transnational US corporation active in China.
Chinese consumers will relieve the global
overcapacity problem in the auto industry, but
they cannot do so if transnational corporations
keep robbing them of consumption power by keeping
Chinese wages low to siphon profits home.
GM has been closing and idling plants over
the past four years and will have to cut its
annual North American assembly capacity to 5
million vehicles by the end of 2005 from 6 million
in 2002. Meanwhile, top Japanese auto makers are
adding jobs and assembly lines in North America to
meet shifting demand there at the expense of GM
and Ford, but not the US economy, prompting
executives, including Toyota president Fujio Cho,
to dismiss concerns that their success would
reignite a political backlash. Thus Okuda's
concern is not about US protectionism, a concern
refuted by Toyota's own president. It is about GM
plans in China.
Car companies now are
merely brand-name designers and assemblers of a
generic world car. All cars today are assembled
from parts produced all over the world, wherever
they can be produced at the lowest cost. Different
band-name designs package the same world car for
varying appeals in different market segments, some
for speed and power, some for styling and luxury,
some for economy, etc. As US car-assembling giants
face market resistance, US auto-parts companies
have begun to fall like rows of dominoes, made
worse by rising material and energy prices and
uncompetitive wages. Recently, auto-parts supplier
Collins & Aikman Corp became the latest to
file for bankruptcy protection, lining up behind
fellow suppliers Meridian Automotive Systems,
Tower Automotive Inc and Intermet Corp. Whether
those companies and the others that might join
them at the bankruptcy court will recover - and
what form they will take after bankruptcy - is an
open question. A restructuring of the entire US
auto-manufacturing industry and its supplier
network is shifting the center of gravity outside
the US, possibly to China.
Japan has its
own ambitious plans for China, where Japanese car
makers have already invested more than $5 billion.
Honda Motors just announced that its joint venture
in China has begun exporting made-in-China Hondas
to Europe. This is why the Japanese, with their
own ambitious plans in China, are thinking about
helping Detroit, to keep a terminally ill
competitor on anemic life support, not to ward off
US protectionism, but to preempt unwanted US
competition in China. A trade war between the US
and China will play directly into Japanese hands,
not to mention the European Union.
The
sudden decline in the popularity of SUVs - on the
basis of which US auto companies have for more
than a decade clocked big profits in the era of
cheap oil - has joined with rising material costs,
mounting worker-benefits costs and expensive
unionized workforces to eat into huge chunks of
the sector's profits. Add to that the relentless
pressure from foreign auto makers, and the result
has been a steep slide for any company that relies
on the Detroit auto makers for its bread and
butter. In April, while North American auto sales
rose, both GM and Ford sales of SUVs dropped - as
did their total sales.
As the supply
sector shrinks along with declining US auto
makers' market share, an industry that once seemed
ripe for consolidation is now plagued by the
question of who would want to acquire companies in
a sector that has had such a hard time making
money lately and will in the foreseeable future.
The pool of likely acquirers from within the
sector is also dwindling as virtually the whole
sector slides in concert. It is hard to
consolidate when earnings are weak to
non-existent, with no access to capital markets,
and equity merger and acquisition funds dry up.
Buying auto-supply companies that are dependent on
the struggling US auto makers for business is not
the most attractive proposition at this time for
other companies. The only exception is a Chinese
acquirer who may buy to facilitate opportunities
in the Chinese domestic market and eventual
entrance to the US market to increase long-term
global market share rather than immediate return.
But with current political controversy over
Chinese acquisition of Maytag and Unocal, China
will likely adopt a wait-and-see posture on how US
domestic politics on free trade plays out. This
delay will make bankruptcy more likely to a host
of distressed US companies in many sectors besides
autos.
With General Motors' significant
cash reserves, it could be several years before
the company is forced to face the music, despite
its dwindling market share and mounting loss. With
more than $50 billion in cash, even with losses at
the rate of $5 billion a year, it will take 10
years before GM runs dry. Long before that, GM's
China strategy may bear fruit if no trade war
erupts to derail its plan.
The US steel
and airline industries have dumped under-funded
pension plans on the federal government's Pension
Benefit Guaranty Corp (PBGC). The auto industry
may be next. Beyond the airline industry, the
federal insurance program faces tremendous
exposure from the auto sector. PBGC says the
pension assets of auto makers and parts companies
fall short of the pension promises they have made
to workers by up to $50 billion, more than the $31
billion shortfall in the airline industry's
pension plans. A Credit Suisse First Boston
analysis of pension plans in 54 US industries,
based on 2003 public filings, ranks the auto
industry's plans the weakest of all. Half a dozen
auto-supply companies recently sought protection
under Chapter 11 of the Federal Bankruptcy Code,
which is likely to result in $837 million in
unfunded pension obligations being transferred to
the PBGC. A total of 26 companies in the auto
industry have pension plans with assets that fall
at least $50 million short of obligations.
The company that worries the PBGC most to
date is Delphi Corp, the Troy, Michigan, parts
operation of GM that was spun off in 1999.
Delphi's plans have pension obligations valued at
$11.4 billion but assets of only $7.4 billion.
Delphi relies on GM for about half of its $28
billion in annual revenue and is saddled with high
labor and raw-materials costs at the same time
that GM's production is falling. PBGC calculates
pension liabilities based on what it would cost to
pay retirement benefits if the plans were
terminated; companies give snapshots of the
current health of their plans, often a rosier
view. PBGC says that if Delphi were to turn over
its pension plan to the agency today, the
under-funding would total $5.1 billion rather than
the roughly $4 billion indicated by Delphi. UBS
suggested in a recent report that Delphi should
consider a Chapter 11 filing, in part to shed its
pension obligations and to pressure the UAW to
help it cut costs. "Bankruptcy has become a
management tool these days," the UBS report noted.
Bush administration proposals to bolster
PBGC finances could intensify the pressure on
companies with low credit ratings. The plan calls
for flat-rate premiums for companies to jump to
$30 annually from $19 for each employee covered by
a pension plan, and higher for companies with low
credit ratings. It also seeks to limit the ability
of financially weak companies to make new pension
promises to workers.
Overcapacity and
trade
Tapping into a growing Chinese market
will significantly contribute to less painful
resolutions of these problems, both for the auto
giants and for the government pension agency. This
is one of the reasons Greenspan says anti-China
protectionism hurts the US economy more than it
helps, and why the White House is dodging the
CNOOC/Unocal controversy.
In an age of
global overcapacity, the economies with large
populations and massive untapped consumer power
hold the key to the future. This presents a
dilemma for US policy toward such countries as
China and India. On one level, the world economy
needs to develop these populous markets to relieve
global overcapacity; on another level, the rise of
income necessary for such expanded consumption
translates into a leveling of the power
differential long enjoyed by the world's sole
superpower. Suddenly, the needs of the global
market to overcome global overcapacity with new
consumers are turning against the traditional
security and economic interests of the United
States. In response, the US is turning back toward
its own history of command economy. Emotional
debates have emerged within US policy circles on
the merits of globalized neo-liberal market
fundamentalism versus the need for protectionist
economic nationalism.
In some economies,
such as the US, policymakers traditionally achieve
their command objective through macro-management,
while in other economies, such as Japan until the
1980s, and South Korea and Taiwan even today,
policymakers prefer to do so through
micro-management. China has recently moved toward
macro-management of its economy, reportedly with
some success, while the US, as exemplified by the
ruling authority of FICUS that leads to
presidential actions, appears to be reverting to a
micro approach to deal with command economy
objectives on a case by case basis.
Policymakers in self-proclaimed market
economies normally manage their policy objective
through monetary and tax policies in accordance to
macro-economic theories, but even then they do so
with national objectives in mind. Such national
objectives are known as national interests in
policy nomenclature. For example, the Fed defers
to the Treasury on determination of the proper
exchange rate for the dollar. When market forces
move against the Treasury's view, moving the
dollar either too high or too low in relation to
other currencies, the Fed supports the Treasury as
a matter of national security in its effort to
intervene in the market to bring the dollar back
in line, or at least moderate the volatility. All
nations employ industrial policy when it comes to
defense and defense-related sectors. And as
military/civilian dual-use definition expands,
more and more of research and development,
high-tech production, heavy manufacturing and
strategic materials are removed from free trade to
rely on government subsidies and procurement
contracts. Dual-use restriction is one of the
major factors contributing to trade imbalances
between the US and China. Beyond dual-use
technology, the US has very little to sell. Free
trade in the US perspective is not remotely the
same as freedom to trade.
Market
economies and privatization
The idea that
market economies are governed by the unseen hand
of the market is pure fantasy. The US has been
relying on its petroleum reserves to moderate the
rise in oil prices since 1973 and China is only
beginning to realize the need of a national
petroleum reserves. And the idea that market
forces always produce the best possible social
outcomes or the best protection of national
security is blatantly false. Without government
control, markets merely become command economies
that are commanded by powerful special interests.
The aim of government command in all economies is
to protect the interests of all the people fairly
within the nation and to protect national
interests beyond a nation's borders. No nation
will allow the market to threaten its national
interests or security.
The idea that
market economies require privatization to operate
effectively is also pure fantasy. Markets can
operate quite well in socialist economies. All
they need is a different framework from capitalist
economies. Some economies are privatized more than
others. Even in capitalist economies,
privatization is never total. Mutual funds are a
sector of voluntary collective ownership. The
insurance sector in the US used to be
predominantly mutually organized companies, as
were credit unions. They operated very well until
laws protecting them were rescinded for
ideological rather than economic reasons.
Privatization of social security is an
oxymoron. It is either private security or social
security, but not both simultaneously.
Historically, Social Security was introduced in
the United States after private security failed
the average worker in the 1930s depression. How on
Earth can private security in a market economy be
expected to save Social Security when Social
Security grew out of the failure of private
security in a business cycle? There is an iron law
of the market: when sellers outnumber buyers,
prices go down. Now, actuary problems of Social
Security arise when the number of living retirees
is growing faster than the number of tax-paying
young workers, causing a bigger draw on the Social
Security trust fund than concurrent contributions.
So if young workers buy stocks during their
working years to provide for their future
retirement and retirees must sell the shares they
have accumulated over their previous earning years
in order to live in retirement, and if retirees
outnumber young workers by a wider margin with
every passing year, how is the market going to
rise with more sellers than buyers?
Even
in the privatized sectors in capitalist economies,
the government still decides what is profitable.
In fact, it even decides what profit is, and how
much to tax it. Much of the recent issues on
corporate fraud have to do with illegally booking
debt as profit to mislead the market. Free markets
are free only to the extent within the rules of
the game set by government. When governmental
rules stay for long periods, they become invisible
tradition and are accepted by market participants
as natural conditions.
Generally accepted
accounting principles (GAAP) have a large measure
of government-defined concepts and measures in
them. Most governmental rules that can be changed
easily without political difficulty are changed
rather forthrightly. What are left are rules that
for all kinds of political reasons cannot be
changed easily by government. War provides
opportunities for governments to change these
undesirable, obsolete or dysfunctional rules that
are politically difficult to change in peacetime.
The private sector cannot launch wars to bring
about preferred rules for enhancing profitability,
but it can co-opt government policy toward war.
This is the economic basis for all wars.
Next: Scarcity economics and
overcapacity
Henry C K Liu is
chairman of the New York-based Liu Investment
Group.
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