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     Jan 16, 2013

Nixon in China revisited
By Martin Hutchinson

Richard Nixon, whose centenary was marked last week (born January 9, 1913), is generally regarded as a very flawed president. In terms of domestic economic policy, it's tough to argue with this; we are still paying the price of the big-government regulatory excrescences introduced under his tenure. Internationally his record is much better; it can be argued that his opening to China led to China's emergence as a world economic force. However, from a purely American point of view, has this emergence in fact made us better off?

To assess the effect of Nixon's achievement, we must remember that before 1972 relations between the United States and China were non-existent. The US recognized the Taiwanese government as the legitimate government of China. US assets had been

expropriated in 1950, after which the US placed an embargo on trade with China.

When China exploded its first atomic bomb in 1964, president Lyndon B Johnson considered nuclear retaliation, though he decided against it. In short, US relations with China in 1949-72 were very similar to US-Iran relations today.

Had Nixon not gone to China, we can assume that the isolate-China policy would have persisted at least through 1977, to the end of the cautious and domestically oriented Gerald Ford administration. The fall of Vietnam and Cambodia in 1975 would have provided an additional barrier against an early change. President Jimmy Carter might well have attempted to thaw relations but would have met with strong opposition from Republicans.

It was said when Nixon opened to China that only a relatively hawkish Republican could have done it, because of the domestic opposition that would otherwise have been generated. This would have remained true under Carter, and with a weak foreign policy team and little support in congress, he might well have avoided the confrontation. Thus it would probably have been left to the Ronald Reagan administration to change the position, probably in president Reagan's second term (1985-89) when a general thaw in the Cold War occurred.

In these circumstances, with a US trade embargo in force, the Chinese opening to the world would have been very difficult to get going. The availability of the gigantic US market was essential to provide the foreign exchange needed to develop Chinese industry and agriculture.

The first burst of increased Chinese exports happened remarkably quickly after China's government changed orientation in 1976; exports more than trebled in five years, from US$7.3 billion in 1976 to $24.4 billion in 1981 - modest figures now, but a vital foreign exchange source then. The further increase in exports was then rather slow until an explosion after 1987. With the US embargoing Chinese goods in 1976-81, the initial surge would have been impossible.

There is also a political element. Had relations between the US and China remained in the deep-freeze when Mao Zedong died in 1976, the natural tendency of the Chinese leadership would have been towards paranoia. The hardline "Gang of Four", led by Mao's last wife, Jiang Qing, came quite close to winning, with hatred of the United States having been dissipated by gallon after gallon of champagne toasts in the Great Hall of the People by Nixon, his secretary of state Henry Kissinger, his successor Gerald Ford and the Chinese leaders Mao and prime minister Zhou Enlai.

Had no Nixon and Ford visits taken place, the official Mao-era vision of the United States as the Imperialist Wolves would have remained dominant among China's decision-makers and most of its people. This might well have been sufficient to tip the scales towards triumph for the Gang of Four, doubtless quickly followed by liquidation of Deng Xiaoping and probably the moderate Hua Guofeng, Mao's immediate successor.

Had this happened, there would certainly have been no opening to capitalism before Jiang Qing's death in 1991, and probably not thereafter. China would today be the impoverished, economically unimportant country it was in the later years of Mao.

Almost every inhabitant of China (and the "almost" is purely there for courtesy) should thus have raised a glass to Nixon last Wednesday. Without his action, the country would today be no freer than it is and its people would be immeasurably poorer than they are.

It is not however absolutely clear whether Americans should also raise a glass to him for this development. (It is very clear that they should spit on his grave for having signed the legislation creating the Environmental Protection Agency in 1970, which has reduced their current wealth by a double-digit percentage!)

Free-trade theory and David Ricardo's 1817 Doctrine of Comparative Advantage state that the United States should have benefited hugely from China's emergence as a major economic power. However, the assumptions behind those doctrines become shaky in a world linked as closely as today's, in which the two countries concerned are not small players in a world free market but are the two most important players in a complex geo-economic equilibrium.

There have clearly been losers from the emergence of China. Mexico, for example, signed up to the North America Free Trade Agreement (NAFTA) in 1994 under the assumption that it was about to become the natural low-wage manufacturing center for the US market. The emergence of China, more or less contemporaneous with NAFTA and the telecom revolution in global supply chains, which occurred in the decade following NAFTA's ratification, have left Mexico disappointed and slow-growing.

With China emergent and global supply chains far easier to construct than they used to be, Mexico's advantages of relatively cheap labor (but not as cheap as China's) and geographical propinquity were negated. Only now, as coastal China becomes a higher-cost labor source than Mexico itself, are there signs that NAFTA's promise for Mexico may finally be coming to fruition.

Low-skilled Americans suffering unemployment are customarily thought to be another victim of China's emergence, but here the picture is not so clear. Certainly North Carolina became uncompetitive as a garment source when China opened up. However, China's opening coincided with the winding down in 1994-2004 of the protectionist Multi-Fiber Arrangement and the telecoms revolution.

Had China been locked in its Maoist cave, other countries, notably India and Vietnam (if that country had liberalized without China's example) would equally have been able to provide cheap labor and skills for multinational garment operations.

Indeed some such countries, notably Indonesia, the Philippines and Pakistan, may also be counted as marginal net losers from China's emergence, since they lost business they would otherwise have obtained. More recently, the emergence of Africa would have provided yet more sourcing alternatives for manufacturing multinationals. If the communications and demand are there, the world's population is poor enough and growing fast enough that cheap labor will always be supplied.

There are two major gainers from China's emergence: consumers of Chinese-made products and multinationals sourcing from China. A third group, multinationals selling to China, have notably failed to make adequate returns; for every company eking out modest profits in China, there are 10 that have found it a bottomless pit of loss.

Garment consumers have benefited spectacularly, with prices no higher today in nominal terms than they were 20 years ago, but, as discussed above, without China other countries would have stepped into the cheap-labor niche and delivered most of the consumer price benefits.

That isn't true in electronics. Twenty years ago, most electronic gadgetry was assembled in the US and Japan; today its cost to consumers (or in Apple's case, to Apple) is greatly reduced by the magic of Foxconn's Chinese production system. Without China, sourcing in East Asia, including Foxconn's own Taiwan, would be possible, but the cost would be much higher.

We now come to the unquestionable gainers from China's emergence - the profit statements of multinational corporations. US corporate profits are at a level in terms of gross domestic product not seen since the glory days of 1929. Part of this is thanks to the madness of Federal Reserve chairman Ben Bernanke and his negative real interest rates, but when you look at the international profits of US based corporations you see profitability even higher than in the domestic area.

Thanks to China, Apple and its confreres are able to manufacture at Third World wages and sell at rarified Western prices. That won't last forever, indeed Apple shareholders already seem to see the shadow of a coming return to normal. However, so far the profitability, caused by China's emergence, to US top management and its investment bankers and hedge fund managers has been greater than in any other of the world's great booms.

Ronald Reagan conquered the Evil Empire, but the economic return to the world from that victory has so far been a little disappointing - Vladimir Putin is only a modest improvement on Leonid Brezhnev. On the other hand, Nixon's triumph in China, timed with exquisite precision (or luck) to have the maximum effect on the post-Mao succession struggle a few years later, has so far brought considerably more economic return to the world's peoples, even if there are losers as well as winners.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.

(Republished with permission from PrudentBear.com. Copyright 2005-13 David W Tice & Associates.)





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