THE BEAR'S
LAIR 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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