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Post China July 31, 2013

Posted by olvidadorio in Economics.

I often enjoy reading dispatches by Stratfor, a Texan intelligence/analysis think-tank-for-hire. Most recently this opinion piece: The PC16: Identifying China’s Successors. Stratfor’s head, George Friedman speculates, which countries might at some point take on China’s role as cheap work-force manufacturing country. Their thesis: a ragtag group of up-and-coming developing countries from Tanzania to Peru will fill this role, with investments from small cut-throat margin manufacturers leading the way.

I agree with a lot of Friedman’s analysis. Case in point: One friend in China had lost his job in the US, when his employer closed its cap/headgear factory. He was offered to move to China to work as their representative with the manufacturing subcontractor there. Needless to say he took the job (and the raise). I was intrigued to hear that recently he was sent to Bangladesh to scout out new manufacturing locations. China is in fact getting too expensive for his industry to outsource to. He reported conditions in Bangladesh were rather atrocious, perhaps just right for business.

One aspect strikes me as amusing about Friedman’s message. He has been pooh-poohing China’s ascent for quite a while. Mainly its military rise to power, but in this case its economic strength. As an example for the economic rise and fall of China, Friedman points to Japan and Germany, both of which saw great economic growth in the mid 20th century by selling their cheap but disciplined workforce to the US-dominated world market.

Both are definitely interesting examples and have undergone a transition via initial industrial expansion to saturation. I may not be an expert on the country, but rumors of a Japanese economic crisis have been with me just about all my conscious life. Germany I know a bit better. I remember distinctly how the late 80ies and early 90ies were marked by a kind of crisis of self: It was a popular topic for political commentators to reflect on Germany’s slide from economic poster-child to merely normal, plagued economy. The word used was “musterknabe”, something between poster-child, first-in-class and teacher’s pet. I think this choice of words (maybe subconsciously) belies what truly was afoot: Germany, like Japan and later China has been toiling as industrial work-horse in the stable of the dollar-denominated world market, headmastered by the USA.

But this exactly has been and still is the collective myth in Germany: export is good. “Exportweltmeister” — “world champion of export” Germans like to call themselves and proudly pound their chest when the yearly numbers roll in. Indeed, producing such high-value output with a moderately sized and pricey workforce is something to be proud of. However, I do remember wondering as a child: but we work more than they do. Why is this good?

Indeed, why? No sane country would tolerate a long-standing trade surplus in industrial goods — effectively subjecting its workforce to serf-labor at the hands of other nations — unless it is either weak, or (someone) gets something significant in return. Usually we find a combination of both.

Mid 20th century Germany and Japan got the gift of having an industrial economy at all. If they didn’t play ball with the US no access to resources would have been had. You needed dollar-denominated investors in order to get dollar-denominated materials. See, the fact that the US can run up such an epic trade deficit tab does have something to do with the fact that there are US soldiers stationed all over the world, making sure that resource markets don’t get closed off and shipping lanes stay uninhibited for shipments to the free, brave and well-adjusted.

This is exactly the reason why it made sense for China to lease out its workforce. Now the Chinese elite is stuck with entanglement in the US system of trade — and higher aspirations. The difference between China and Japan/Germany is that the latter two did not have a military and geopolitical option. They were weak. They still are, to a certain extent. China was weak, but there are no obvious barriers to changing that, other than rubbing up against US hegemony, Russia and India. I don’t know about you, but once the resource stakes get higher later in this century, a bit of rubbing won’t hold hardly anybody back no more.

…Which is why Friedman has been harping on about China’s military underwhelm. To Stratfor and its whole ecosystem, US hegemony is axiomatic. In the very article I mentioned above, Friedman speaks of the natural cycle of rise and fall — for China and all other nations — not for the US.

No other world can be sold to their clients and this is what they do, it’s their job. They must explain the world intelligently, but through an amenable lens please. To us less interested in fantasy it can serve to bemuse: In Stratfor parlance, US weakening influence abroad is getting sold as “US losing interest in doing police work for others”. Since when does this make sense? Being police is being empire! Remove the policing and all you are left with is an encrusted exploitative trade balance which will, which must crumble.

This crumbling will be of interest — and I’m the last to predict that it will leave China and how it’s currently run unscathed. I don’t know how it will turn out. I have previously suggested one scenario. The issue with history is that scenarios that make sense don’t necessarily have to manage to come to pass. One central assumption of mine was that the Chinese elite values its investments, which are entangled in the US-controlled economy. — Controlling exchange from RMB to dollar being a big part of its mechanism for extracting wealth from its serf-people. How much do these elites care about their involvement with the US? I don’t know. There’s always more messed-up versions of devolving tensions between powers. I hope we don’t get those.

Germany has also been cut loose a bit from its waning big brother, Onkel Sam. Nevertheless, the power of myths prevails. Germans still believe in the redeeming value of an export-driven economy. I believe the EU has been one attempt to solve the tension between reality (of becoming a regional power) and the myth of export.

In fact, a clever friend of mine once pointed out that calling Germany an export nation is a bit of a scam. Most of its exports go to other EU member states, which, if things go one way, is much more of a domestic exchange than not. Taken as a whole, the EU trade balance has pretty much been straddling parity for the last ten years (with a recent uptick).

Remember the two reasons I gave, why a country would engage in big trade surplus arrangements? There were two options: (a) weakness (b) getting something else in return. The current spates around the Euro are exactly the second part of why export. Germany is trying to get something in return for those exports to its neighboring countries, namely to let German elites own and dominate their economies.

This strategy has so far not been particularly elegant. I wonder whether we’ll see some more old-fashioned military, geopolitical posturing on Germany’s part. Though something tells me it’s not their style. And Germany still is an occupied country. As for China, I see no such impediments, at all.

What I do see is many practical difficulties to China, Russia, India, Germany, Iran challenging US hegemony. If they are smart (and usually they are), expect a policy of nibbles all round. Bit by bit, calculated provocation, rock the boat until it creaks. In the end, we will see that the emperor has no clothes — and the waters of reality will rush in and engulf the far-flung shrouds of the US imperial system. It will be too ephemeral to withstand. With that, American Consumerism (TM) will no longer be. The US will turn on itself, either neglect the troops abroad or mostly bring them home.

Which is when everyone else gets to duke it out in their own back-yard. Stratfor, unfortunately, will find itself out of a job.



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