The Coming China WarsThe Coming China Wars

A Presentation by Peter NavarroA Presentation by Peter Navarro

SMA Board of Directors MeetingSMA Board of Directors MeetingOctober 18, 2007October 18, 2007

Tonight’s MessageTonight’s Message

Develop a more broad-based “China Price” strategy and broader coalition to counter the growing China threat to American industry and the U.S. economy

The Situation is DireThe Situation is Dire

• Continued job loss in key Continued job loss in key manufacturing industriesmanufacturing industries

• Skyrocketing raw materials Skyrocketing raw materials prices squeezing bottom lineprices squeezing bottom line

• A collateral downward pressure A collateral downward pressure on on wageswages

It’s Not Just Blue CollarIt’s Not Just Blue Collar

• China continues to move up and across the China continues to move up and across the value chainvalue chain–Autos and aircraft (up)Autos and aircraft (up)

• Loss of customer baseLoss of customer base!!!!!!!!

–Biotech and pharmaceuticals (up)Biotech and pharmaceuticals (up)–From assembly to R&D and design (From assembly to R&D and design (acrossacross))

A Weak OppositionA Weak Opposition• Political opposition fragmented

– Industry – Labor– Environmentalists – Human rights activists– Consumer advocates

• Political message narrow and compartmentalized– Each interest group talks about its own

interests•Jobs, Unions, Global Warming, Tibet

• Policy wars being fought piecemeal

Political Will WaningPolitical Will Waning

• Each additional U.S. job offshored one less reason to fight – NAM’s “forked tongue” message– Financial services & Chuck Schumer– Chamber of Commerce lobbying in

Beijing– The Google-Yahoo syndrome

Proposed Solution Proposed Solution • Use China Price analysis as an Use China Price analysis as an

organizing toolorganizing tool

• Build a broader-based China Price Build a broader-based China Price CoalitionCoalition

– Industry, Labor, Environmentalists, Human Industry, Labor, Environmentalists, Human Rights Activists, Consumer AdvocatesRights Activists, Consumer Advocates

• Fight the policy wars simultaneously Fight the policy wars simultaneously on all five China Price on all five China Price frontsfronts

Broaden the MessageBroaden the Message1.1. Manufacturing key to economic strengthManufacturing key to economic strength

• Good jobs and decent wagesGood jobs and decent wages

2.2. Promote energy efficiencyPromote energy efficiency

3.3. Protect the environment & and stop Protect the environment & and stop global warmingglobal warming

4.4. Ensure product and food qualityEnsure product and food quality

5.5. Beware China’s financial “nukes”Beware China’s financial “nukes”

6.6. Beware the Hot War threatBeware the Hot War threat

7.7. Beware the Space War threatBeware the Space War threat

The China PriceThe China Price

China’s 19th Century

Mercantilism in a 21st Century Age

The China Price DefinedThe China Price Defined

The ability of Chinese manufacturers The ability of Chinese manufacturers to undercut the competition by 50% to undercut the competition by 50% or moreor more

The China Price BlitzkriegThe China Price Blitzkrieg

• 70% of DVDs and toys70% of DVDs and toys• 50% of bikes, cameras, shoes, 50% of bikes, cameras, shoes,

phonephone• >1/3>1/3rdrd of air conditioners, color of air conditioners, color

TVs, computer monitors, TVs, computer monitors, luggage, microwavesluggage, microwaves

• Dominant in appliances, Dominant in appliances, furniture, jeans and furniture, jeans and apparelapparel

How Does China Do It?How Does China Do It?

• Year-long research project at UCI• Team of 100 MBAs identified and

analyzed “eight major drivers of China Price”

!! Five of the eight drivers represent unfair trade !! Five of the eight drivers represent unfair trade practices !!practices !!

!! Half or more of China Price advantage due to !! Half or more of China Price advantage due to Chinese mercantilism and protectionism !!Chinese mercantilism and protectionism !!

Weapons of Mass Weapons of Mass Production Production

Cheap Wages 40%

*Web of Illegal Subsidies 17%

Network Clustering 16%

*Currency Manipulation 11%

*Counterfeiting & Piracy 8%

Foreign Direct Investment 3%

*Lax Health & Safety Regs 2.5%

*Lax Environmental Regs 2.5%

TOTAL 100%

Giving the Dragon Its DueGiving the Dragon Its Due

• Well-educated, well-disciplined, Well-educated, well-disciplined, highly productive labor (40%)highly productive labor (40%)

• Large “reserve army of unemployed” Large “reserve army of unemployed” depresses wagesdepresses wages– Over 100 million unemployedOver 100 million unemployed

• The Marxian FutureThe Marxian Future– 300-500 million peasants to stream into 300-500 million peasants to stream into

Chinese factories in next 10 to 20 yrsChinese factories in next 10 to 20 yrs

• This advantage isn’t going This advantage isn’t going awayaway!!

The “Big Five” Unfair The “Big Five” Unfair PracticesPractices

Web of Illegal Subsidies 17%

Currency Manipulation 11%

Counterfeiting & Piracy 8%

Lax Health & Safety Regs 2.5%

Lax Environmental Regs 2.5%

TOTAL 100%

China’s Web of SubsidiesChina’s Web of Subsidies

• The biggest outrage– Subsidized energy and water– Subsidized or free land– Cheap or free capital

• VAT tax rebates• Protection of internal markets

– China is the real protectionist!

Currency ManipulationCurrency Manipulation

• China pegs the yuan to the dollar– Grossly undervalued (20% to 40%)

• A “tariff” on US exports• Overstimulates US imports• Forces rest of Asia to manipulate

their currencies• Extremely destabilizing to

international monetary system and free trade

Counterfeiting & PiracyCounterfeiting & Piracy• World’s biggest pirate nation

– Not just Louis Vuitton & DVDs• Provides real UNFAIR cost advantages

– R&D– Marketing– IT

• Public health implications– From Lipitor to Viagra– Pet food

Lax Environmental RegsLax Environmental Regs• Most polluted country in the worldMost polluted country in the world

– 16 of 20 of world’s largest polluted cities16 of 20 of world’s largest polluted cities– Rivers, streams, and oceans degradedRivers, streams, and oceans degraded– A cancer epidemicA cancer epidemic

• Provides real cost advantagesProvides real cost advantages– Scrubbers & pollution control Scrubbers & pollution control

technologiestechnologies– Waste disposalWaste disposal

• Largest global warmerLargest global warmer– The coal plant explosionThe coal plant explosion– The Asian brown The Asian brown cloudcloud

Lax Health and Safety RegsLax Health and Safety Regs

• The most dangerous place to The most dangerous place to work in the worldwork in the world– Dismemberment capital of the Dismemberment capital of the

world world

• The slave labor capitol of worldThe slave labor capitol of world• Provides real (unfair) cost Provides real (unfair) cost

savingssavings– Safety equipmentSafety equipment– Liability Liability costscosts

Foreign Direct InvestmentForeign Direct Investment

• State of the art machinery & techState of the art machinery & tech– Japanese and Koreans in NorthJapanese and Koreans in North– U.S. and Hong Kong in SouthU.S. and Hong Kong in South– German engineering German engineering

• Best management practicesBest management practices– Fruits of the B-School treeFruits of the B-School tree

• Attracted by:Attracted by:– Large potential marketLarge potential market– Chinese mercantilism & protectionismChinese mercantilism & protectionism

POINT: Much of FDI is attracted by unfair POINT: Much of FDI is attracted by unfair trading practices and Chinese protectionism!trading practices and Chinese protectionism!

Major ConclusionsMajor Conclusions

• China Price unfair advantage multifaceted

• No one magic policy bullet to stop Chinese juggernaut

Must attack “Great Protectionist Wall of China” on all five China Price fronts!

A Roadmap to VictoryA Roadmap to Victory

“Don’t Play Checkers in a Chess World.”

Ron Vara

Building the CoalitionBuilding the Coalition• Politics makes for strange bedfellowsPolitics makes for strange bedfellows

– IndustryIndustry– LaborLabor– Environmentalists Environmentalists – Human Rights ActivistsHuman Rights Activists– Consumer AdvocatesConsumer Advocates

• Must overcome natural distrustMust overcome natural distrust– Industry vs. laborIndustry vs. labor– Industry and labor vs. environmentalistsIndustry and labor vs. environmentalists

• Recognize (and confront!) the corporate Recognize (and confront!) the corporate schismschism– Expose the offshoring lobbyExpose the offshoring lobby

Crafting the Message #1Crafting the Message #1

This???This???

American steel has been one of the hottest plays on Wall American steel has been one of the hottest plays on Wall Street for the past 5 years. With a 5.7 percent annual Street for the past 5 years. With a 5.7 percent annual productivity jump over the past decade, this gleaming productivity jump over the past decade, this gleaming industry has added $350 billion and 1.2 million direct and industry has added $350 billion and 1.2 million direct and indirect jobs to the economy. indirect jobs to the economy.

American industries across the broader manufacturing American industries across the broader manufacturing sector have precisely the same kind of prospects and sector have precisely the same kind of prospects and potential as our reborn steel industry– if we act together potential as our reborn steel industry– if we act together now. now.

Or This????Or This????

Message #2: Message #2: Energy EfficiencyEnergy Efficiency

Message #3: EnvironmentMessage #3: Environment

• What happens in China doesn’t What happens in China doesn’t stay in China!stay in China!

Unlike heavy carbon dioxide emitting steel producers overseas, American steel has Unlike heavy carbon dioxide emitting steel producers overseas, American steel has passed the Kyoto target by 240 percent through hi-tech advancements achieved. This passed the Kyoto target by 240 percent through hi-tech advancements achieved. This includes a 29 percent improvement in energy efficiency since 1990. includes a 29 percent improvement in energy efficiency since 1990.

Message #4: Product Message #4: Product SafetySafety

Message #5: Financial Message #5: Financial “Nukes”“Nukes”

• America’s loss of political independenceAmerica’s loss of political independence

Message #6 Hot War ThreatMessage #6 Hot War Threat

• Military budget growing twice as fast as economy

• Largest standing army in world• Developing deep water navy and

nuclear sub capabilities• Anti-satellite capability will

neutralize U.S. air superiority• Cyber warfare and hacking

Message #7: Space WarsMessage #7: Space Wars

• Space program geared at seizing Space program geared at seizing ultimate high groundultimate high ground

• Manned programs to moon, Mars, Manned programs to moon, Mars, JupiterJupiter

• Beidu’s GPS alternativeBeidu’s GPS alternative• ““To Serve To Serve ManMan”?”?

The Chinese Are Coming!The Chinese Are Coming!

• Preoccupied with Iraq, U.S. on Preoccupied with Iraq, U.S. on collision course with Chinacollision course with China

• China Price analysis shows China China Price analysis shows China is real protectionist! is real protectionist!

America ultimately pays for cheap Chinese America ultimately pays for cheap Chinese goods with a loss of jobs, stagnant income, goods with a loss of jobs, stagnant income, skyrocketing energy prices, unsafe products, skyrocketing energy prices, unsafe products, and a more polluted world!and a more polluted world!

Attack on Every FrontAttack on Every Front

• The WTOThe WTO• Department of CommerceDepartment of Commerce• U.S. Trade RepresentativeU.S. Trade Representative• Treasury DepartmentTreasury Department• White HouseWhite House• CongressCongress

– Individual billsIndividual bills– An omnibus billAn omnibus bill!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Time for Q&A! Time for Q&A!

Cheap Wages 40%

*Web of Illegal Subsidies 17%

Network Clustering 16%

*Currency Manipulation 11%

*Counterfeiting & Piracy 8%

Foreign Direct Investment 3%

*Lax Health & Safety Regs 2.5%

*Lax Environmental Regs 2.5%

TOTAL 100%

www.peternavarro.com