What Business Executives Must Do
The world’s business executive corps must also stand up and be counted among those who would seek constructive change. As illustrated in Chapter 1, “The Cheating ‘China Price’ and Weapons of Mass Production,” one undeniable major contributor to the world’s “Made in China” problem is the ever-increasing propensity of business executives around the world to offshore their factories and production facilities to China—often to evade stronger environmental, health, and safety regulations in the home country.
I always marvel at this lemming-like offshoring behavior because those business executives now falling over each other to open their China beachheads have clearly not thought the problem through. In the parlance of business strategy (which I teach at the business school at the University of California-Irvine), these executives have failed miserably in performing a complete “risk assessment” of moving their facilities to China.
The biggest risk of moving all or most of one’s production and research facilities to China that today’s business executives are not now properly accounting for is “geopolitical risk.” To explain this kind of risk by example, we need only observe that no company executive should want their company held hostage to a trade war with China, a hot war with China, or any one of China’s coming “wars from within.” Yet what should be very clear from this book is that the likelihood of any one of these types of wars breaking out is rising rapidly.
I might add here parenthetically that when I talk about this issue with corporate executives, I simply ask them this question: Who are we more likely to go to war with, Brazil or China? The answer is self-evident, and within that answer lies this essential truth: Conflicts between China and the rest of the world are only likely to increase as China continues down the path of an unsustainable development driven by unfair trading practices and a rapid destruction of its environment. Although producing in China and selling into the Chinese market may seem very attractive now, when the China problem eventually hits the world fan, the last place your corporation is going to want to be is stuck in China. Accordingly, appropriate strategic recommendations for the world’s business executives include
Don’t put all your manufacturing or R&D eggs in one China basket! Companies seeking some type of Asian exposure can diversify into other countries in the region. As the Mattel Corporation painfully learned during the worst product recall in world history, it can be very damaging for any company to have the preponderance of its production in China.
Play a constructive role in improving China—don’t become a lobbyist for Chinese mercantilism just because your company produces in China.
Understand and harness the growing power and potential profitable opportunities of marketing “Made in the U.S.A” and “Not Made in China” products.
Significantly increase quality control for those products that your company manufactures and/or distributes from China.
Why America Must Live within Its Means
While China’s unfair trading practices constitute the major reason the United States runs huge trade deficits with China, these unfair practices are not the only reason. At least part of America’s huge trade imbalance problem may be traced directly to its nearly decade-long descent into a “living beyond one’s means” lifestyle. This is a lifestyle that has been accommodated both by chronic federal budget deficits and a surfeit of easy money from the Federal Reserve’s “printing press.”
America’s chronic budget deficits not only overstimulate U.S. demand for Chinese imports. They also require the United States to borrow money from China to finance these budget deficits. This is at least part of the reason that China has become America’s de facto “central banker” and why China can now exert undue influence on America’s financial and political institutions.
As for the U.S. Federal Reserve, its “easy money” policies have likewise overstimulated import demand for Chinese goods by making it easier for American consumers to use their credit cards to binge on cheap Chinese goods. The Fed’s easy money printing press has also indirectly overstimulated the demand for Chinese imports by helping to turn the American home into an ATM.
In particular, during the height of the now-burst housing bubble, artificially low interest rates maintained by the Fed encouraged the “serial refinancing” of many American homes. American homeowners then used equity drawn from their homes in the form of cash loans to boost their consumption, and a big chunk of those ATM dollars flowed offshore to China. From these observations, it follows that
To help curb its voracious appetite for Chinese imports, the United States must balance its budget, practice monetary restraint, and live within its means.