China China China

One of the hottest issues that’s in all the headlines these days is our economy w.r.t. China.

I saw a very interesting Frontline interview, that I’ll post later this week once I further digest it. But for now, here’s a balanced article on the pros and cons of our entanglement with the Chinese economy.

Some key quotes:

Ohio State University business professor Oded Shenkar, author of the new book The Chinese Century, hears many war stories from local companies. He gives it to them straight: “If you still make anything labor intensive, get out now rather than bleed to death. Shaving 5% here and there won’t work.” Chinese producers can make the same adjustments. “You need an entirely new business model to compete.”

Well that seems rather obvious. Unfortunately the problem seems to be that China is succeeding at both the low and the high end. Past competitors hit us hard in the low end (e.g. labor intensive work), but we were able to pull out ahead with an high tech and information based economy. But not this time.

America has survived import waves before, from Japan, South Korea (news – web sites), and Mexico. And it has lived with China for two decades. But something very different is happening. The assumption has long been that the U.S. and other industrialized nations will keep leading in knowledge-intensive industries while developing nations focus on lower-skill sectors. That’s now open to debate. “What is stunning about China is that for the first time we have a huge, poor country that can compete both with very low wages and in high tech,” says Harvard University economist Richard B. Freeman. “Combine the two, and America has a problem.”

What will be the next wave of innovation that we will bring out to continue our advantage? I’m thinking bio-tech. And technology still – but more in the intellectual property space. And personalized services – especially personalized services (think 250 million markets of 1).

Nonetheless, I suspect that the old 1950’s style American Dream will be declared dead moving forwards. The idea of one parent working, 8 hour working days, weekends off, vacations, comfortable middle class, so on and so forth are already in trouble today. Let’s look at the competition:

China is also propelled by an enormous domestic market that brings economies of scale, feverish local rivalry that keeps prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores (NYSE:WMT – News), Target (NYSE:TGT – News), Best Buy (NYSE:BBY – News), and J.C. Penney (NYSE:JCP – News). “The reason practically all home furnishings are now made in China factories is that they simply are better suppliers,” says Janet E. Fox, vice-president for international procurement at J.C. Penny Co. “American manufacturers aren’t even in the same game.”

I think we’ll be able to find some way to work smarter, but as a whole, most will have to work a lot harder to tread water. (Thought: How will Europe respond to this? In particular, how will they retain their existing lifestyles? Will they be able to?) And much of this points to the fact that a higher education will become increasingly essential. K-16?

Here’s a fascinating tidbit:

Also, unlike Japan 20 years ago, China is a much more open economy. It continues to lower tariffs and even runs a slight trade deficit with the whole world — which makes the U.S.’s deficit with China all the more glaring.

Wow. That I did not know. Did you?

It’s a great article that I encourage you to read, except for this closing sentence:

More innovation. Better goods. Lower prices. Newer plants. America will surely continue to benefit from China’s expansion. But unless it can deal with the industrial challenge, it will suffer a loss of economic power and influence. Can America afford the China price? It’s the question U.S. workers, execs, and policymakers urgently need to ask.

Instead of simply demonizing China for “stealing American jobs,” we need to realize the fact that we’re hooked on Chinese prices. (Hm. Sounds like our dependence on foreign oil.) But the reality of it is that we can’t just ignore them and hope it goes away. Rather, what we need is a strategy to continue to succeed.