In 1970, I was an undergraduate at New York University, studying Chinese history and language.
I was totally immersed in the subject. I thought I understood it backwards and forwards.
I was wrong.
One my classmates, a business major from Hong Kong, had taken no academic courses on China. He didn’t know much about its politics and cared little about its history. But as it turned out, he had a clearer vision of China’s future than I did.
“Look,†he said. “Hong Kong is just a tiny territory with a meager 421 square miles. But in international trade, it’s beating the pants off of much larger industrial nations. It has an amazing trade surplus. It’s even beating the United States in key sectors.
“Now imagine what would happen if, someday, the work ethic of Hong Kong’s labor force were transferred to all of mainland China.
“Imagine if, someday, the entrepreneurial know-how of Hong Kong’s business community were transferred to all of mainland China.
“Imagine what China would be like if it had a per-capita trade surplus like Hong Kong’s!â€
My response:
“Someday, maybe. But in our lifetime, no. The economic culture of mainland China is precisely the opposite of Hong Kong’s. It depresses individual initiative. It encourages the labor force to work as little as possible. The word ‘profit’ itself is taboo.
“It will require a political revolution that will be convulsive. It will need a cultural metamorphosis that could take many generations. When you’re 50, tell the story to your grandchildren. Maybe they will get to see that day.â€
Now, however, just one generation later, the transfer he described has already taken place. It has required neither a political revolution nor many generations.
But compared to Hong Kong, China still has nearly 190 times the population and over 8,500 times the territory. The China of 2005 is the Hong Kong of 1970, multiplied a thousand-fold.
Indeed, Hong Kong’s business leaders have established close links with their counterparts in Shanghai, infusing the business centers of China with their expertise. Taiwanese, Japanese, Korean, and now, American business leaders are doing the same.
China has the largest modern shopping centers in the world and even the largest Wal-Marts.
You don’t need a Ph.D. in economics to understand this. Nor do you need a crystal ball to see the consequences. All you have to do is pick up your daily paper and read the recent news …
America’s Trade Deficit With China
Will Surpass $200 Billion This Year
America’s trade deficit with China grew by more than ten fold between 1986 and 1992, and even back then, it was the cause for grave concern.
Politicians from both parties issued dire warnings. Congress rang alarm bells. President Clinton spoke on the ways to improve America’s competitiveness. But despite many trial balloons — and much hot air — nothing was done to change the trend.
Result: Between 1992 and 2002, America’s trade deficit with China grew by nearly another ten times.
Once again, we heard the grave voices of concern and solemn promises of action. But once again, nothing was done.
Result: Just in the three years since 2002, our trade deficit with China has DOUBLED.
All told, since 1986, America’s trade deficit with China has grown by over 12,000%.
This year, our trade deficit with China is expected to surpass $200 billion. To get a rough idea of how big that is, consider a few comparisons.
This year’s trade deficit with China is close to $50 billion more than our nation’s entire budget deficit in 2002.
- This year’s trade deficit with China is about $40 billion more than our nation’s entire trade deficit with all nations in 1998.
- In fact, this year’s trade deficit with China is the largest single deficit between any two countries in the history of foreign trade.
And this is not just a matter of numbers. It has wide and far-reaching implications for the future of American industry and the fate of your investments.
It is turning the entire American economy inside out and upside down. It is driving the flow of international capital and the emigration patterns of the world’s most talented scientists.
It is transforming — and possibly inverting — the third world (Latin America, Africa and Southeast Asia), the “second world†(the former Soviet block) and the “first world†(North America, Western Europe and Japan).
Overall, the U.S. imports about 50 percent more goods and services than it sells abroad. So just to stabilize the deficit, U.S. exports have to grow about twice as fast as imports. That’s going to be a tough task.
Nor will the task be made easier simply by manipulating the value of the U.S. dollar.
A few years ago, the pundits told you that a cheaper dollar would fix the deficit problem. But then, even when the dollar got cheaper, the deficit kept getting bigger anyhow.
And now, while the dollar has recovered, the deficit has continued to get worse.
Greenspan Warns of
U.S. Trade Deficit
Alan Greenspan warned the world’s finance ministers and central bankers on Friday that the growth in the United States’ trade deficit may be “quite painful†for the world economy if it is not halted.
He was the keynote speaker at the Group of 7 meeting in London. He called for America to stop the “pernicious drift toward fiscal instability†created by the high current-account deficit.
And everyone listened carefully.
But although Greenspan’s words were on target, his actions have been way out of kilter.
Indeed, in recent years, it was Mr. Greenspan who dropped U.S. interest rates to their lowest level in nearly a half-century … helped make money and debt cheap … and encouraged American consumers to embark on the wildest borrowing- and-spending binge of all time.
No wonder they spent hundreds of billions on cheap foreign goods!
Now, in the twilight of his career, the outgoing Fed Chairman is issuing a dire warning. But it’s too late. The damage has already been done …
Ford’s November U.S. Sales
Fall 15%; Toyota’s Rise 10%
Ford said its November U.S. sales of cars and trucks fell 15%, led by sport-utility vehicles. Meanwhile, Toyota’s sales increased 10%.
“They’ve dug themselves a very deep hole with the success they had in the summer with the employee pricing,†said Michael Luckey, president of Luckey Consulting Group in Kennelon, New Jersey.
Sales of Ford’s Explorer SUV fell 52%, reaching a 15-year low for the second straight month after a redesigned model debuted in October. Sales also fell 55% for its large SUV the Lincoln Navigator.
My view: Both Ford and General Motors are going down. They will not be bailed out by the U.S. government. They will file for bankruptcy in the near future.
And this is happening despite cheap money, despite tax cuts and despite massive government stimulus to keep the U.S. economy growing.
Why? What’s behind the emerging disaster in Detroit?
The simple answer: It’s a direct consequence of America’s inability to compete with its primary trading partners, especially those in Asia.
Ford Cuts May
Not Be Enough
Ford Motor Co. is poised to close plants and cut jobs in North America. But no one seems to think it will be enough to turn around the company. Unfortunately, they may be right.
In emerging nations, cutbacks would immediately bring cost savings. But not in advanced nations like the United States.
For example, the company is planning to shut down plants in Atlanta, St. Louis and St. Paul. But due to the company’s labor agreement with the United Auto Wokers, it not only has to keep paying high wages and retirement benefits … it also must keep plants open, according to the Wall Street Journal.
To make matters worse, Ford is obligated to take back 24 plants from Visteon Corp., an auto parts manufacturer. And those plants are losing money.
This is crazy. It implies that the only way Ford may be able to break out of these contracts could be with a Chapter 11 filing.
And already, despite the rally in the stock market overall, Ford’s shares are sinking steadily.
So imagine what’s likely to happen to the shares in anticipation of a possible bankruptcy.
Don’t be surprised if someday soon the once-mighty Ford Motor Company is transformed into the equivalent of a penny stock.
U.S. Suffering a
Massive Brain Drain
America’s trade deficit with countries like China is more than just a matter of losing more business or making less money. It represents a broad loss of scientific, intellectual, and cultural leadership in the world.
Foreign-born scientists and engineers made up 22% of our work force in 2000. Foreign-born entrepreneurs co-founded Google, Sun Microsystems, and Intel. Foreign-born doctors are essential to our health-care system. Foreign-born teachers are critical for the health of our higher education.
But now we’re in danger of losing that talent.
Indeed, China and India are beginning to retain their best and brightest, while smaller nations like the U.K., Canada, and Australia are offering the scientists who typically would have come here, larger labs, more funding, and fewer research restrictions.
In short, the brain drain that used to afflict mostly emerging nations in Latin America and Africa, is now spreading to the United States.
If this continues, it will not only make it hard for us to compete … it will also make it hard for us to recover our competitive powers in the future.
And if it continues, it could take generations before the United States can regain its leadership status.
Thirty years ago, I was wrong when I doubted another major nation’s ability to revive itself in a short period of time. I hope that I’m wrong again. In either case, the current state of affairs is undeniable.
My Advice
Don’t ignore the flip side of China’s success — continuing pain and struggle for many U.S. industries, companies and investments.
Avoid stocks like Ford, General Motors, and others that have lost their way.
Favor investments we’ve recommended — including those related to gold, copper, energy, and other commodities that are being driven higher by the rapid growth in Asia. They are literally going through the roof.
And, above all, keep most of your money safe.
Good luck and God bless!
Martin
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
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