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The Coming Realignment

China's ascent will bring about novel challenges to "common wisdoms" and rethinking of old terms and assumptions anchored in events past. How do you classify a country governed by a Communist regime but whose government share of GDP is less than half that of the U.S.? An economy that attracts the largest volume of foreign investment in history without providing adequate protection for intellectual property rights? One with extremely high savings rates but which grossly misallocates investment capital? One with the most competitive market in certain segments, but which has a paternalistic subsidy regime? A stabilizing force in world affairs that is now threatening the use of force to regain its "renegade province" of Taiwan? China will challenge these and many other dichotomies we have come to accept; it may also realign the economic, political, and social landscape in the United States as well as in other countries. Among the coming impacts and challenges in the United States:

  • An increasing fault line separating those U.S. industries and firms who see themselves as primarily beneficiaries of an increasing China trade and investment and those who see themselves as victims of China's ascent. The first group consists of multinationals with extensive China operations; the second includes companies who cannot substitute China investment for exit, including many small and medium firms. The two groups will take on an opposing position on trade and protectionism and may align with the two political parties on the basis of their trade agenda.

  • A return of job security to center stage of employer-employee negotiations and a possible reversal of a decade-old trend away from unionization. The feeling of vulnerability now grappling sectors that until recently saw themselves immune to off-shore job loss might entice the unionization of high-skill knowledge workers and bring about significant changes in the structure of the union movement and its activities.

  • Severe pressures toward protectionism not seen for 70 years or so, including not only pressure to establish temporary tariffs, but also demands for renegotiation of trade agreements and challenges to the role of international institutions, most notably the WTO. With increasing concerns about the U.S. being the loser in the trade game, the risk of protectionism and its heavy damage to the global economy looms larger than ever.

  • Paraphrasing the trade debate in terms of "rational economics" versus "hot-headed protectionism" will no longer do. While the benefits of free trade are clear, the long-term realities of a service-based economy lacking a manufacturing base are nothing but. The same is true for the assumption that the U.S. economy can prosper by continuing to be the global innovator and focus on added value economic activities in a world where most nations aspire to, and invest in, the same strategy; and for the belief that the United States can indefinitely absorb the world's output paid for by U.S. assets.

For companies, employees, and consumers, the question is no longer if and when China is coming, for it is already here, but how to prepare for the new economy. Side by side the new economic realities, a new geo-political order is being created. For instance, seeing the length to which the United States and Europe went to secure their oil reserves, why wouldn't an energy-starved and increasingly assertive China take the same route? And why wouldn't it leverage its economic muscle for geo-political gains through such means as economic assistance, training, and defense support? For all the similarities, millennia of Chinese history suggest that it will chart its own course, but if history is clue (and I believe it is), China will not be satisfied with anything but a position of prominence, however defined.

So where does all this leave us? First, there is the unsettling prospect of a trade war. In an age of global interdependence, protectionism will be a severe mistake, producing grave consequences for all; yet this is where we may be heading if we continue to hold on to old clichés and false analogies—like the one asserting that the current shift from manufacturing to services is a repeat of the move from agriculture to manufacturing a century ago—until they hit a reality wall. Second, we share the responsibility of maintaining the perception of fairness, which lies at the heart of the American psyche. If we fail to identify and assist the losers in this new round of the trade game, the belief in opportunity for all may be undermined, and with it, the broad participation that makes America what it is: a haven for the openness and innovativeness but with a sense of inclusion. The challenge is how to do so without infringing on the dreams and hopes of other constituencies in the global economy, both at home and abroad. While we continue to look for the balance, the more immediate question for both firms and individuals is not how to stop the tide of Chinese imports, but how to remain competitive in the dawning Chinese century. That is what this book is about.

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