Commerce Is Not Conquest

by Don Boudreaux on October 18, 2006

A front-page story in today’s New York Times discusses the likely delay in introducing Chinese-made automobiles into the American market. Here are the opening few paragraphs:

NINGBO, China — Every day in cities like this one, Chinese factories
churn out waves of exports that flood markets in the United States and
Europe: DVD’s, microwave ovens, furniture, washing machines, shoes and
more.

So it is no surprise that as China’s industrial revolution advances,
Western automakers and their workers have begun to worry seriously that
an invasion of Chinese cars will begin soon.

It turns out it probably will not be so soon after all.

Despite
growing anxiety that the Chinese would quickly seek to conquer yet
another important industry, it now looks as if it will be at least
another several years before Chinese automakers start exporting large
numbers of cars they both design and make. They had intended to start
selling their own brands in the United States as soon as 2007 but have
pushed off their plans by a couple of years.

And now, some
Chinese auto executives admit, it could be as late as 2020 before they
will be ready to take on the world auto market.

Note the misleading belligerent language — "invasion of Chinese cars" and "conquer yet another important industry" — along with the utterly wrongheaded allusion to natural disasters — "flood markets." Here’s how I would re-write these opening paragraphs.

NINGBO, China — Every day in cities
like this one, Chinese factories churn out waves of exports that improve the
lives of countless consumers in the United States and Europe: DVD’s, microwave ovens, furniture,
washing machines, shoes and more.

So it is no surprise
that as China’s industrial revolution advances, Western automakers and their
workers have begun to worry seriously about the competition they will face as
American car buyers will soon enjoy even greater choice as a result of the
Chinese offering their cars for sale in the U.S.

It turns out it probably will not be so soon
after all.

Despite growing anxiety that the Chinese would
excel at satisfying consumer desires in yet another industry often nebulously
alleged to be “important,” it now looks as if it will be at least another
several years before Chinese automakers start exporting large numbers of cars
they both design and make. They had intended to start selling their own brands
in the United States as soon as 2007 but have pushed off their plans by a couple of years.

And now, some Chinese auto executives admit it could be as late as 2020 before they will be ready to take on the world auto market. This delay is unfortunate, for it means that Americans must wait longer than expected for the gains that inevitably come from having access to a greater supply of automobiles, as well as from the added competition that Chinese producers would put on GM, Toyota, Hyundai, Volkswagen, and other long-established auto producers.

Comments

{ 34 comments }

Ravi October 18, 2006 at 1:00 pm: Well done sir! I just read the original article in the train coming to work and I was thinking to myself, "Hmmm…this means the car prices won't be going down that soon." I was also thinking about how some newspapers( Not just NY times which I subscribe to and read almost everyday) while they operate in a capatalistic mode, they profoundly advocate the opposite model.
David Z October 18, 2006 at 1:29 pm: The decline of the domestic auto industry is a structural change in our economy – and it's understandable that the people who will inevitably suffer want the rest of the country to reject the competition. But it is inevitable in an increasingly globalized world. The longer we delay the changes, the harder they will be to bear.
Xmas October 18, 2006 at 1:29 pm: I would have thrown in something about WHY the Chinese automakers are having problems. Maybe a line or two about how the Chinese economy, while becoming more liberal, is still under the control of the government bureaucracy and communist party aparatchiks.

Maybe I wouldn't have just put "improve the lives of consumers" either. I would have said, "waves of products that meet the demands of Western consumers, who are all growing wealthier thanks to the availability of such low-priced, high quality Chinese goods."
gene berman October 18, 2006 at 3:13 pm: While I have no more factual information to add (to the question of why a delay in Chinese entry into the US auto market), one reason occurs that han't been mentioned.

Of all the various industries into which Chinese entrepreneurs (and the state banking apparatus) could diversify, auto manufacture appears to offer the most negative portents.

Compared to the numerous consumer-product and hand-labor-based industries, auto manufacturing promises lower (than other) ROI–and then, only to the successful in absorbing the auto "culture" in which the US, Europe, and Japan have been steeped for almost 100 years. The risk capital is enormous and it would only make sense that that which exists be devoted to projects which require far lesser amounts but which also, in total, provide not only greater percentage prospects but the safety of their diversification across market areas.

My guess would be that the auto entrants which would offer greatest potential return would be those geared to their own market. Even there, a careful project approach would likely be along the lines of a JV, with many forms of expertise provided by an already-established entity.

The apparent high quality of available Chinese labor, coupled with the non-existence of "big names" in the industry conducting operations there in facilities of their own (as, for instance, Toyota and Honda do here and as do Ford and GM in many other countries) point to another important possible reason. That is the uncertainty as to the security of property; the larger the potential investment and the longer the term over which repayment is envisioned, the more likely are ordinary investors–anywhere–to "pass." Even in a JV, the foreign partner would probably wish to invest only moderately (in addition to personnel and know-how) and would probably end up with most of the actual money investment coming from the authority.
faultolerant October 18, 2006 at 3:40 pm: Don,

You're normally the voice of reason in conversations like this one, however, this time your rewrite sounds just as stilted and silly as the original. While the NYT article could have been written in Detroit, yours sounds like yet another Chinese asskisser on parade.
Acad Ronin October 18, 2006 at 7:59 pm: I spent several years as a macroeconomist working for a stockbroking firm. Part of my job was talking to reporters. All though there are a handful of reporters that understand econ, most do not. What they do understand is how to write dramatically. Unfortunately, I am not aware of any school of journalism that offers a degree in economic or even business journalism.
happyjuggler0 October 18, 2006 at 8:17 pm: Well-framed Don. I am sad that so many people don't see that money you save on buying lower priced goods is money you can spend elsewhere, thus enriching those poor and middle class folks who get more bang for their paycheck.

The other point that is usually overlooked is that whenever you buy goods and services provided by poor people you are helping bring them up out of poverty.

Thus you are helping the poorest people in the world at the same time that you are helping yourself.
bee October 18, 2006 at 9:49 pm: China has provided the soilders for european and american executives to lead. Yes, the cars come from china but the capital and know how are from europe and america. The problem we face is that it is cheaper and easier to make a car in china than america. This is topped off by americans who prefer imported goods to american goods.
Ryan Fuller October 19, 2006 at 1:03 am: "The problem we face is that it is cheaper and easier to make a car in china than america. This is topped off by americans who prefer imported goods to american goods."

How is this a problem? To me, it sounds like all the reason you'd need to start making cars in China instead of America. More cars will get made because it's cheaper and easier, and Americans will get goods according to their preferences.
Cam October 19, 2006 at 1:47 am: I would've also mentioned that these Chinese cars will be made by resourceful Chinese engineers and workers. On top of providing good prices to Western consumers, exporting cars will help generate further wealth for the Chinese people.

Not to mention that in the long-run, Western workers and capital will be shifted to more productive industries, assuming the government lets them.
LongTimeReader October 19, 2006 at 2:09 am: Don: This is the best thing you've ever published on this blog.
gary lammert October 19, 2006 at 5:43 am: Even without Chinese entry into the American market, GM is near the end of its road. Its final apogee of valuation matches the Wilshire Fractal Maximum saturation pattern on 24 November 2006:

16 October 06

LIMIT UP

Wednesday 18 October 2006 – DAY 372 of a 159/398/372 of 398
Maximum 2003-2006 X/2.5X/2.5X Growth Fractal

On the previous EF posting on this weekend, the fractal saturation
solution for the Wilshire's 2002-2006 echo three- phase growth fractal
was delineated. A smarter fractalist might have been able to delineate
the big picture pattern in May 2005 – after the end of the Wilshire's
second growth fractal. The x/2.5x/2.5x patterns were already there
with a 40/100/100 rolling fractal to the 5 January 2005 top. For this
extremely myopic fractalist, 97 percent of the elephant's picture had
to be drawn in large bold and black letters, before the whole elephant
could be imaged – pretty bad and not much to be said for personal
gestalt or analytical abilities. Day 398 of the third fractal is the
ideal final day of maximum saturation.

A personal basic flaw in interpretation of valuation fractals for the
last four years has been in viewing the fractal system predominantly
in the context of an the expected 140 year plus second fractal
saturation collapse. This has been continuously reinforced with a
number of recurrent lower order ideal 2.5x second fractal units with
their characteristic terminal punctuation of nonlinear decay. Missed
was the equally important recurrent theme of three phase quantum
x/2.5/2.5x maximum growth fractal. This X/2.5X/2.5X maximal growth
pattern also occurred in a recurrent theme throughout the last 4 year
evolution.

What lies at the end of the third fractal's maximal growth? Is it a
slow unwinding or is it a profound cataclysmic macroeconomic collapse
reflecting the extent of over valuation and over saturation of a
6-year predominantly debt-driven illusive asset wealth phenomena that
characterizes the new manufacturingless United States?

One thing is true and not arguable. All Congressional Budget Office
formulas and equation's regarding the longevity and viability of US
(and state and local) entitlement programs are based on a linear 2-3
percent GDP growth model. What would happen to that model if a
contraction occurred equal to or much worse than the 40-45 percent
contraction of GDP in the 1930's?

Commodities: LIMIT UP

As predicted on the week-end posting, the CRB was … limit up on
Monday 16 October. Treasuries fell with the yield up to 49.30, with an
inversion of yield over the thirty year of .11 percent.

Investment money will, over the next 5-6 weeks, temporarily exit the
bond market, drive commodity- especially grain- prices up and support
higher equity prices. At the Wilshire's secondary saturation point -
secondary to its March 2000 high – at 159/398/398 days, the system's
available investment money will have been optimally 'self assembled'
into both a maximally saturated summation index composing the sum of
the commodity and equity markets. At the system's saturation point,
interest rates will be higher reflecting that particular investment
area's transiently exiting funds (and higher commodity prices). Higher
interest rates will cast gloomy shadows over those recent real estate
speculators and those otherwise recently acquiring mortgages in the
over supplied housing market.

Qualitatively, these are the ideal conditions for a very old, very dry
and decayed forest to be ignited and consumed, No external events such
as lightening are necessary for collapse at the macroeconomic
saturation area. The activation energy exists within the complex
system at the saturation point. Like oily rags and gasoline
inappropriately stored in the attic on the hottest of summer days,
spontaneous combustion will occur.

Gary Lammert
Lee October 19, 2006 at 6:43 am: The problem is that most people do not distinguish between constructive forms of competition from destructive.

If you were entering a 100m sprint and wanted to ensure victory, you could conspire to poisen all the other participants the night before the race. You would win, but only because you handicapped the competition.

Rules that prevent such destructive competition ensure that the standards raise year on year, because the only way to beat the competition is to be faster and faster.

Unfortunately, I have found that many without any economics education do not distinguish between the two, and phrases like "market competition" are taken to mean both. Hence the comparison of market competition to conquering, war and destruction.
bartman October 19, 2006 at 9:35 am: Gene Berman:

The Chinese already build and export many cars. Here in the UAE I could purchase cars made by Haifei, Geely and Chery, as well as 3 or 4 brands of pick-up truck. My favorite is the Great Wall brand

The Haifei Lobo starts at about $4,000.
contrail October 19, 2006 at 11:29 am: Maybe the story could have added a part on how China routinely turns a blind eye to intellectual property violations, which allows them to negate external competition from hindering their economy, while at the same time placing their goods on the open markets who obey the market rules.

But hey, so long as the US consumers get more choice, that's all that matters.
faultolerant October 19, 2006 at 2:16 pm: Contrail,

Your comment about "intellectual property" won't gain ANY ground in this forum – or for that matter any forum where "economists" and "libertarians" congregate. See, these kind of folks are more than happy to sell off YOUR work and YOUR ideas (or give them away), but are major hypocrites when it comes to THEIR ideas and THEIR work. Yes, they'll hide it behind hoary phrases like "market economy" and "scarcity" – but at the end of the day, these kinds of people are fundamentally atavastic, atomistic, amoral, immoral, self-centric, egocentric consuming machines.

When it comes to economists and libertarians the lowest common denominator is always money and material things. God forbid these folks raise their sights any higher than the local WalMart. More's the pity. Not to mention if you even speak of "poor chinese workers" most visitors to these forums are happy to throw away a few thousand UAW members (who, by the lib/econ POV are evil) in favor of just one non-unionized chinese worker. You'll not likely ever find a more soulless, morally vapid group assembled in one place.
Adron October 19, 2006 at 2:24 pm: People don't know this?!

hmpf. I guess that is why I have to scream a lot at the various companies that I work at when we discuss the economic activity and decisions the respective companies should make.

Hard hard life being an economist! (Fortunately I program for money
dj superflat October 19, 2006 at 2:33 pm: "You'll not likely ever find a more soulless, morally vapid group assembled in one place."

those are some of the most impressive histrionics i've ever read. so the comments thread here is worse than a collection of SS officers at auschwitz or pol pot and his top lieutenants? than what are you doing here?
Scott October 19, 2006 at 3:00 pm: "most visitors to these forums are happy to throw away a few thousand UAW members (who, by the lib/econ POV are evil) in favor of just one non-unionized chinese worker."

Hmm, one non-unionized chinese worker is as productive as a few thousand UAW members, no wonder union members are opposed to free markets.

My question to you faultolerant is, if those UAW members are supposed to care as much about me as I'm supposed to about them, shouldn't they work for less than some foreigner worker? Why is it only a one way street? Why is it always that consumers should pay more for "Made in my country" goods, rather suppliers sell for less in the name of national interest?
Ryan Fuller October 19, 2006 at 4:17 pm: "Hmm, one non-unionized chinese worker is as productive as a few thousand UAW members, no wonder union members are opposed to free markets."

Good point.
Bruce Hall October 19, 2006 at 5:18 pm: An excellent article by Inc. Magazine on ths subject. A bit long, but you may find it more interesting than simple generalizations about competiting with China.

http://www.inc.com/magazine/20050301/china.html
Scott October 19, 2006 at 5:40 pm: OK, I'll admit some of the words faultolerant used were new to me so I decided to look up them as well as the rest. I'm not sure he was actually insulting us.

"these kinds of people are fundamentally atavastic, atomistic, amoral, immoral, self-centric, egocentric consuming machines."

Atavastic (Atavistic?): one that is suggestive of or suited to an earlier time or style

–[I'll take that as a compliment and I don't think I'm alone in wanting a time before socialism]

Amoral: being neither moral nor immoral
Immoral: conflicting with generally or traditionally held moral principles

–[Not sure how someone can both be amoral and immoral. Besides wouldn't someone who does have traditionally held moral principles be atavistic?]

Atomistic -> Atomism -> Individualism: a doctrine that the interests of the individual are or ought to be ethically paramount

Egocentric: concerned with the individual rather than society

–[Kinda speaks for itself]
Kent Gatewood October 19, 2006 at 10:31 pm: During the previous dust-up, the intellectual property rights views of libertarians and economists was passed over.

Is there a libertarian position on ipr?
True_Liberal October 19, 2006 at 10:40 pm: Acad R sez: "…All though there are a handful of reporters that understand econ, most do not. What they do understand is how to write dramatically. Unfortunately, I am not aware of any school of journalism that offers a degree in economic or even business journalism."

You could say the same about any technology from aeronautics to underwater sonics – no reporter seems interested in learning the basics.

But they knew how to ask "How does that make you feel?", and how to pronounce "6-week anniversary". J-school ranks right up there with the Schools of Education.
matt October 20, 2006 at 9:13 am: Ha ha… Scott, good comment. Before I got to it, I admit I also looked up "atavastic" and needed clarification for "amoral" and "immoral".
Kent Gatewood October 20, 2006 at 11:26 am: Are there any laws of physics precluding commerce from leading to conquest? Maybe American capitalists are Ferengi, while Chinese capitalists are Klingon. China's real majority owner is the communist party. Combine Chinese nationalism with the communist urge for a universal utopia, and conquest may seem inevitable and gorious from Peking.
contrail October 20, 2006 at 11:54 am: Kent,

Re: your question on IP rights…the silence is deafening, isn't it?

Better to just whitewash any criticism of China as ignorant anti-market hysteria.
Daniel October 20, 2006 at 3:46 pm: The concern about Chinese car makers, because of cheap labour, invading and conquering the automobile market is atavistic. I don't know the name of the authors or the title, but hasn't someone concluded that labour nowadays represents about 3% of manufactoring costs? A higher percentage of manufacturing cost is in logistics, plus inventory is tied up for a month on a ship. Eventually the Chinese automanufacturers will join the S. Korean, Japanese, and German automanufacturers and open plants closer to their consumers.

In the spirit of globalisation, I used the British spelling of labour and globalisation.
faultolerant October 20, 2006 at 3:58 pm: Scott,

Believe me, I was insulting your kind.

If you're so terribly taken with the chinese, I'll make you an offer: 1 one-way ticket on American Airlines from New York to Beijing, coach class. Paid in full. My treat.

See how much you like living in their society – I, for one, am not overly thrilled with ours looking like Peking or Mumbai any time soon.

Care to go? And stay?
Scott October 20, 2006 at 5:09 pm: faultolerant,

I'm not sure how my support of free trade and capitalism translates into being "terribly taken with the chinese" but
nonetheless, who's being self-centric now? It sounds like your saying you have your standard of living but want to deprive Chinese and Indians from achieving the same. You may say you care more about your fellow Americans, but I and many libertarians look beyond national borders.

Besides, wasn't it America's relatively free and capitalistic society in the late 19th/early 20th century that helped get it to where it is today?
tarran October 20, 2006 at 7:50 pm: Kent, there is controversy regarding IP among libertarians. Some, usually minarchists, support it, some, primarily anarchocapitalists, oppose it.

I am opposed to the three flavours of IP.

Let's start with the least defensible: patents.

A patent of monopoly in essence is a monopoly granted an some person or group to be the only ones allowed to sell something. As it requires a central state to issue the patents, anarchists like myself reject them out of hand. The basic idea is that if one person comes up with a new way to arrange matter, he or she should dbe allowed to dictate whether or not other people similarly arrange matter that they own. This is a violation of the physical property rights of these others. They are also harmful from a utilitarian perspective: the steam, automobile and aircraft industries all stagnated while patents were actively enforced within them and underwent explosive growth after the patents were either broken or expired.

The anarchist position on copyrights is more nuanced. In effect, there can be a contractual copyright, but the current system of state enforced copyright are obviously immoral. A contractual copyright would be like a EULA. In essence to copyright owner would require you to agree contractually to not copy or permit copying any copies of the work in question you have received. Obviously, the enforcement of this form of copyright is completely on the shoulders of the content producer.

Similarly, there is a contractual basis for trademarks. In this case though one would have to contract with stores or market owners to enforce one's trademarks.

This is, or course a complex subject. I highly recommend reading some of the stuff that on the Mises Institute website which explore the subject in a great deal of detail. There's a pretty good article that Stephen Kinsella wrote with Walter Block. I cannot point you to a pro-IP libertarian piece, so I leave that task to someone else.
Kent Gatewood October 20, 2006 at 11:17 pm: tarran–appreciate the detailed answer. The second question that came to me was how Merck would make an investment decision for drug research with some hope for a monopoly?

The first question was how to enforce contracts without a state? I can see a company repudiating their agreement and daring anyone to stop them.

I'll go off to Mises and see.

Thanks once again
faultolerant October 24, 2006 at 12:48 am: Scott,

I'll address your "argument" one step at a time:

I'm not sure how my support of free trade and capitalism translates into being "terribly taken with the chinese" but
nonetheless, who's being self-centric now?

Your consistent defense of all things chinese and snide denigration of any challenges to it certainly do make you look like a patent sino-asskisser. Free trade and capitalism was never the issue. You're free to trade with anyone you like. Calling you for being pro-chinese and anti-american was at issue.

It sounds like your saying you have your standard of living but want to deprive Chinese and Indians from achieving the same.

To assert that I want to "deprive" chinese and indians of anything overstates the case. I am fundamentally indifferent to them. I simply do not believe they deserve any priority treatment at all, of any kind. Unfortunately, that you and your kind seem to be so enamored with cheap labor that you're quite willing to put Americans out of work says more for your hypocracy than anything else.

You may say you care more about your fellow Americans, but I and many libertarians look beyond national borders.

Why? What is there to gain in impoverishing Americans (even temporarily)to the advantage of someone else? Are you so "worldly" that you put the wellbeing of a person half a world away over your neighbor? I'm not quite so willing to throw overboard someone close to me to advantage a people and a culture who have, as their stated goal, the death of me, my family and my culture. It's not exactly what I look for

Besides, wasn't it America's relatively free and capitalistic society in the late 19th/early 20th century that helped get it to where it is today?

And of what relevance is that comment? It's a meaningless comment unrelated to the argument at hand.
Russell Nelson October 25, 2006 at 1:48 am: Kent: one way to enforce arguments is by reputation. Why should you believe a contract that anybody signs? A state imposes penalties for breaking a contract, but in fact anybody can do that. The question is: can you collect those penalties? A state uses the threat of violence to lend an air of authority to a contract. In the absence of a state, you would have to rely on the reputation of the other signer of the contract. Or you can have a company which serves as the guarantor of a contract, in return, say, for keeping the interest on a performance bond.

The free market has lots of ways of solving these problems, however as long as the state solves them for "free" (or rather by forcing everybody to pay taxes), there's no profit in devising alternate solutions.