China Makes, The World Takes

A look inside the world’s manufacturing center shows that America should welcome China’s rise—for now.

Other examples: A carrying case for an audio device from a big-name Western company retails for just under $30. That company pays the Chinese supplier $6 per case, of which about half goes for materials. The other $24 stays with the big-name company. An earphone-like accessory for another U.S.-brand audio device also retails for about $30. Of this, I was told, $3 stayed in China. I saw a set of high-end Ethernet connecting cables. The cables are sold, with identical specifications but in three different kinds of packaging, in three forms in the United States: as a specialty product, as a house brand in a nationwide office-supply store, and with no brand over eBay. The retail prices are $29.95 for the specialty brand, $19.95 in the chain store, and $15.95 on eBay. The Shenzhen-area company that makes them gets $2 apiece.

In case the point isn’t clear: Chinese workers making $1,000 a year have been helping American designers, marketers, engineers, and retailers making $1,000 a week (and up) earn even more. Plus, they have helped shareholders of U.S.-based companies.

All this is apart from a phenomenon that will be the subject of a future article: China’s conversion of its trade surpluses into a vast hoard of dollar-denominated reserves. Everyone understands that in the short run China’s handling of its reserves has been a convenience to the United States. By placing more than $1 trillion in U.S. stock and bond markets, it has propped up the U.S. economy. Asset prices are higher than they would otherwise be; interest rates are lower, whether for American families taking out mortgages or for American taxpayers financing the ever-mounting federal debt. The dollar has also fallen less than it otherwise would have—which in the short run helps American consumers keep buying Chinese goods.

Everyone also understands that in the long run China must change this policy. Its own people need too many things—schools, hospitals, railroads—for it to keep sending its profits to America. It won’t forever sink its savings into a currency, the dollar, virtually guaranteed to keep falling against the RMB. This year the central government created a commission to consider the right long-term use for China’s reserves. No one expects the recommendation to be: Keep buying dollars. How and when the change will occur, what it will be, and what consequences it will have, is what everyone would like to know.

One other aspect of China’s development to date has helped American companies in their dealings with it. This is the fact that China, so far, has been different in crucial ways from America’s previous great Asian challenger: Japan. Americans have come to view the Japanese economy as a kind of joke, mainly because the Tokyo Stock Exchange has been in a slump for nearly 20 years. Nonetheless, Japan remains the world’s second-largest economy. Toyota has overtaken General Motors to become the largest automaker; Japan’s exporters have continually increased their sales of electronics and other high-value goods; and the long-standing logic of the Japanese system, in which consumers and investors suffer so that producers may thrive, remains intact.

Japan was already a rich and modern country, as China still is not, by the time trade friction intensified, in the 1980s. More important, its leading companies were often competing head-to-head with established high-value, high-tech companies in the United States: Fujitsu against IBM, Toshiba against Intel, Fuji against Kodak, Sony and Matsushita against Motorola, and on down the list. Gains for Japanese companies often meant direct losses for companies in America—whether those companies were seen as stodgy and noninnovative, like the Detroit firms, or technologically agile and advanced, like the semiconductor makers.

For the moment, China’s situation is different. Its companies are numerous but small. Lenovo and Qingdao are its two globally recognized brand names. But Lenovo is known mainly because it bought the ThinkPad brand from IBM, and a quarter of Qingdao Beer is owned by Anheuser-Busch. Chinese exporters have done best when working for, rather than against, Western companies, as Foxconn (like numerous smaller firms) has in working with Apple. While the Chinese government obviously wants to strengthen the country’s brands—for instance, with an aircraft company it hopes will compete with Boeing and Airbus—its “industrial planning” has mainly taken the form not of specific targeting but of general business promotion, as with the incentives that brought companies to Shenzhen.

China’s economy, technically still socialist, has also been strangely more open than Japan’s. Through its first four decades of growth after World War II, Japan was essentially closed to foreign ownership and investment. (Texas Instruments and IBM were two highly publicized exceptions to the rule.) China’s industrial boom, by contrast, is occurring during the age of the World Trade Organization, to which it was admitted in 2001. Under WTO rules, China is obliged to open itself to foreign investment and ownership at a much earlier stage of its development than Japan did. Its export boom has been led by foreign firms. China is rife with intellectual piracy, hidden trade barriers, and other impediments. But overall it is harder for foreign economies or foreign companies to claim damage from China’s trade policies than from Japan’s.

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James Fallows is a national correspondent for The Atlantic and has written for the magazine since the late 1970s. He has reported extensively from outside the United States and once worked as President Carter's chief speechwriter. His latest book is China Airborne. More

James Fallows is based in Washington as a national correspondent for The Atlantic. He has worked for the magazine for nearly 30 years and in that time has also lived in Seattle, Berkeley, Austin, Tokyo, Kuala Lumpur, Shanghai, and Beijing. He was raised in Redlands, California, received his undergraduate degree in American history and literature from Harvard, and received a graduate degree in economics from Oxford as a Rhodes scholar. In addition to working for The Atlantic, he has spent two years as chief White House speechwriter for Jimmy Carter, two years as the editor of US News & World Report, and six months as a program designer at Microsoft. He is an instrument-rated private pilot. He is also now the chair in U.S. media at the U.S. Studies Centre at the University of Sydney, in Australia.

Fallows has been a finalist for the National Magazine Award five times and has won once; he has also won the American Book Award for nonfiction and a N.Y. Emmy award for the documentary series Doing Business in China. He was the founding chairman of the New America Foundation. His recent books Blind Into Baghdad (2006) and Postcards From Tomorrow Square (2009) are based on his writings for The Atlantic. His latest book is China Airborne. He is married to Deborah Fallows, author of the recent book Dreaming in Chinese. They have two married sons.

Fallows welcomes and frequently quotes from reader mail sent via the "Email" button below. Unless you specify otherwise, we consider any incoming mail available for possible quotation -- but not with the sender's real name unless you explicitly state that it may be used. If you are wondering why Fallows does not use a "Comments" field below his posts, please see previous explanations here and here.
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