The Coming China Wars

1
The Coming China Wars

• A Presentation by Peter Navarro
• SMA Board of Directors Meeting
• October 18, 2007

2
(No Transcript)
3
Tonights Message
Develop a more broad-based China Price strategy
and broader coalition to counter the growing
China threat to American industry and the U.S.
economy
4
The Situation is Dire

• Continued job loss in key manufacturing
  industries
• Skyrocketing raw materials prices squeezing
  bottom line
• A collateral downward pressure on wages

5
Its Not Just Blue Collar

• China continues to move up and across the value
  chain
• Autos and aircraft (up)
• Loss of customer base!!!!
• Biotech and pharmaceuticals (up)
• From assembly to RD and design (across)

6
A Weak Opposition

• Political opposition fragmented
• Industry
• Labor
• Environmentalists
• Human rights activists
• Consumer advocates
• Political message narrow and compartmentalized
• Each interest group talks about its own interests
• Jobs, Unions, Global Warming, Tibet
• Policy wars being fought piecemeal

7
Political Will Waning

• Each additional U.S. job offshored one less
  reason to fight
• NAMs forked tongue message
• Financial services Chuck Schumer
• Chamber of Commerce lobbying in Beijing
• The Google-Yahoo syndrome

8
Proposed Solution

• Use China Price analysis as an organizing tool
• Build a broader-based China Price Coalition
• Industry, Labor, Environmentalists, Human Rights
  Activists, Consumer Advocates
• Fight the policy wars simultaneously on all five
  China Price fronts

9
Broaden the Message

• Manufacturing key to economic strength
• Good jobs and decent wages
• Promote energy efficiency
• Protect the environment and stop global warming
• Ensure product and food quality
• Beware Chinas financial nukes
• Beware the Hot War threat
• Beware the Space War threat

10
The China Price

• Chinas 19th Century Mercantilism in a 21st
  Century Age

11
The China Price Defined
The ability of Chinese manufacturers to undercut
the competition by 50 or more
12
The China Price Blitzkrieg

• 70 of DVDs and toys
• 50 of bikes, cameras, shoes, phone
• gt1/3rd of air conditioners, color TVs, computer
  monitors, luggage, microwaves
• Dominant in appliances, furniture, jeans and
  apparel

13
How Does China Do It?

• Year-long research project at UCI
• Team of 100 MBAs identified and analyzed eight
  major drivers of China Price

!! Five of the eight drivers represent unfair
trade practices !! !! Half or more of China
Price advantage due to Chinese mercantilism and
protectionism !!
14
Weapons of Mass Production
15
Giving the Dragon Its Due

• Well-educated, well-disciplined, highly
  productive labor (40)
• Large reserve army of unemployed depresses
  wages
• Over 100 million unemployed
• The Marxian Future
• 300-500 million peasants to stream into Chinese
  factories in next 10 to 20 yrs
• This advantage isnt going away!

16
The Big Five Unfair Practices
17
Chinas Web of Subsidies

• The biggest outrage
• Subsidized energy and water
• Subsidized or free land
• Cheap or free capital
• VAT tax rebates
• Protection of internal markets
• China is the real protectionist!

18
Currency Manipulation

• China pegs the yuan to the dollar
• Grossly undervalued (20 to 40)
• A tariff on US exports
• Overstimulates US imports
• Forces rest of Asia to manipulate their
  currencies
• Extremely destabilizing to international monetary
  system and free trade

19
Counterfeiting Piracy

• Worlds biggest pirate nation
• Not just Louis Vuitton DVDs
• Provides real UNFAIR cost advantages
• RD
• Marketing
• IT
• Public health implications
• From Lipitor to Viagra
• Pet food

20
Lax Environmental Regs

• Most polluted country in the world
• 16 of 20 of worlds largest polluted cities
• Rivers, streams, and oceans degraded
• A cancer epidemic
• Provides real cost advantages
• Scrubbers pollution control technologies
• Waste disposal
• Largest global warmer
• The coal plant explosion
• The Asian brown cloud

21
Lax Health and Safety Regs

• The most dangerous place to work in the world
• Dismemberment capital of the world
• The slave labor capitol of world
• Provides real (unfair) cost savings
• Safety equipment
• Liability costs

22
Foreign Direct Investment

• State of the art machinery tech
• Japanese and Koreans in North
• U.S. and Hong Kong in South
• German engineering
• Best management practices
• Fruits of the B-School tree
• Attracted by
• Large potential market
• Chinese mercantilism protectionism

POINT Much of FDI is attracted by unfair trading
practices and Chinese protectionism!
23
Major Conclusions

• China Price unfair advantage multifaceted
• No one magic policy bullet to stop Chinese
  juggernaut

Must attack Great Protectionist Wall of China
on all five China Price fronts!
24
A Roadmap to Victory

• Dont Play Checkers in a Chess World.
• Ron Vara

25
Building the Coalition

• Politics makes for strange bedfellows
• Industry
• Labor
• Environmentalists
• Human Rights Activists
• Consumer Advocates
• Must overcome natural distrust
• Industry vs. labor
• Industry and labor vs. environmentalists
• Recognize (and confront!) the corporate schism
• Expose the offshoring lobby

26
Crafting the Message 1
This???
27
Or This????
American steel has been one of the hottest
plays on Wall Street for the past 5 years. With
a 5.7 percent annual productivity jump over the
past decade, this gleaming industry has added
350 billion and 1.2 million direct and indirect
jobs to the economy.
American industries across the broader
manufacturing sector have precisely the same kind
of prospects and potential as our reborn steel
industry if we act together now.
28
Message 2 Energy Efficiency
29
Message 3 Environment

• What happens in China doesnt stay in China!

Unlike heavy carbon dioxide emitting steel
producers overseas, American steel has passed the
Kyoto target by 240 percent through hi-tech
advancements achieved. This includes a 29
percent improvement in energy efficiency since
1990.
30
Message 4 Product Safety
31
Message 5 Financial Nukes

• Americas loss of political independence

32
Message 6 Hot War Threat

• Military budget growing twice as fast as economy
• Largest standing army in world
• Developing deep water navy and nuclear sub
  capabilities
• Anti-satellite capability will neutralize U.S.
  air superiority
• Cyber warfare and hacking

33
Message 7 Space Wars

• Space program geared at seizing ultimate high
  ground
• Manned programs to moon, Mars, Jupiter
• Beidus GPS alternative
• To Serve Man?

34
The Chinese Are Coming!

• Preoccupied with Iraq, U.S. on collision course
  with China
• China Price analysis shows China is real
  protectionist!

America ultimately pays for cheap Chinese goods
with a loss of jobs, stagnant income,
skyrocketing energy prices, unsafe products, and
a more polluted world!
35
Attack on Every Front

• The WTO
• Department of Commerce
• U.S. Trade Representative
• Treasury Department
• White House
• Congress
• Individual bills
• An omnibus bill!!!!!!!!!!!!!!!!!!

36
Time for QA!
www.peternavarro.com