Thursday, 24 March 2011

Japan loses; China wins

Business Mirror

The first effect of the Japanese disaster has hit the shores of the Philippines. And it is not a tsunami or radiation.

From the Inquirer: “The expansion of the Philippine National Railways’ [PNR] capacity is now in question following likely delays in the delivery of trains donated from Japan, which is still reeling from the recent earthquake and tsunami that killed thousands of people and caused billions of dollars in damage.”

This donation of railcars has been of interest to me since it was first revealed, as I find using the train to get to Makati from south of Manila is very efficient and cost-effective. It is a good deal for the PNR and for commuters.

With all the experts speaking of the fallout from the Japanese disaster from financial gurus to scientists, one subject that has not come up very often is the effect on China.

While China’s influence and power in Asia and the world grew in the last decade, Japan, although a diminishing power, could never be discounted. Japan always has stood as somewhat of a counterbalance to China in Asia. Japan is still America’s strongest Asian ally. Japan is still a very larger holder of US government debt. Japanese companies are major investors around Asia, greater than China. And one must never forget that Japan and China have been enemies, very bitter enemies at times, going back a long way.

While Asian neighbors (and enemies) have long memories, the Japanese earthquake may not only have altered the geology of Japan and Asia, but may also alter the geo-political aspects of the region.

Japan will find a way to rebuild. Resilience is a critical component of the Japanese psyche. However, there has been some talk about an assistance program funded initially by other nations. The US is not in a financial condition that would allow it to create and lead a massive, formal financial plan similar to what it did for Europe after World War II. The only real player who has the ready cash to loan Japan is China. So far, China has been a very minor participant in the ongoing relief efforts.

Even as China is being called the next global leader and potential superpower, it still acts as a second-rate, developing nation. Maybe that is because it is still being ruled by men who are a product of the old “Third World” China.

Nevertheless, there is no denying that there will at least be a power vacuum in Asia as Japan gets itself back on its feet. Japan’s misfortunate should be beneficial to China if it properly and wisely tries to take advantage of the situation. As one commentator, Nicholas Kronos from the US, put it, “Undoubtedly this disaster has knee-capped our loyal ally Japan’s regional power for some time to come and perhaps permanently. China enjoys the best position to move into the resulting vacuum and exploit Japan’s hobbling.”

As much as China would like to be taken seriously on the world’s stage, in truth, China often acts like the drunken loudmouth bully in a karaoke joint whom everyone would like to punch and throw out but is just too darn big.

China in many ways is like the thug who made his money breaking the rules and wants to shed the mob image but cannot help himself from buying all that gold bling-bling and fancy watches.

And China has broken the rules—from using prison labor to manufacture goods for export to ignoring all modern environmental standards to a complete disregard for product-safety standards that are commonplace everywhere else.

In the British Financial Times newspaper, China “expert” Martin Wolf wrote an article titled “How China Should Rule the World.” His assumption is that, eventually, China will accomplish what the title says and he offers how China can accomplish its global dominance objective. “How should China achieve its aim? Broadly, it would be best achieved via further development of the rules-governed, institutionally-based global system.” That statement shows Wolf’s ignorance of China. Rules-governed? Not a chance. This is China.

Read this: “China is the natural successor of the US as guardian of the open-trading system. It is important, for this reason, that China abide by all the rules and principles of the system. It has a rising interest in protecting its own intellectual property and, for this reason, a matching interest in ensuring its own adherence to these rules.” Are we talking about the same China? Why would China give up a multibillion-dollar business of counterfeiting goods? Wolf is totally unrealistic.

When he addresses Chinese trade imbalances, Wolf moves to the realm of fantasy. “China itself recognizes that the outcome [of high trade surpluses] has proved domestically destabilizing.” Then he asserts that China intends to grow the domestic economy by stimulating consumer demand for local goods and increasing imports. He then cites recent numbers to show “imports will grow faster than exports this year.” Foolish. The only reason Chinese import percentages are up is that exports to the US are down due to the financial crisis.

Wolf’s overall thesis is that China will change its behavior to be more in line with global standards of conduct as it moves farther into global dominance because it is in China’s best interest. Nothing could be farther from the truth.

China has achieved its economic success by following its own path of conduct, regardless of the rules. Why would anyone believe that would change?

Having said all that, China is now even more the prevailing force in Asia, for good or ill, and it must be dealt with in light of the situation facing the future of Japan.

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