China and the Big Dip

China is a state connected inextricably to the world market, especially through the United States. This poses great opportunities as well as challenges for the Chinese leadership, which they have acknowledged will require their full participation in the 21st century. Specifically, China has become both the supplier of choice in commodities and slightly advanced goods to the United States and others. While this provides much economic opportunity, it also creates a system of dependence, whereby China’s economic health is closely tied to that of America. The current economic crisis is an example of how closely linked the two ideological opponents are in the marketplace. Where demand in the U.S. for consumer goods like toys and electronics drop, so too do jobs at factories producing parts for everything from Barbie to iPods. Currently, factories supplying goods such as these are scaling back or going out of business completely. As the latest Economist magazine reports, the company producing the iPod and PlayStation for their respective brand names used to employ over 250,000 general laborers, but has let over 100,000 of them go. In a way, China is a barometer for global economic health in a close-knit market.

The solutions to this dependency include focusing on the middle class as consumers and expanding domestic markets. Additionally, although it may seem counterintuitive, investing in more U.S. debt to ensure that there is a mutual dependency and mutual interest in the success of each other’s economies. This peaceful approach to power, according to the Chinese government, is their modus operandi for now and in the future. However, the recent satellite shoot down and space warfare experimentation served as a reminder to the world that China is capable of expanding conflict into space if necessary and that it has come out as an advanced power.

The solutions for success are limited, though. Many of China’s laborers have been sent home from urban factories back to their rural, poor communities because of the current economic slump. Factories producing low margin, low value goods like textiles are still churning out products, but there is little reason to believe this activity could produce a middle class in the numbers needed to sustain a healthy domestic Chinese economy to replace the orders from the U.S. and other developed countries. China will also have to diversify its market and trading partners while maintaining ties with the U.S. in preparation for the hoped for recovery in the future. However, many consumers associate Chinese products with being “cheap.” Even while I was in Iraq, Iraqis had a low opinion of Chinese goods. In fact, “Chinese” was an epithet for “cheap.” If the Chinese are to get away from this opinion, and keep manufactures from fleeing to cheaper labor markets like Sri Lanka and Vietnam, they should begin developing higher quality, higher technology products and begin staking out leadership positions in those markets – competing head to head for dominance with Boeing, Caterpillar, and Research In Motion (although I dare say that, as I invest in all three!). The point it, the only way to emerge stronger from the current slump would be to rethink what they are producing and instead attract more valuable investment that can’t simply be replaced. And, the United States should also do the same.

References:
http://www.economist.com/business/displaystory.cfm?story_id=13145129