Monday, September 03, 2007

Trinkets and treasure: China tames the US By Julian Delasantellis

August in Seattle sees the arrival of Seafair, the city's annual midsummer entertainment and cultural festival. A traditional part of Seafair has been the arrival of a number of US Navy warships for the "parade of ships" through Puget Sound, then to dock in Seattle for tours by the large numbers of local citizenry who wait to board the ships for hours under the hot sun - in contrast to everything you might have heard, it rains very infrequently in Seattle during midsummer.

The parade of ships for Seafair 2007 was not all that impressive; just a few smaller navy combat and support ships. All the big capital ships of the navy's Pacific fleet are currently in the Persian Gulf, steaming around in circles, waiting to bump into something with an Iranian flag on it so the American neo-conservatives can manufacture a casus belli for a future catastrophic war in Iran that will divert Americans' attention from the current catastrophic war in Iraq.

But Seafair in the summer of 2001, in that last, innocent idyllic US summer of blissful ignorance of how a lot of the world really felt about it, that parade of ships was grand. At the ranch, President George W Bush chopped wood, and as the only lethal foreign threat heading toward the US homeland reported by the media from overseas was that of sharks, the navy sent a particularly impressive contingent for the parade of ships.

Led by the 100,000-ton nuclear aircraft carrier USS John C Stennis, and accompanied by a number of major combat support ships, it was a particularly impressive sight as it sailed in from the northern Pacific Ocean through the Strait of Juan de Fuca toward Seattle.

I remember that year I was watching the ships' transit from a bluff above Puget Sound. There I saw them paced, and then passed, by the actual greatest naval power existent then, and even more so now, on Earth: the great imperial battle fleet of the navy of the People's Republic of China.

Box it and ship it
In saying that I am in no way, shape or form referring to the actual People's Liberation Army (PLA) Navy. What I mean, what I saw that day, were the real dreadnoughts of modern-day Chinese naval power, the huge containerized cargo ships, some Chinese, most not, full of Chinese manufactured goods, making another one of their visits to the port of Seattle, the same way they do to hundreds of other Western ports every single day.

English economist John Maynard Keynes once marveled that, even in the conditions of the nascent globalization of the early 20th century, he could, as a fine English gentleman, sit in his garden in the morning and enjoy the benefits of all manner of fruits and delicacies from all over the world. This is more so now; these days, the world's middle classes have ready access to products they barely knew existed, from countries that themselves barely existed only half a century ago.

Today, you don't have to be a fine English gentleman with a manservant to enjoy fruit from Turkey or prawns from Vietnam - being a middle-class North American or European with a charge card will do just as nicely.

No politician or ideology has accomplished this transformation; in reality, globalization's true avatar is now the containerized shipping unit, those standard 20-to-40-foot rectangular cargo boxes that are seamlessly transferred from oceangoing ships to inland transit, either by trains or trucks, or to inland-waterway transport on barges.

This phenomenon started in the mid-1920s with US Midwestern railroads working with converted railroad boxcars; in 1929, the Seatrain lines brought this concept to sea by driving railroad boxcars on to ships for transport from the US northeast to Cuba.

The advantages of containerized shipping are obvious: massive cranes rapidly handling the containers obviate the need for expensive work crews to offload and reload each cardboard box of cargo at each transfer point of the transport process (ie, from ship to train, then from train to truck); also, the locked containers mean that it is far less likely that expensive plasma TVs or fur coats might once again just happen to "fall off the truck" to wind up in someone's house.

A relatively recent phenomenon is the fitting of the containerized units with self-contained electric refrigeration units. This is the manner in which many of these exotic delicacies and sweetmeats find their way on to the dining tables of the West; stores and restaurants are just not making enough money selling prawns at US$20 a kilo to justify flying them in fresh in the cargo hold of a Boeing 747.

Some 4,000 containerized cargo ships sail the world's oceans. Mostly, this transport is reserved for finished, manufactured products; other cargo, such as petroleum products or wheat, move in their own, specially dedicated cargo ships.

The largest container-ship companies in the world are Denmark's Maersk, Germany's Hapag-Lloyd and MSC from Belgium. China's two state-owned shipping companies, China Ocean Shipping (Group) Co (COSCO) and China Shipping Container Lines Co Ltd (CSCL), are currently respectively the sixth- and eighth-largest shipping companies in the world.

This makes the power currently accruing to China from the world shipping process even more remarkable. China is dominating the world with a fleet it does not own, that it sacrificed no treasure to build.

Unhealthy addictions
About 600 years ago, China attempted to do naval supremacy the old-fashioned way. In the early 15th century, as the great British navy to come was tied down supporting British ground forces fighting across the English Channel in France in the Hundred Years' War, and while the greatest naval power in the Mediterranean was that of the Ottomans, the Ming Dynasty's Yongle Emperor, Zhu Di, possessed the largest and most powerful navy on Earth.

With almost 200 ships, nearly twice the fleet of the great Spanish Armada almost two centuries later, the Chinese fleet dominated the waters of the western South Pacific and Indian oceans, all the way to the east coast of Africa.

In his 2006 book 1421: The Year that the Chinese Discovered America, Gavin Menzies argues that the emperor's chief admiral, Zheng He, actually sailed up the east coast of South America to the Caribbean, "discovering" the New World (the one that native Americans had discovered thousands of years earlier) 71 years before Christopher Columbus.

But it was all for naught. Court intrigue, along with the cost of maintaining a navy of some 27,000 sailors, led the great Chinese navy of the Ming Dynasty eventually to wither away and die; it was argued at court that the treasure being expended on the navy was doing nothing to protect China from the land-based armies of the remnants of the Mongol Empire. From that point forward, the concept of a "Chinese navy" was just about the closest thing you could come to a textbook oxymoron, something on the order of "giant shrimp" or "military intelligence".

Until now.

You frequently see containerized cargo ships making their way down Puget Sound to the port facilities in Seattle, completing their two-week high-seas journey from the massive Hong Kong and Shenzhen port complexes in southern China.

Most of the time, as they complete these voyages in from the Pacific, they ride low in the water, right down to the waterline. On these ships, the thousands of containers visible on deck, and the many more you don't see under the decks (the largest container ship in the world, the Maersk Line's Emma Maersk, can hold more than 14,000 individual 20-foot container units) are chock full, with TVs, washing machines and appliances, tires, toys and trinkets; the full catalogue of rapidly depreciating disposables over which North America is sacrificing its treasure.

As the containerized cargo ships leave Seattle, or San Francisco, or Long Beach, San Diego, Vancouver, all the way north to the newly bustling port of Prince Rupert, British Columbia, the ships ride a lot higher in the water. Most of the cargo containers are empty; they're being sent back to China to be refilled.

With the Chinese trade surplus with the US now running at about $150 billion a year, there's a lot more stuff coming into the US west coast than leaving. (And much of the value of what the US does export to China comes from either Boeing jetliners or intellectual properties, such as first-run teen-slasher movies, neither of which gets much transported to China on containerized cargo ships.)

Or maybe it just seems that way. What really is being transported back to China in those empty containers is power.

In the middle of the 19th century, first Britain, then Britain allied with France, fought two wars with China. These are called the Anglo-Chinese Wars in China; in the West, they are more frequently called the Opium Wars.

In a historical circumstance that those contemporaneous historians such as Niall Ferguson who wax about the boundless beneficence of the British Empire don't talk much about, the Opium Wars were fought over the Western powers' demand that China allow free license for British and French companies, particularly the British East India Company, to import and sell opium in China.

The Chinese government at the time well knew of opium's destructively addictive effects, but it was powerless to fight off the by then technologically superior Western powers. The Chinese defeat in the First Opium War in 1843 led to China ceding its control of, and British rule over, Hong Kong for 154 years; the 1860 Treaty of Tianjin that ended the Second Opium War was a virtual unconditional surrender by the Chinese: besides allowing the opium trade, it also allowed large Western military outposts (including those of the United States) to be set up in Beijing, as well as giving Western navies free access to navigate up the Yangtze River.

For at least the next century, the humiliation and subjugation of the Opium Wars burned in the heart of all Chinese nationalists.

One hundred and fifty years ago, the West subjugated China by addicting it to opium. Today, that power dynamic has been reversed. It is the West, especially the United States, that has become addicted, to an equally or even more addictive substance, cheap consumer products, and, more important, the profits that accrue from them.

Wal-Mart is a grand example of this phenomenon. Some 100 million Americans, one-third of the US population, passes through its happy doors every week. Between 15% and 20% (in sectors such as electronics and toys the percentages are closer to 50%) of all US consumer expenditure is rung up on Wal-Mart's registers. There may be a steamrolling public panic about the safety of Chinese consumer products but, as yet, there are still weeds growing in the cracks of the sidewalks of all those small downtown toy boutiques that sell locally produced US toys. Americans are still overwhelmingly going for the Wal-Mart price.

As Wal-Mart spread out of the southern United States in the early 1990s, its advertising campaign prided itself on the true-blue US origin and manufacture of its products; it has not used that pitch for quite a while. At least 10% of the US-China trade deficit represents Wal-Mart's China tab, but that does not mean that all the rest of the US consumer sector has taken up the flag for endangered American workers and manufacturers.

From the "big box" retailers Target, Sears and Kmart to the "category killers" of Circuit City and Best Buy, there are plenty of containers sailing east across the Pacific with barcodes that will have them sent to those establishments as well.

But the real source of China's power lies not with American consumers reclining in their Barcaloungers, with their Wal-Mart-bought chips and soft drinks, watching the latest Adam Sandler digital video disc that they picked up at the checkout counter while waiting to pay for the Wal-Mart big-screen TV. Americans may be unable to control their addiction to Chinese consumer products; it's a lot more important that the US ruling corporate sector is equally or more addicted to Chinese profits.

Just as a religious believer might trumpet the growth in a society's virtue, a believer in the religion of free-market capitalism holds no value higher than growth in productivity. Productivity growth, making an equal quantity of a product with less cost, or making a larger quantity of a product with the same quantity of value of input, is capitalism's glorious bright Elysium; it is the core process by which profit is generated.

Wal-Mart and other US retailers have managed to keep many of their prices stable in an era of general 2-4% retail inflation. Others have declined; they actually have been at Wal-Mart. However, this has only been accomplished through the enormous reduction in labor input costs made possible through non-unionized Chinese labor; save 80% or more on your labor costs, you can roll back prices on a $3 tube of toothpaste a few quarters and still make out like bandits. It is this process, the globalization two-step, fire in the US and hire in China, that is in large part responsible for the massive shift in US national income away from wages and salaries toward profits: the US profit-wage ratio is at its most extreme value since 1966.

Seen this way, the addiction of the US corporate class to profits from ships arriving from China represents perhaps the most significant great-power naval victory since Jutland in World War I. The addiction of the US consuming classes is nice but, ultimately, it has its limits; once you have two or three plasma TVs in your house, your appetite for more is probably moving toward being slaked.

However, for the corporate classes that comprise America's ruling elite, there will always be that one bigger next artificial high, be it from a grander beach house, a shinier Ferrari, a faster private jet, an older classical painting or a younger trophy wife, that continuing to mainline the Chinese profit needle might get one closer to. On the unlikely possibility that there still are a few communists left in the Chinese Communist Party, they must find the irony nothing short of ambrosial - once again, just as Vladimir Lenin said they would, communists are selling capitalists the rope with which they will hang themselves.

Looking after vested interests
The operation and effectiveness of the new Chinese power paradigm has been well demonstrated in President George W Bush's China policies. The self-proclaimed chief executive officer president, a man who seems to wake up every day with a burning desire to make rich people richer, who once described his political base as "the haves and have mores", has repeatedly proved, through his actions, that he well sees the value in using China to advance his unique cause.

On April 1, 2001, in the air above the waters near China's Hainan island, a US Navy EP-3 Orion maritime surveillance plane collided with a Chinese PLA F-8 fighter. The US aircraft, with 24 sailors, was forced to make an emergency landing at the PLA's Lingshui air base on Hainan; the Chinese pilot perished.

Both sides claimed the crash was the result of the other side's pilot doing his best Top Gun pilot imitation. American conservatives and militarists were outraged: they demanded an immediate return of the crew and plane; they also demanded that no Chinese nationals board the plane, claiming it to be sovereign US territory.

Some American neo-conservatives, trying out the themes they would find so devastatingly effective just a few months later, actually called for US military air strikes on China to effect the release of the plane, claiming that would provide the new president (Bush) with the requisite macho bona fides to get his domestic agenda passed in Congress.

China took a hard line. It boarded the plane and demanded an official US apology for the incident and the death of the PLA pilot before either the plane or crew would be released. American conservatives were aghast; they said Bush and his United States must never apologize for anything, a point that would be repeatedly proved during the nation's upcoming misadventure in Iraq.

The US State Department hemmed and hawed for a while, before finally producing an apology so obsequious that it bordered on abject groveling. The US even apologized for the plane's emergency landing on Hainan without prior ground clearance, something akin to a mugging victim apologizing for having his face get in the way of the mugger's truncheon. The crew was released after 12 days; the plane was released a few months later, but the Chinese demanded that it not be flown off the island but cut into little pieces and crated. They also demanded that the US pay reparations for damages done to the airfield as a result of the EP-3's emergency landing. The US acquiesced to both these demands.

Conservatives were thus even more outraged; they demanded, at the very least, US economic sanctions be applied to China, starting with blocking China's then-pending membership to the World Trade Organization. The Bush administration would hear none of it. For it, Chinese membership in the WTO would be a virtual Good Housekeeping Seal of Approval for US industrialists hoping to shed their US workforce to hire much cheaper labor in China.

China's accession to the WTO went forward on schedule that September.

Since then, the major bilateral issue in US-China relations has been the artificially low level at which China has kept its currency, the yuan. The theory of the floating exchange regime that has governed the world's currency markets since 1973 states that countries such as China with massive trade surpluses should see their currencies appreciate in value against the currencies of the countries with which they are running surpluses. This has not happened with the yuan-US-dollar exchange rate: it was fixed by the Chinese government until the summer of 2005; since then, its controlled appreciation against the dollar has been modest at best.

It is obvious to everyone that China is keeping the yuan rate artificially low to maintain its competitiveness; a number of members of the US Congress, most notably Democratic Senators Charles Schumer and Max Baucus and Republican Senators Lindsey Graham and Chuck Grassley, have tried to get legislation moving that would impose economic sanctions on China that would punish it for the artificial suppression of the yuan's value.

The Bush administration will hear nothing of this either. Even though a yuan appreciation would greatly increase the chances that US manufacturing workers who still have their jobs might be able to keep them, Bush has announced that he will veto any attempt to punish China for its currency-management regime, and the pro-sanctions forces are not even close to having the required two-thirds vote in Congress to override a veto.

China does not have to lobby US congressional representatives to look after its interests; the US industrial elite does that quite well on its own. In much the same way that Nazi Germany established Vichy France to further its interests without actually occupying the country, the US corporate elite's desire to use China to enrich its wealth further has allowed China to create Vichy America.

That Taiwan problem ...
The major strategic contingency the Chinese military must plan for is the possibility that one day the political leadership might task it with the conquest of Taiwan.

The relations of China and the US over Taiwan have been governed by the "Shanghai Communique", signed at the end of president Richard Nixon's historic trip to Beijing in 1972. This had the US in essence denying Taiwan's claim that it was a separate state independent from China, in return for vague Chinese assurances that it would not force the issue militarily.

Very few observers believe that China will just tear up the Shanghai Communique and invade without provocation. However, if Taiwan did commit some provocation that questioned China's sovereignty over the island, if the situation were ambiguous enough, China just might send its fleet across the Taiwan Strait.

The only force that could check this move would be the US military, both the US Navy's 7th Fleet, based in Yokosuka, Japan, and the Pacific Air Force, primarily operating out of bases in Japan and South Korea.

Here can be seen the true genius of the Chinese plan to subdue the US with trinkets and treasure. To counter the US militarily would be hugely expensive, and probably beyond China's current technological capacity. Far better to do it the way it has, with trade. The Chinese could have America's industrial elite, fearing a shutoff of the China wealth spigot, whisper in the ears of American policymakers that they should lay off any military countering of a Chinese move against Taiwan.

Give China 10 days to two weeks of unhindered military access to the Taiwan Strait, and it'll put the flag of the People's Republic of China over the Presidential Palace in Taipei. This is the classic "indirect approach" of mid-20th-century English military strategist Sir Basil Henry Liddell Hart; instead of facing the US at its strongest, its technological superiority, China has attacked the US at its weakest point, its acquisitive, materialist, greedy soul.

Cold War relics
In the early 1980s, the same people who are now warning against the menacing Chinese military threat were issuing just about the same warning about the Soviet military threat. Seen as a particularly ominous development was the Soviet construction of two "aircraft carriers" (in reality, the only aircraft they carried were helicopters, and a small number of the limited-range and -capability Yak 38 vertical-takeoff fighters), the Kiev and the Minsk.

Even though there were only two of these ships, as compared with the 12 aircraft carriers of the US Navy, and even though the Kiev and the Minsk were less than half the size of the big US carriers, warnings were still issued that this new development would soon represent a serious threat to America's century-long dominance of the oceans. Or, as the Ronald Reagan Pentagon argued before Congress, you better increase our budget.

The Kiev and the Minsk never really represented any threat to the US; they were unreliable and expensive to operate and, after the Soviet Union collapsed in 1991, there wasn't even any money to pay the sailors who crewed them.

In 1996, the Kiev was sold to China; in 2006, so was the Minsk. This also raised a few eyebrows among US militarists: were the Chinese, in buying the old Soviet navy on the cheap, going to use them to resuscitate the Soviet naval threat under the Chinese flag?

Nothing of the sort has happened. The Kiev and Minsk have been retired to be the prime attractions at a military theme park in Shenzhen. (There was some talk that the Minsk would face the wrecker's ball, or maybe, in the ultimate metaphor for the futility of expending national treasure in the modern world on expensive military equipment, it would be sunk to provide an artificial reef for marine life - in other words, the once-mighty warship would be deliberately turned into a snack for barnacles.) A recent photo in The Economist showed the Kiev tied up at dock beside a family at a picnic table under a Pepsi-Cola umbrella.

Nothing better illustrates the success of the Chinese strategy. For all the good they'll do for you in today's world, you might as well turn actual naval assets into money-making tourist attractions; you'll even be able to get some product-placement loot out of US beverage companies.

Real power now lies in those cargo ships forever steaming inexorably to the American heartland. In a couple of years, the United States will conclude its (by then) million-death, trillion-dollar misadventure in trying to subdue a few spits of green land between the Tigris and Euphrates. It will discover that, even if General David Petraeus' "surge" might have won the battle of al-Anbar, back home the US ruling elite has surrendered to China in the battle for the United States, without even firing a single shot.

Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at


“If the world is upside down the way it is now, wouldn’t we have to turn it over to get it to stand up straight?” - Eduardo Galeano