Leave aside Iraq and consider the symbols of American economic power – the great technological icons that used to glow. Boeing, once the unchallenged king of commercial aviation, has been dethroned by Europe's Airbus. America's space program has turned to global begging to keep funded.
Motorola, the company that devised the technology that gave the world mobile phones, fell to such depths that it had to get out of semiconductors, selling off its big fab investment in China – now the world's biggest mobile market – to Chinese chip company Semiconductor Manufacturing International Corp (SMIC).
IBM, the company that brought the personal computer into the world, is selling its PC business to China's Lenovo. Microsoft, which defined and controlled how PCs were to be used, now faces a strong challenge from the Linux open operating system, also devised, like Airbus, in Europe.
China is playing an active role in just about every aspect of America's changing fortunes. It is encouraging the switch to Linux. It is a major buyer of Airbuses. It is the main place to which US manufacturing capacity is moving. It is the main growth market to which Motorola and GM and McDonald's are looking to lock in their company's fortunes.
Wal-Mart now sources 80% of its goods in China because 80% of the goods America used to make, and the retailer used to buy, are either discontinued or too expensive. Wal-Mart's success mirrors America's decline in almost every manufacturing sphere but gun-making and nappy manufacture. And as Wal-Mart stores begin to blanket the Chinese Mainland, the benefits accruing to China will pile up at an even faster rate because rising sales in China will put more Chinese to work producing more made-in-China products.
Even Intel Corp, which developed the microprocessors that drive most of the world's PCs and servers, has hit a wall. In this case at least the competitor most advantaged is also American – Advanced Micro Devices (AMD), but China is the prize Intel cannot lose and still call itself the world's largest semiconductor company.
Looking at options
While China is looking for alternative sources of semiconductors, software and airplanes, it has at least, in recent years, been buying lots of US Treasury securities. US Treasury department data suggest Chinese investors held US$174bn of Treasuries at end-September, the great bulk of them held by the People's Bank of China. But suddenly, with the US dollar continuing to slide, there is talk of China looking at its options even here. Around the time the US stopped China-made brassieres from entering the country in November on dumping grounds, Yu Yongding, a member of the PBOC committee managing China's reserves, appeared on a university podium in Beijing and said China had reduced its T-bill holdings.
The statement precipitated massive nervousness in the markets – even though the data seems to show that China, if anything, has overall increased its holdings. As China watcher Carl Weinberg of High Frequency Economics points out, while Beijing did sell off a modest amount of Treasuries in August, its buy-up of agency and corporate bonds added up to a net increase in US paper.
With the horses out of the barn, the PBOC issued a clarification, saying a sell-down was not on the cards. The central bank said it did not engage in political gamesmanship and said its sole objective in deploying reserves was to make money – and a sell-down would only end up reducing the value of its considerable US Treasuries portfolio.
But what was also clear as November turned into December was that Treasuries investment was shrinking relative to the size of China's growing foreign reserves. And also that China sneezing now can cause colds even in Washington.
The New York Times noted that China in the past has said that dollars comprised around 80% of its reserves, most of that in Treasuries. That may have been true five or six years ago, when China took over Hong Kong's Foreign Exchange Fund when it stood at US$100bn. But as China's reserves have mushroomed – 27% year-on-year – it is clear Beijing has been shopping around. Treasury holdings increased only 11% in the January-to-September period (Japan's shot up 23% in that time, to US$720bn).
It turns out China wasn't playing politics, but was simply being a sensible consumer: the US dollar has been shriveling against the euro (losing ground by 4.2% in November alone) and the yen – and even though China's reserves had grown to US$515bn, the value of its US dollar holdings was dropping like a stone.
Noting Japan's growing concern about the dollar, Pierre Auguste of State Street Global Advisors said in November: "Bank of Japan officials have begun a verbal intervention effort, commenting almost daily on the yen's appreciation. It is expected that they will replace the talk with action if the dollar trades down to 100 against the yen." In an uncharacteristic step, Prime Minister Wen Jiabao, on a visit to Laos, lambasted the US for not tending to its soaring deficit that was deflating the value of the dollar. In buying US Treasuries, of course, China and Japan are propping up US consumers with more credit to charge into China and buy more goods. But there comes a point where the dollar dips to such an unattractive level that buying US Treasuries makes as much sense as parking funds in a Chinese bank.
And the world is reaching that point, as even Federal Reserve Chairman Alan Greenspan conceded in November when he said, "a diminished appetite for adding to dollar balances must occur at some point."
When the chips are down, America can prove a robust comeback kid. There was a time when Japan was going to usurp its role in semiconductors – before Intel came along and turned that proposition on its ear. IBM, it's true, may be giving up on the PC that it once commercialized so successfully – but only because it is leaving what has become a commodity business to get on with more important things, namely software and huge computer services projects that are revolutionizing business.
When traditional manufacturing left the country, the United States produced Silicon Valley and satellite silicon valleys across the economy. And besides maintaining its lead in technology and many branches of science (certainly to judge from the Nobel medal count), it also became a financial services superpower.
Trade lobbyist Margery Kraus (Q&A, page 14) says it is inevitable that there will be many countries that won't be able to compete with China's booming manufacturing economy – and there will be tensions. "We can either protect these markets against the influx of Chinese products, or figure out how to add value to Chinese products and get money from the fact that those products are coming into a market," she says. Kraus argues that people will adjust and "figure out how to take advantage of the new reality instead of fighting for an old one."
Let's hope so. China gains nothing if America fails to solve its problems.