Economist Ernest Preeg has a simple message: China may be the world's workshop for low-wage, low-skill work right now, but don't expect it to stay that way for long.
In a new book, Preeg, a fellow at the Manufacturers Alliance think tank and a former deputy assistant Secretary of State, argues that China is making surprisingly rapid strides developing advanced technology products like semiconductors and satellites, and taking its manufacturing more upscale in the process.
In his book The Emerging Chinese Advanced Technology Superstate, Preeg says that China is boosting its exports of higher-technology goods - defined by the U.S. Census Bureau as roughly 600 manufactured-product categories with the greatest research and development content.
Since 1998, U.S.-China trade in this type of goods - representing 30 percent of total goods traded - has gone from roughly balanced to a $36 billion surplus for China last year.
And the United States, he said, is largely asleep at the wheel.
``The current U.S. domestic policy response to the Chinese advanced-technology challenge is disturbing and points to an increasingly difficult road ahead for American companies,'' he wrote. ``What is lacking most of all is a sense of national purpose in responding to a rapidly changing world.''
The book is due to be published this summer by the Arlington, Va.-based Manufacturers Alliance. Preeg shared a draft copy and sat down for an interview with Plastics News.
He traces some of the loss of competitiveness to rapid Chinese expansion of spending on research and science in the last decade.
>From 1995-2002, he said, China's R&D expenditures grew 22 percent a year, vs. 6 percent in the United States. In absolute terms, U.S. spending is much higher, but China is growing quickly.
Similar rapid growth is seen in what Preeg calls the other barometer of advanced technology development, doctoral degrees in science and engineering. He projects that the number of Chinese engineering graduates will be 70 percent higher in China than in the United States this year.
Chinese manufacturing exports used to be dominated by low-tech goods. In 1995, they accounted for 67 percent of what the country shipped out, but that figure fell to just under half by 2004, he wrote.
``The analogy keeps popping up to what happened in the 1950s, with the Soviet Union and Sputnik,'' he said. ``We responded with a man on the moon. ... That's not happening today.''
In some ways, he said the opposite is happening: He criticized the U.S. government for cutting funding for one of its principal research groups, the National Science Foundation. Of course, Preeg said, it's a complicated picture.
Previous decades have seen similar predictions about the rise of Russia and Japan, in ways that never materialized as thought.
He said it's hard to get a picture of how much of China's trade includes sophisticated parts made elsewhere and only assembled in China. And China needs to make changes of its own. Preeg said the Chinese government's policy of manipulating its currency by pegging it to the dollar is illegal under world trading rules, and is a reason why U.S. manufacturers are less competitive. That, he said, makes Chinese goods 40 percent cheaper than if the market set the value of the Chinese yuan.
He predicts that if China eventually moves to a market-based currency and takes strong steps to reform its banking system, its yuan will emerge, with the dollar and the euro, as one of the three key world currencies.
Preeg outlined what he said are key steps for the United States:
* Push China and other Far East countries to stop manipulating their currencies, and take a case to world bodies if needed.
* Pressure China to strengthen intellectual property rights.
* Sign broader free-trade agreements with China and other Pacific Rim countries.
* Fix U.S. fiscal irresponsibility by boosting domestic savings - which would lower the trade deficit - and reduce or eliminate the federal budget deficit.
* Make U.S. government policy more internationally competitive in areas like education, health care and tort reform.