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. Last Updated: 07/27/2016

U.S. Grapples With Rising Chinese Clout

GUANGZHOU, China -- When Japan, at the zenith of its economic power, built a huge airport in Osaka in the late 1980s, the project set off a seven-year trade battle with the United States over the nearly complete exclusion of non-Japanese companies.

China, Japan's heir as Asia's rising star, is now completing its own immense airport here in Guangzhou, the sprawling commercial center of affluent southeastern China. But the Chinese are going about it differently.

U.S. companies designed the terminal, its air-conditioning system and the flight information system. A German company engineered the vaulting roof, a Danish company produced the boarding gates and a Dutch company, the check-in counters. Chinese women in broad-brimmed straw hats wield shovels and brooms across from a modern air-traffic-control tower designed by a company from Singapore.

The welcome that China is offering to multinational companies and foreign investment has left many Western business executives, so critical of a closed Japan more than a decade ago, enthusiastically embracing China, its cheap workforce and its huge markets.

But that same openness -- combined with China's vast population of 1.3 billion and military muscle -- makes it an even greater long-term economic challenge to the United States than Japan seemed to be in the 1980s, according to a growing number of executives, economists and officials.

While China's economy is still one-third the size of Japan's, the potential size of its market has made it very hard for companies to say no when Beijing officials demand that they build factories, transfer the latest technology or adopt Chinese technical standards.

Japan has effectively run out of low-wage workers for its industries, and quickly brought much of its economy up to and in some cases beyond Western technological standards. China still has vast reserves of cheap labor in inland areas and many backward industries that can grow swiftly as they copy Western and Japanese methods.

"China could do what Japan did, as a very fast follower, but China could do it bigger and better and for a longer period of time," said Steven Weber, an Asia scholar at the University of California at Berkeley. "It's not necessarily as vulnerable as Japan was."

But while Japan's danger to other economies over the last decade has taken the numbing forms of economic stagnation and political lassitude, China poses the risk of fast, sharp shocks.

Its transition from a planned economy to a form of capitalism seems to make it especially susceptible to economic booms and busts, and Chinese officials have begun worrying that an unsustainable economic bubble is developing. At the same time, China's one-party system may struggle to adapt to the social tensions brought to the surface by rapid economic development.

Optimists see it surmounting such obstacles.

"Once China passes the high growth, it will have the bursting of the bubble," said Eisuke Sakakibara, Japan's former vice minister of finance for international affairs, "but that will happen in 20 years. China is Japan of the 1960s."

Others express greater caution. David Cunningham, the president of Asian and Pacific operations at Fed- Ex, said the company was considering the new Guangzhou airport as the site of an Asian hub, somewhat like its huge operations in Memphis. But FedEx is watching China's growth carefully.

"What could be devastating is if the global business-investing person becomes burned or disillusioned and takes their investment elsewhere, and today it can happen at the click of a finger; ask Southeast Asia about it," Cunningham said, referring to the Asian financial crisis of 1997-98, from which the region is still recovering.

Like the Japanese challenge of a generation ago, China's strength is drawing growing attention in American politics. Senator John Edwards of North Carolina has become the main challenger to Senator John Kerry of Massachusetts for the Democratic presidential nomination by emphasizing jobs lost to trade, especially trade with China; Kerry says he and Edwards essentially agree on trade questions.

The U.S. administration over the last year has tried to assuage worries about job losses by talking tough with the Chinese -- in particular, demanding that China let the exchange value of its currency float upward to raise the price of its exports. But it has also continued to assert its faith in a policy of free trade.

China's strengths are indeed impressive. Its wage advantage is much greater than Japan's was a decade or two ago. China has the diplomatic muscle to resist trade and currency concessions that might undermine its competitive edge. And its opening to foreign investment brings China both the latest technology and the corporate connections overseas that help it fight restrictions on its exports.

For all these reasons, China's trade surplus with the United States has soared, quintupling in the last decade to $124 billion in 2003. By comparison, Japan's surplus did not quite triple in the decade when its economy conjured the most anxiety among Americans. And in the last decade, it has leveled off, at $66 billion last year.

China's biggest competitive advantage, its immense and low-paid work force, is on view here in the southeast, at places like the BBK Electronics Corporation's air-conditioned factory in Dongguan, a two-hour drive from the new Guangzhou airport.

China has 10 times the population of Japan, with more unemployed adults in rural areas than the entire U.S. work force. Raising the wages of so many people to the levels found in industrial nations will take a long time.

Through the 1970s and 1980s, Japanese wages rose 70 percent faster than U.S. wages, according to data from the International Labor Organization. That, together with rapid appreciation in the value of the yen, helped push up Japanese factory wages from one-third of U.S. levels to rough parity.

Chinese wages, though, were no more than 4 percent of U.S. and Japanese wages in 2002, the most recent year available. While official Chinese statistics show that wages doubled from 1996 to 2002, some factory owners say pay has been flat -- or even declined slightly -- in recent years, as rural migrants continue to pour into the cities.

In the meantime, China's productivity gap is being closed by a rapid investment in infrastructure, as China puts a third of the world's steel production and half its cement into extending modern roads, power grids and telecommunications links across the country.