Few topics generate as much controversy in the United States as the question of whether free trade has been beneficial for our society. In the early 1990s, the main focus was on trade with Mexico and the impact of the North American Free Trade Agreement (NAFTA). Protectionist sentiment still occasionally results in trade disputes with Mexico such as the restrictions on Mexican trucking that resulted in higher tariffs last year. However, the main target of trade skeptics today is China. The widespread failure to grasp the nature of the complex relationship between the United States and China has led to periodic trade disputes and could seriously harm both countries in the years to come.
Zachary Karabell has made an important contribution to the debate in Superfusion: How China and America Become One Economy and Why the World’s Prosperity Depends on It. Mr. Karabell attempts to trace the history of China’s remarkable rise over the past twenty years by presenting a wide ranging “thirty thousand foot” view of political and economic forces as well as individual case studies of American companies that penetrated the Chinese consumer market. The underlying thesis is that China and America have “fused” into a single economy of “Chimerica”.
Expanding American Brands into China
While Mr. Karabell’s big picture observations receive more space in the book, from a business and investing standpoint the individual case studies are equally interesting. The question of how a business can establish, maintain, and grow a brand over time is difficult enough to answer when one is dealing with a single culture and society. Even within a country like the United States, there are many brands such as See’s Candies that have not gained traction outside one region. What steps must be taken to expand brand loyalty into a very different culture?
The case studies of Kentucky Fried Chicken and Avon were both revealing in terms of the missteps that American firms are prone to making when expanding into different cultures as well as the eventual placement and branding of the products. Some amusing anecdotes are discussed such as KFC’s mistake in translating the “Finger Licking Good” slogan into a Chinese phrase meaning “So Good, You Suck Your Fingers.” But the most interesting aspect of both KFC and Avon’s entry into China is that they transformed middle market brands in the United States into high end “aspirational” brands in China.
This is actually not very surprising because countries that are experiencing rapid growth in personal incomes often want to emulate richer countries and by consuming American brands, these consumers were demonstrating their economic success in small ways. Of course, the American brands had to be adapted for local tastes and the book provides useful details on how this can be done. KFC has been so successful due to its “early mover” advantage in China that it is now the largest fast food operator in the country with over 2,300 outlets including more than 200 in Beijing alone.
Taking a Broader Perspective
While the individual case studies are of great interest, Mr. Karabell’s major focus is clearly on the broader macroeconomic forces that are driving America and China into a single unified economy that he calls “Chimerica”. The use of that term is perhaps unfortunate because it is likely to serve as fodder for political sound bites promoting protectionist policies. The book clearly shows that not only are these economic ties mutually beneficial in many ways but that they have reached the stage where China and America are integrated to the point where attempts to reverse course would lead to disaster.
Proponents of isolation often gloss over important questions with sound bites such as “buy American”, but what does this really mean when American companies have manufacturing facilities in foreign countries while foreign companies have facilities in the United States? When one buys a Toyota Camry manufactured in Kentucky, is that choice more or less “American” than purchasing a Ford Mustang manufactured in Flat Rock, Michigan simply because Toyota is a Japanese company? The same example applies to American companies that outsource manufacturing to foreign countries and then import these goods into America for final sale. Should the litmus test be the question of where the company’s stock is listed? Or the question of what percentage of revenue is generated from various countries? Or the ownership of the company’s shares based on the citizenship of the shareholder?
All of these questions may be of interest from a public policy perspective but the bottom line is that in a global economy companies are increasingly focusing on leveraging the comparative advantage of different countries in an attempt to operate in the most efficient manner possible. One can object to this by correctly claiming that American manufacturing jobs have been lost over the past several decades. However, it is disingenuous to not also examine the benefits that American consumers have enjoyed in the form of more affordable consumer goods produced by overseas manufacturers or the benefits of American brands expanding into China.
Looking Ahead
Mr. Karabell concludes the book with a discussion of how the United States can avoid a fate similar to Great Britain’s after World War II. After the war, economic, political, and military dominance of the West clearly shifted from Britain to the United States and has resulted in six decades of undisputed dominance for America. With China’s economy growing at a much faster rate than America’s, is it inevitable for the United States to follow the path of Britain in the coming decades?
This is a sobering question particularly in light of the massive government deficits facing the United States that neither political party shows any sign of addressing. The fact that China is playing a major role in funding these deficits will eventually force the United States to come to grips with the problem. The question is whether this will be done on America’s terms or in a way decided by the Chinese.
Recent events in Washington are troubling to say the least. Politicians are calling for a commission to address tax and spending questions that our elected Representatives have decided to punt on. This reveals an abdication of duty of the highest order and does not inspire confidence that the matter will be decided on America’s terms.
It would cost less than $14,000 (at the full retail price) to send each Member of Congress and the President’s cabinet a copy of Mr. Karabell’s book. It would be money well spent if they actually bother to read the book.