December 5, 2004


  • December 5, 2004

    Death Sentences in Texas Cases Try Supreme Court's Patience


    By ADAM LIPTAK and RALPH BLUMENTHAL





    In the past year, the Supreme Court has heard three appeals from inmates on death row in Texas, and in each case the prosecutors and the lower courts suffered stinging reversals.


    In a case to be argued on Monday, the court appears poised to deliver another rebuke.


    Lawyers for a Texas death row inmate, Thomas Miller-El, will appear before the justices for the second time in two years. To legal experts, the Supreme Court's decision to hear his case yet again is a sign of its growing impatience with two of the courts that handle death penalty cases from Texas: its highest criminal court, the Court of Criminal Appeals, and the United States Court of Appeals for the Fifth Circuit, in New Orleans.


    Perhaps as telling is the exasperated language in decisions this year from a Supreme Court that includes no categorical opponent of the death penalty. Justice Sandra Day O'Connor wrote in June that the Fifth Circuit was "paying lip service to principles" of appellate law in issuing death penalty rulings with "no foundation in the decisions of this court."


    In an unsigned decision in another case last month, the Supreme Court said the Court of Criminal Appeals "relied on a test we never countenanced and now have unequivocally rejected." The decision was made without hearing argument, a move that ordinarily signals that the error in the decision under review was glaring.


    The actions of the two appeals courts that hear capital cases from Texas help explain why the state leads the nation in executions, with 336 since 1976, when the death penalty was reinstated, more than the next five states combined.


    In the Miller-El case, appellate lawyers and legal scholars are buzzing over what they say is the insolence of the Fifth Circuit.


    In an 8-to-1 decision last year, the Supreme Court instructed the appeals court to rethink its "dismissive and strained interpretation" of the proof in the case, and to consider more seriously the substantial evidence suggesting that prosecutors had systematically excluded blacks from Mr. Miller-El's jury. Prosecutors used peremptory strikes to eliminate 10 out of 11 eligible black jurors, and they twice used a local procedure called a jury shuffle to move blacks lower on the list of potential jurors, the decision said. The jury ultimately selected, which had one black member, convicted Mr. Miller-El, a black man who is now 53, of killing a clerk at a Holiday Inn in Dallas in 1985.


    Instead of considering much of the evidence recited by the Supreme Court majority, the appeals court engaged in something akin to plagiarism. In February, it again rejected Mr. Miller-El's claims, in a decision that reproduced, virtually verbatim and without attribution, several paragraphs from the sole dissenting opinion in last year's Supreme Court decision, written by Justice Clarence Thomas.


    "The Fifth Circuit just went out of its way to defy the Supreme Court on this," said John J. Gibbons, a former chief judge of the United States Court of Appeals for the Third Circuit, in Philadelphia, who joined a brief supporting Mr. Miller-El. "The idea that the system can tolerate open defiance by an inferior court just cannot stand."


    The Supreme Court agrees to hear only about 80 cases each year. It seldom accepts cases to correct errors in the lower courts and concentrates instead on resolving conflicts among appeals courts and announcing broad legal principles. But in recent years the court has often found itself fixing problems in specific Texas death penalty cases. Over the last decade, it has ruled against prosecutors in all six appeals brought by inmates on death row in Texas.


    The cases all involved challenges to the fairness of the procedures used to convict and sentence the defendants rather than arguments about their innocence.


    The two appeals courts handle an enormous number of capital cases and grant relief in very few. Between 1995 and 2000, the Court of Criminal Appeals heard direct appeals in 270 death sentences and reversed eight times, according to a report by the Texas Defender Service, a nonprofit law firm that represents death row inmates. The reversal rate - 3 percent - is the lowest of any state. California, which has a much larger death row, at 635, has executed only 10 people since 1976, to Texas's 336.


    By contrast, a comprehensive study of almost 6,000 death sentences across the nation over the 20 years ended in 1995 found a 68 percent chance they would be overturned by a state or federal court.


    The Fifth Circuit also reviews Texas death sentences when inmates file writs of habeas corpus - challenges to unlawful detentions. The court has 50 or 60 capital cases pending at any given time, a spokesman said. But in recent years it has very seldom ruled in favor of prisoners on death row.


    The two courts have been resistant to claims involving withheld evidence, lies told by prosecutors and problems in jury selection, as in the Miller-El case. But legal scholars say the most intractable issue involves unusual instructions that were given to Texas juries from 1989 to 1991.


    The Supreme Court ruled in 2001 that those instructions were unconstitutional. Yet the two appeals courts continued to uphold the death sentences that resulted from the instructions. Since 1991, more than 40 of the people in those cases have been executed, according to Jordan Steiker, a law professor at the University of Texas.


    The state appeals court, which considers only criminal cases, is made up of elected judges, mostly former prosecutors.


    The judges on the federal appeals court come from more varied professional backgrounds and have life tenure. But legal scholars say that court, once famous for defending civil rights, is now quite conservative, is burdened with one of the heaviest federal appellate dockets in the country and shows mounting hostility to death row inmates and their lawyers.


    David R. Dow, a law professor at the University of Houston who represents death row inmates, said the federal appeals court had lost its way in capital cases.


    "The Fifth Circuit does not understand that it is an inferior tribunal to the United States Supreme Court, and it acts lawlessly," said Professor Dow, who was a law clerk to Judge Carolyn Dineen King of the Fifth Circuit in 1985 and 1986. Referring to the court's critical role in several historic civil rights cases, he added, "If it acted this lawlessly in the 1960's, black people and white people would still be eating at separate lunch counters."


    Judge King, who is now the court's chief judge and is widely considered a political and legal moderate, said Professor Dow's critique did not apply to all of her court's decisions.


    "The only response I would make," she said in an e-mail message, "is that a broad generalization about the Fifth Circuit's death penalty decisions indicates to me that the speaker may not have read all of them. One cannot fairly generalize about those decisions."


    Judge Lawrence E. Meyers, a Republican first elected to the Texas Court of Criminal Appeals in 1992 and its longest-serving member, said, "From my standpoint being on the court, I've seen it go up and down, from way too liberal to way too far to the right." Now, he said, "I feel like we've evened it out."


    Although he has dissented in some major cases, including Monday's 5-to-4 vote to deny a stay of execution to a Texas woman later given a limited reprieve by the governor, Judge Meyers said there was no intent to defy the Supreme Court.


    "We feel the Supreme Court is changing the rules on us in midstream," he said. "If they feel we're not getting it, it's because they're not being clear, but that's just a personal view."


    Presiding Judge Sharon Keller, a member since 1995 and a former assistant district attorney in Dallas, did not respond to several telephone messages.


    A Court of Prosecutors


    "The Worst Court in Texas" was the ignominious verdict on the cover of the November issue of Texas Monthly, the state's glossy bible of style and politics. The target: the Texas Court of Criminal Appeals.


    Texas is an anomaly - the only state with two separate and completely equal high courts. One, the Texas Supreme Court, handles only civil cases. The other, the Court of Criminal Appeals, hears only criminal cases. Each has nine judges who run for staggered six-year-terms. Only Oklahoma has a similar bifurcated appeals court system, but its Supreme Court holds overall administrative responsibility.


    The consequence, some experts say, is a Texas criminal appeals court largely unleavened by general practitioners and the kind of top legal talent that fills corporate boardrooms. Indeed, seven of its nine members are former prosecutors who tend to run on tough-on-crime-platforms and, critics say, embody the court's antidefense bent.


    "No one runs for the Court of Criminal Appeals on a platform of vindicating constitutional rights," said Professor Steiker, the University of Texas law professor.


    But Judge Meyers said there was a benefit to specializing. "It gives us a chance to be more attuned to criminal matters and the latest rulings," he said.


    The system has allowed unprepared candidates to serve on the court. In 1994 a tax lawyer, Stephen W. Mansfield, won election despite admitting during the campaign that he had lied about his legal experience and biography. While a judge, he was arrested for scalping complimentary college football tickets (he pleaded no contest to trespassing) and was accused of animal abuse for locking his dogs in his car while he sat on the bench. He did not seek re-election in 2000 but ran again in 2002 and lost.


    Embarrassed by that debacle, the state now requires candidates for the court to gather at least 50 signatures from all 14 appellate districts.


    In another episode widely perceived as an embarrassment, Roy Criner, a prison inmate serving 99 years for the rape and murder of a 16-year-old girl that he insisted he had never committed, successfully petitioned for a DNA test not available during his trial. The test determined that the semen in the victim was not his. A second test produced the same result.


    The trial court asked the criminal appeals court to order a new trial, but with Judge Keller prominently in the majority, it voted 6-3 to let the conviction stand. Gov. George W. Bush, then running for the White House, granted Mr. Criner clemency. "It's pretty bad when you have to go to Governor Bush for relief," said James Marcus, executive director of the Texas Defender Service.


    Maintaining that the court was not responding to such bad publicity, another member of the court, Judge Barbara Hervey, a former San Antonio prosecutor elected in 2000, has been instrumental in using a $20 million legislative appropriation, and seeking additional money, to foster a network of "innocence clinics" at law schools around the state to investigate credible claims of wrongful conviction. Though the article in Texas Monthly stung, she said, "We are in the game of justice."


    Robert Dawson, a University of Texas law professor working with Judge Hervey on the innocence project, said he saw the court "beginning to float back" to more moderate rulings. Deducing too much from the recent Supreme Court critiques would be a mistake, he said. "It's like driving down a road and seeing two cars a mile apart with flats and concluding that the tire manufacturing industry is in the toilet."


    Capital Cases in Volume


    A state court largely made up of former prosecutors might be expected to be skeptical of the claims of death row inmates. Why federal judges on the Fifth Circuit might share that attitude is a bit of a mystery, legal scholars said, noting that the judges are appointed for life, and are generally distinguished and independent-minded intellectuals.


    One explanation is political. Of the court's 16 judges, only 4 were appointed by Democratic presidents.


    "The Fifth Circuit has been anything but a liberal court," said Arthur D. Hellman, a law professor at the University of Pittsburgh and an expert on the federal courts. "It's probably second only to the Fourth Circuit," in Richmond, Va., "as a conservative circuit."


    "The Fifth Circuit," he added, "seems to be in tune with the Supreme Court in the broad run of cases."


    But not in all cases.


    "The one exception," said Eric M. Freedman, a law professor at Hofstra University, "is in the area of habeas corpus, especially in death penalty cases. In that area it has been consistently over the top in inventing rationalizations by which to defend the indefensible."


    "A circuit that 40 years ago was justly famous for implementing the mandates of the Bill of Rights and the Supreme Court respecting racial fairness," he said, "is now justly notorious for its outright refusal to apply fundamental principles of due process to the criminal justice system."


    The court, which hears appeals from Texas, Mississippi and Louisiana, is by some measures the busiest federal appeals court. Its judges decided an average of 862 cases each in 2003 - more than three each business day - compared with a national average of 459.


    In a 1992 speech, Judge King, who had not yet become the court's chief judge, said the "sheer volume" of cases in the Fifth Circuit "has had an adverse impact on the number of decisions that we can fairly claim have been fully considered and understood."


    "We cannot devote to more than a few cases a year," she continued, "the time required for a careful review of a record of any length, for in-depth research and even for prolonged, thoughtful consideration."


    In an e-mail message, Judge King said, "The situation has eased somewhat since 1992 because the volume of complicated civil appeals is declining." On the other hand, the judges on the court in 1992 decided 640 cases each year, or some 200 fewer than they do today, according to the administrative office of the federal courts.


    Other courts make essentially all their death penalty decisions available for formal publication; in recent years, the Fifth Circuit has published only 18 percent of such decisions. And its decisions were on average half the length of capital decisions from other federal appeals courts.


    Appellate lawyers who follow the court's death penalty jurisprudence say the court is overwhelmed by the number of capital cases, which may cause it to be hostile to the claims of death row inmates. "You can't do death in volume," said George H. Kendall, a lawyer with Holland & Knight in New York who represents Delma Banks Jr., a Texas death row inmate.


    At times the federal appeals court has been unfathomable to its critics. Last December, for instance, it considered the last-minute appeal of Billy Frank Vickers, scheduled to die for the killing of a grocer in 1993. With the inmate already given his last meal, the judges deliberated until 9 p.m. and announced they were leaving, with no decision. Bewildered state prison officials allowed the death warrant to expire, granting Mr. Vickers a delay. He was executed six weeks later.


    In October, a Houston federal judge granted a last-minute stay to Dominique Green, but the state appealed. The Fifth Circuit then gave defense lawyers less than half an hour to file their response, Professor Dow said. A rushed brief was e-mailed to the court and turned down. The Supreme Court also rejected a stay, and Mr. Green was executed that night.


    Instructing Jurors to Lie


    Much of the tension between the Supreme Court and the two lower courts is rooted in the instructions given to juries in Texas from 1989 to 1991.


    Three Texas death penalty cases heard by the Supreme Court in the last four years have concerned those instructions.


    From 1976, when the death penalty was reinstated, until 1989, Texas juries were generally asked only two questions at the sentencing phase of a capital trial: Was the killing deliberate? Does the defendant pose a danger to others? If the jurors unanimously answered yes to both, the judge was required to impose a death sentence.


    In 1989, the Supreme Court ruled that the Texas procedure was flawed because it did not allow the jury to consider mitigating evidence that might cause it to spare the defendant's life. But the Texas Legislature did not revise the procedure until 1991.


    In the meantime, Texas judges adopted ad hoc instructions that retained the two questions but also told jurors that they could falsely answer "no" to one or both questions if they thought the mitigating evidence was strong enough.


    In 2001, the Supreme Court held that instructing a juror to lie was unconstitutional. "It would have been both logically and ethically impossible for a juror to follow both sets of instructions," Justice O'Connor wrote.


    But the Fifth Circuit and the Court of Criminal Appeals continued to uphold death sentences imposed under the unconstitutional procedure, saying that some juries considering some mitigating evidence actually could have followed the seemingly inconsistent instructions.


    Indeed, in 2003 the entire Fifth Circuit reaffirmed that approach in a case against Mark Robertson, convicted in 1991 of murdering a store clerk, a friend and the friend's grandmother. He was sentenced to death for the last killing. Judge Edith H. Jones, writing for the majority, said the Supreme Court's 2001 decision was meant to apply only to some cases in which the instructions had been used.


    Two dissenting judges said the court was simply refusing to follow the instructions of the Supreme Court. "I am amazed," wrote one, Judge Harold R. DeMoss Jr., that the majority "would have the audacity to turn around and reach the same result the Supreme Court just vacated."


    The Supreme Court declined without comment to hear the case again. The Court of Criminal Appeals then stayed Mr. Robertson's execution and has not yet ruled on his case.


    In June, though, the Supreme Court returned to the subject, in even more explicit language in the case of Robert Tennard, convicted of killing a neighbor in Houston in 1985. The Fifth Circuit's approach, Justice O'Connor wrote in the decision for the 6-to-3 majority, "has no foundation in the decisions of this court."


    Still, the Texas Court of Criminal Appeals appeared not to have heard the message, and the Supreme Court addressed the topic in another case in November. The criminal appeals court relied on "precisely the same 'screening test' we held constitutionally inadequate" in the June decision, the decision said.


    In the Miller-El case, too, which will be argued for a second time on Monday, there is reason to expect a firm response from the court.


    Mr. Miller-El, who has been on death row since 1986, contends that prosecutors violated his constitutional rights by excluding blacks from his jury.


    Writing for the majority in the Supreme Court's 8-to-1 decision last year, Justice Anthony M. Kennedy discussed evidence that prosecutors had acted improperly. Among other things, he noted, prosecutors questioned black potential jurors more aggressively about their views on the death penalty than they did white jurors.


    Only Justice Thomas dissented from the decision, saying that none of the factors cited by Justice Kennedy "presented anything remotely resembling clear and convincing evidence of purposeful discrimination."


    Mr. Miller-El, Justice Thomas wrote, "ignores the fact that of the 10 whites who expressed opposition to the death penalty, eight were struck for cause or removed by agreement, meaning no 'manipulative' script was necessary to get them removed."


    The Fifth Circuit's decision in February, which ruled against Mr. Miller-El, echoed that and many other statements in Justice Thomas's dissent. "Of the 10 non-black" potential jurors "who expressed opposition to the death penalty," the decision said, "eight were struck for cause or by agreement, meaning no 'manipulative' script was necessary to get them removed."


    Judge DeMoss, the author of the Fifth Circuit decision, declined to discuss it.


    Professor Dow said he was still skeptical that the two appeals courts would follow the directions of the Supreme Court. "We're coming up on 25 executions this year," he said. "They get away with it most of this time. They appear not to be chastened when they do not get away with it."



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  • December 4, 2004

    Dollar's Fall Tests Nerve of Asia's Central Bankers


    By JAMES BROOKE and KEITH BRADSHER





    TOKYO, Dec. 3 - As Americans embark on another season of debt-supported holiday spending, they might want to give thanks that Masatsugu Asakawa is still buying in America, too.


    Mr. Asakawa, 46, is the top official at the Finance Ministry here responsible for managing the largest portfolio of United States government securities in the world, worth a staggering $720 billion. As the dollar has slumped this fall, many investors have started to worry that Mr. Asakawa and his counterparts elsewhere in Asia will be tempted to pare their holdings, perhaps causing the currency to plunge much further and setting off a round of interest rate increases in the United States that could send the global economy into a tailspin.


    But Mr. Asakawa, at least for now, says that he intends to keep right on adding American holdings to Tokyo's portfolio.


    "We've heard the rumors in the last few days that the Chinese guys, the Indian guys, the South African guys are diverting from dollars," Mr. Asakawa said. "We have no plan at all to divert from our dollar-denominated assets."


    Still, Mr. Asakawa admits that he has not been sleeping so well lately.


    "This thing wakes me up; it is terrible," Mr. Asakawa said in excellent American-accented English - he once studied at Princeton - as he toyed with a blue plastic portable currency monitor. After hours, the wireless device beeps by his bedside whenever the dollar strays beyond a set range. "Fortunately," he said, "my wife is very understanding."


    Mr. Asakawa has been waking up a lot more often because the long-running symbiotic relationship between Asia and the United States has started to fray.


    For years, manufacturers in Japan, China, South Korea and Taiwan have been selling far more to Americans than Asians have been buying from the United States. As a result, Asians have accumulated huge quantities of foreign exchange, which they have used mostly to buy American government securities.


    By doing so, they helped keep interest rates in the United States low and the dollar relatively strong. That allowed Americans to borrow cheaply and fill their shopping bags with yet another load of well-priced goods imported from Asia. Low interest rates also enabled Washington to readily finance the federal government's gaping budget deficit.


    But as borrowing by the United States from abroad has soared this year to $620 billion, a record 5.7 percent of overall economic activity, many foreigners have become reluctant to keep accumulating dollars at the same pace. That has left officials like Mr. Asakawa and others at central banks elsewhere in Asia holding America's purse strings.


    Japan's total stockpile of foreign currency, at $817 billion, is still the largest in the world, but China, which now owns about $600 billion, is catching up fast.


    Among countries that are accumulating dollars - especially China - grumbling is on the rise that Washington should do more to protect the value of their investments by cutting the budget deficit and adopting other policies to slow or reverse the dollar's decline.


    "Shouldn't the relevant authorities be doing something about this?" asked Prime Minister Wen Jiabao of China at a conference in Laos last Sunday.


    In Beijing these days, one of the fastest-growing fortunes the world has ever seen is managed by fewer than two dozen traders, chosen for showing mathematical brilliance at China's top universities.


    Generally lacking any financial experience outside China, they sit at trading stations around a gold stand bearing a jeweled globe, two feet in diameter and with seas of lapis lazuli, in a rented room on the fourth floor of an insurance building.


    Most of the money in China's central bank coffers has accumulated in the last four years, the product of an investment torrent washing over China and the ever-expanding flood of goods pouring out of Chinese factories.


    As in Japan and China, small groups of civil servants in Taiwan and South Korea are struggling to invest sizable foreign currency reserves of $235 billion and $193 billion, respectively. For years, all four countries have held the bulk of their reserves in the Treasury bills, notes, and bonds that finance the federal budget deficit, leaving American consumers and companies free to spend more on other things and invest their spare cash in more promising ventures.


    Together, these Asian institutions are responsible for holding roughly 40 percent of the American government's public debt.


    In contrast to Japan, China's money managers, while selling little of their existing Treasury holding, have not been buying much more. China's foreign currency reserves rose by $111.3 billion in the first three quarters of the year, according to official Chinese data. But its Treasury holdings, American filings show, climbed by only $16.4 billion.


    Instead, officials at the State Administration of Foreign Exchange in Beijing have been seeking higher yields by plowing billions of dollars a month into bonds backed by mortgages on houses across the United States, according to bankers who help Beijing manage the money. By helping keep mortgage rates from rising, China has come to play an enormous and little-noticed role in sustaining the American housing boom.


    The proportion of China's hoard in Treasury securities has dropped to about 35 percent, they say, compared with the roughly 90 percent of Japan's foreign currency reserves still parked in Treasury securities.


    Some bankers and economists say that dollar-denominated securities over all represent a slowly declining share of China's recent purchases. But no figures are available on how quickly Beijing may be shifting to other currency holdings, so its effect on the underlying demand for dollars is unclear.


    Still, the American reliance on foreign money and the investment decisions of bankers halfway around the world underline a serious risk for the economy: What would happen if this deep investment pool was used to fill coffers elsewhere in the world, perhaps in Europe or in Asia itself?


    With the dollar trading in recent days around five-year lows against the Japanese yen, Russia's central bank unnerved currency markets last week by revealing that it was considering diversifying from dollars to euros.


    A Chinese central banker, Yo Yongding, also caused a brief dive for the dollar on Nov. 26 by making remarks that were initially translated as a statement that Chinese dollar holdings were dropping. The banker later issued a statement that he had noted only that the value of Chinese-held Treasuries had dropped with the falling value of the dollar.


    For all the interest in the other players, currency markets remain focused on Japan, which has aggressively bought dollars, doubling its investment in Treasuries over the last two years. During a 15-month period that ended in March, the Japanese government bought $340 billion of dollar-denominated securities with its yen. The buying spree so stunned speculators that Japan has not had to intervene in the markets since.


    But now with Japan's huge stake in the dollar losing value, the question is, What will Tokyo do next?


    The problem for Japan is that it is in so deep that to a large degree it is chained to its American debtor.


    "Imagine that tomorrow people hear, 'Hey, Japan has decided to divert from U.S. dollars to euros,' " Mr. Asakawa said. "That would create a hugely undesirable impact on the U.S. Treasury market, and we have no intention at all to make an unfortunate impact on the U.S. Treasury market."


    Any selling move by Japan would move the entire market - and cut further into the value of Japan's own portfolio.


    Richard Koo, chief economist for the Nomura Research Institute, is one of many financial soothsayers in Tokyo who work to divine the thinking behind the shabby door on the fourth floor of the gray pre-World War II Finance Ministry building marked Director of Foreign Exchange Markets.


    As he sees it, anything Japan might do to slow its dollar purchases would only create a self-inflicted wound. "If they could move it all out of dollars in one day, I am sure they would do it in an instant," Mr. Koo said. "But if they move 10 percent, and the dollar goes down 20 percent, they are stuck with 90 percent of the portfolio worth 20 percent less."


    Others in Japan are not happy about how much the dollar has already weakened. Toyota, Japan's largest company and its biggest exporter, complains that for every 1-yen gain against the dollar, the company's annual profit falls by 20 billion yen, currently $195 million. With Japan's economic recovery still lagging, its dollar buying serves to help keep its exports more competitive.


    This week, Japanese officials have been talking up the dollar and leaving the door open to a resumption of specific dollar-strengthening moves. On Wednesday, Mr. Asakawa's boss, Hiroshi Watanabe, vice minister for international affairs at the Finance Ministry, responded to a question at a news conference about intervention saying, "There is nothing to limit our actions; there are no such concerns."


    Japan and China hold too much American debt to be able to diversify discreetly. Instead, they are urging the Bush administration, in public and private, to get the American budget into better balance and to improve American saving rates.


    "What China and Japan are trying to do is say, 'Please get back on track with fiscal reform,' " said Robert A. Feldman, chief economist for Morgan Stanley Japan.


    China, more than many countries, treats its foreign currency reserves as not just a way to control the value of its currency in international markets but also as a form of national savings. That is one reason its traders are encouraged to take greater risks in search of higher returns.


    China used $45 billion from its stash to bail out the state-owned Bank of China and the China Construction Bank last winter. People close to Chinese policy makers predict that another $50 billion to $60 billion will be used this winter to bail out the much larger Industrial and Commercial Bank of China, also state-owned, and possibly a smaller sum to help the Agricultural Bank of China.


    The Chinese government currency traders, bankers say, have refrained from the kind of highly speculative trading that led to the $550 million in losses disclosed this week by the China Aviation Oil (Singapore) Corporation, which is majority owned by a state-run Chinese company. But the fees and commissions associated with doing business with the Chinese has prompted many big Western banks to set up special trading teams in Hong Kong just to handle transactions for Beijing.


    An important job for such teams involves taking Chinese traders to dinner, Western bankers say, as the Chinese are not allowed to accept gifts. So fee-hungry bankers fly regularly to Beijing from Hong Kong - some making the trip practically every week - to take traders out for lavish evenings.


    For some, one banker said, this duty can become wearisome. The Chinese traders enjoy bowling, he said, but they also have a reputation for wanting to attend Mandarin romantic operas, an acquired taste at best.



    James Brooke reported from Tokyo for this article and KeithBradsher from Hong Kong.



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December 4, 2004

  • College Board Challenges SAT Data on Web





    2 hours, 52 minutes ago

    By KEN MAGUIRE, Associated Press Writer

    BOSTON - The nonprofit College Board, which owns the SAT college entrance exam, is demanding that its chief critic remove from its Web site data showing that minority and poor students scored lower than white and upper-class kids.






     

    In a letter to the National Center for Fair and Open Testing, also called FairTest, the College Board claims the Cambridge-based nonprofit organization violated copyright law by posting the scores without permission.


    FairTest, which opposes what it considers overreliance on standardized tests, posted the Oct. 27 letter on its Web site along with its refusal to comply with the College Board's demand. FairTest argues that the data is widely available in the public domain and therefore not subject to copyright protection.


    The FairTest Web posting breaks down the SAT scores of 2004 college-bound seniors by gender, ethnicity and family income.


    It showed that, on average, African-American students scored a combined 857 (math and verbal), Mexican-American and Puerto Rican students 909, other Latino students 929, white students 1,059 and Asian students 1,084. The overall average was 1,026.


    Scores also rose steadily as family income rose. Students from families making $10,000 or less scored a combined 872 on average. Students from families making more than $100,000 scored on average a combined 1,115.


    More than 1.4 million members of the class of '04 took the SAT, and 37 percent were minorities, a record.


    The SAT, along with the separate ACT, was designed to help predict a prospect's likely success as a freshman year. Critics have attacked the tests as unfair, chiefly because white students tend to do better than other groups. Many reasons are offered, including family income and education, school quality, courses taken, access to tutors and test-prep courses.


    FairTest estimates the number of schools that have ended or reduced reliance on SAT scores has doubled to 700 in the past few years.


    The College Board next spring will administer a revamped SAT. The changes were prompted by colleges' demands for more ways to evaluate applicants' writing abilities.


    "They're trying to eliminate criticism at a time when they're trying to sell product," said FairTest spokesman Robert A. Schaeffer. "Every newspaper in the country prints charts similar to that. They've made no effort to crack down on newspapers and research journals."


    The College Board's letter, signed by legal affairs assistant director Tasheem Lomax-Plaxico, refers only to copyright issues and doesn't mention the content of the posting in question.


    Lomax-Plaxico and a College Board spokesman did not immediately respond to calls seeking comment Saturday.


    Spokeswoman Chiara Coletti told The New York Times there's no effort to hide facts. She said FairTest's use of the data may not be new — FairTest says it has publicized such data for 20 years — but it's the first they heard of it.


    "No one ever brought it to our attention before," Coletti said. "But if it comes to our attention, we have to protect our copyright."


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    On the Net:


    The College Board: http://www.collegeboard.com

    FairTest: http://www.fairtest.org/

     


     

December 2, 2004


  • December 2, 2004

    OP-ED COLUMNIST


    The 9/11 Bubble


    By THOMAS L. FRIEDMAN





    The Washington Post had a story on Monday that contained possibly the greatest hint to a sitting cabinet secretary to start looking for another job that has ever been printed. The article reported, "One senior administration official said Treasury Secretary John W. Snow can stay as long as he wants, provided it is not very long."


    Provided it is not very long!


    Yo, Mr. Secretary, I'd say someone in the White House wants you gone! If I were you, I wouldn't renew any leases for more than a month at a time - or buy any really green bananas for the office. And those books you checked out of the Treasury library? Could you, like, maybe return them in the next few days? You know, just in case. I mean, it all depends on what the meaning of "long" is.


    I feel sorry for Mr. Snow. Reading your career obituary over breakfast can't be much fun. But I feel even more sorry for the country. I can't recall a time when the Treasury Department has been so emasculated by a White House. I went by the Treasury the other day and noticed a big sign outside saying it was being remodeled. Why bother? Who would know if it was gutted? The country would get more fiscal benefit by renting out the Treasury rooms for weddings, graduations and bar mitzvahs than it's gotten in the past four years from any advice coming from there.


    Here's a trivia question for you: Who is the deputy Treasury secretary? It's a pretty important job, but I have no clue who it is.


    This is a time when we really need a strong Treasury secretary capable of speaking up for fiscal sanity. We are about to embark on a 10-year period in which recent tax cuts and runaway spending are expected to add $5 trillion to the cumulative deficit. In my lifetime we will have gone from the Greatest Generation to the Profligate Generation to the Bankrupt Generation. Yes, I'm talking to you 20-year-olds. President Bush has called for sacrifice - but not by his generation. He's passing the bill onto your generation.


    "The 9/11 crisis has been used as a license to spend and cut taxes rather than to set priorities and focus our resources on what is critically important to our nation's security," said Robert Hormats, vice chairman of Goldman Sachs International.


    And Congress has played right along, as have people like Josh Bolton, Stephen Friedman and Gregory Mankiw - Mr. Bush's key White House economic advisers. "You know that all these guys know better," said Clyde Prestowicz, head of the Economic Strategy Institute.


    There have been lots of strong Republican and Democratic Treasury secretaries in recent years: George Shultz, Nick Brady, Jim Baker, Bob Rubin, Larry Summers. But right when we really need one with common sense and the will to set priorities, all indications are that this White House is looking for someone even weaker than Mr. Snow.


    David Rothkopf, a former Clinton Commerce Department official who just wrote a history of the National Security Council, said that President Bush is obviously "seeking consensus and homogeneity. But the system works better when the president gets choices. If everyone is on the same page and it turns out to be the wrong page - you're really up a creek."


    The very reason Mr. Bush had the luxury of launching a war of necessity in Afghanistan and a war of choice in Iraq, without a second thought, was because of the surpluses built up by the previous administration and Congress. Since then, the Bush team has been slashing taxes in the middle of two wars, weakening the dollar and amassing a huge debt burden - on the implicit assumption that nothing will go wrong in the future.


    But what if there is another 9/11 or war of necessity? We're cooked. The tax revenue won't be there, so the only option will be more borrowing and a weaker dollar. But what happens if the Chinese and other foreigners, who now hold over 40 percent of our Treasury securities, decide they don't want to hold these depreciating dollars anymore, let alone buy more?


    It is now clear to me that we have followed the dot-com bubble with the 9/11 bubble. Both bubbles made us stupid. The first was financed by reckless investors, and the second by a reckless administration and Congress. In the first case, the public was misled by Wall Street stock analysts, who told them the old rules didn't apply - that elephants can fly. In the second case, the public was misled by White House economists, peddling similar nonsense. The first ended in tears, and so will the second. Because, as the dot-com bubble proved, elephants can fly - "provided it is not very long."


     


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December 1, 2004


  • Mike Honda speaks at UCD


    Congressman talks about politics and diversity





     



    On one of the more frigid evenings of the year, U.S. Rep. Mike Honda spoke to a group of UC Davis students enthusiastically huddled in Olson Hall about his opinions on the current political climate, his experiences as a Japanese-American and the importance of taking action.


       Honda, Representative for the 15th Congressional District in Santa Clara County, explained that throughout his career, he has tried to remember the lessons he learned growing up in a Japanese internment camp during WWII.


       "I learned that no one taught me about me, that no one taught me about my community and that the government made a mistake sending me and my family to camp," Honda said.


       This experience came to the forefront again after the terrorist attacks of Sept. 11, 2001. As America struggled in the confusing aftermath of the tragedy, Honda focused on protecting civil liberties and making sure the same kind of blinded prejudices would not lead to internment camps for Middle Eastern citizens as well.


       "When 9/11 happened, everything in my life came to a focal point: 9/11, sneak attack, thousands of people died. Pearl Harbor, sneak attack, thousands of people died," he said.


       Honda encouraged students to realize that even in the world of politics, what is popular is not necessarily "right." He used the Iraq war as an example of something that was relatively popular, but not a logical or well planned decision.


       "We went in half-cocked, half-baked and unprepared," he said. "Anyway you cut it, we shouldn't have gone to war, especially without a plan for development in Iraq."


       Honda was one of the three congressmen who voted against the war.


       During the question-and-answer period, students expressed their concerns about rising university tuition. Having been a high-school teacher and vice principal for years, Honda explained that when money is taken from the federal government, in the form of tax cuts for example, local communities ultimately pay for it.


       "You guys not only have higher tuition, but you also have higher interests to pay off, and jobs aren't paying as well," he said.


       To combat this trend, Honda said Americans need to focus on civil education and voting. He noted that the President won only with 51 percent of the popular vote, and that those who want change should stand up and make it happen.


       Yuko Query and Kiyomi Yamamoto, student co-coordinators of the event, saw the talk as a conclusion to their own hard work and tenacity as leaders of the Japanese-American community on campus.


       The Japanese American Student Society, original sponsor of the event, decided to withdraw its support only two weeks before Honda was scheduled to speak, leaving Query and Yamamoto scrambling to find new sponsors.


       According to Query, members of JASS decided not to sponsor the event because they thought the event would be too political for a campus social club to support. Originally, with JASS's sponsorship, the event was designed to focus more on cultural issues.


       Fortunately, Isao Fujimoto, professor of Asian American Studies, and the Asian Pacific American Law Student Association gave their support to make the event possible.


       "We didn't want to give up the event because it was too valuable," Query said. "I still can't believe we actually got him here."


     


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November 28, 2004










  • Posted on Sun, Nov. 28, 2004



    Tension rises as dollar falls

    ASIA'S ABUNDANCE OF GOODS MEETS U.S. HUNGER FOR CREDIT



    When President Bush met the leaders of 20 Asian and Pacific nations last week, he wanted to talk about North Korea and Iran. But those nations had another security crisis on their minds -- the fall of the dollar.


    The dollar is now down to nine-year lows and there are jitters about a financial crisis. If foreign lenders lose confidence, they could trigger a free-fall collapse of the dollar. As the cost of imports rise, inflation could jump. And interest rates for banks and home buyers would soar as investors demand a higher return for their greater risk.


    That nightmarish scenario is probably overdrawn. But the dollar's drop reflects the belief that the American economy is not healthy.


    The signs of illness are two huge and growing imbalances -- the federal budget deficit and the current account deficit, the shortfall between what America takes in from the world through trade and investment and what it spends. In 1990 the global balance stood at zero. Now the United States is $665 billion in the hole.


    President Bush made soothing noises at the Asia-Pacific economic summit about the commitment to a ``strong dollar.'' But investors correctly read the signals that the actual policy is to let markets drive the value of the dollar down in a orderly way.


    The administration sees dollar devaluation as a way to correct a global imbalance. It will make American exports cheaper and more competitive and imports more expensive for American consumers. They are confident the United States remains an attractive place for the world to park its money.


    Those currencies that trade freely -- the euro, Canadian dollar, British pound and lately the Japanese yen -- have gone up rapidly in value against the dollar in the past few weeks.


    The one major trading partner that has escaped so far is China, whose currency is fixed to the value of the dollar. The Chinese want to keep their exports cheap but American pressure may force a small revaluation of its currency.


    Our trading partners are unhappy about the dollar's slide. But this is a needed correction.


    The danger is the fall will encourage countries to reduce their dollar holdings, shifting to euros, gold or Japanese stocks whose value has been rising.


    The problem for the United States is that those dollars are now financing our huge budget deficit, which will hit $450 billion this year. The administration has been unwilling to ask Americans to pay for the war on terror and the war in Iraq.


    The twin deficits are driven in part by the growing difference between what Americans spend and what they earn. American savings -- household, corporate and, of course, government savings -- have deteriorated greatly in the past five years.


    Instead we borrow money abroad. The dollar holdings of China, Japan, India and other Asian countries have leapt up from about $1.1 trillion in 2001 to about $1.8 trillion in 2003. And much of that is invested in American Treasury bonds and stocks.


    The Chinese, emboldened by the reality that we depend on their dollars, now happily lecture us on our profligate ways.


    ``The savings rate in China is more than 40 percent,'' the deputy head of the Chinese central bank recently told the Financial Times. ``In the U.S. it is less than 2 percent. So the problem is that they spend too much and save too little.''


    It is true that Americans consume more than they produce. But we can keep doing it, up to a point, because the folks we import from -- mostly but not entirely in Asia -- are happy to produce more than they consume and to lend us money to buy their stuff.


    ``We are stuck with each other -- they are the lenders of last resort and we are the consumers of last resort,'' says Robert Madsen, senior fellow at MIT's Center for International Studies and an expert on Asian economies. ``If they stopped lending we would have a lot of trouble. If we stopped consuming, they would go into recession.''


    A devaluation of the dollar should encourage Chinese, Japanese and others to spend more on American goods -- as well as creating an incentive for Americans to buy fewer imports. Hopefully the administration will succeed in managing an orderly devaluation and avoid a free-fall.


    Ultimately America needs to reduce a dangerous dependency on foreign lenders. The only way to do that is to save more and to pay for what we spend on our ourselves and our government.


    DANIEL SNEIDER is foreign-affairs columnist for the Mercury News. His column appears on Sunday and Thursday. You can contact him at dsneider@mercurynews.com.


     


     


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  • Posted on Sun, Nov. 28, 2004


    FINDING A KID'S INNER SUPERHERO

    Fear of ambition dilutes value of achievement, come complain




    ``The Incredibles'' is not just an animated adventure for children, at least not to the parents and teachers who have been passionately deconstructing the story of a family of superheroes trapped in suburbia. The movie has reignited one of the oldest debates about child-rearing and society: competition vs. coddling, excellence vs. egalitarianism.


    Is Dash, the supersonic third-grader forbidden from racing on the track team, a gifted child held back by the educational philosophy that ``everybody is special''? Or is he an overprivileged elitist being forced to take into account the feelings of others?


    Is his father, Mr. Incredible, who complains that the schools ``keep inventing new ways to celebrate mediocrity,'' a visionary reformer committed to pushing children to excel? Or is he a reactionary in red tights who's been reading too much Nietzsche and Ayn Rand? Is Syndrome, the geek villain trying to kill the superheroes, an angry Marxist determined to quash individuality? Or is his plan to give everyone artificial superpowers an uplifting version of ``cooperative learning'' in an ``inclusion classroom''?


    At one level, the debate is over current controversies in public education: Many parents believe that their children, mostly in elite schools, are being pushed too hard in a hypercompetitive atmosphere. But other parents are complaining about a decline in programs for gifted children, leaving students to languish in ``untracked'' and unstimulating classrooms. Some critics of education believe that boys especially are languishing in schools that emphasize cooperation instead of competition. No Child Left Behind, indeed.


    But the basic issue is the same one raised four decades ago by Kurt Vonnegut in ``Harrison Bergeron,'' a short story set in the America of 2081, about a 14-year-old genius and star athlete. To keep others from feeling inferior, the Handicapper General weighs him down with 300-pound weights and makes him wear earphones that blast noise, so he cannot take ``unfair advantage'' of his brain.


    Reward for routine


    That's hardly the America of 2004, but today's children do grow up with soccer leagues and spelling bees where everyone gets a prize. On some playgrounds, dodge ball is deemed too traumatic to the dodging-impaired. Some parents consider musical chairs dangerously exclusionary.


    Children are constantly feted for accomplishments that used to be routine. They may not all be honored at a fourth-grade graduation ceremony -- the event in the movie that inspires Mr. Incredible's complaint about mediocrity -- but they all hear the mantra recited by Dash's sister in response to his ambitions.


    ``Everyone's special, Dash,'' she says.


    ``Which is another way of saying no one is,'' he replies.


    The villain, Syndrome, makes the same point when he envisions empowering the masses with his inventions. ``Everybody will be super, which means no one will be,'' he says, gleeful that he will finally have revenge on Mr. Incredible for snubbing him during his childhood.


    He may be the villain, but you could also see his psychopathology as evidence of the bad effects of status-seeking among children. Even the winners can be victims of competition, said Denise Clark Pope, the author of ``Doing School: How We Are Creating a Generation of Stressed Out, Materialistic, and Miseducated Students.''


    ``When learning becomes about competing with your peers to get ahead, what gets learned is how to compete and not how to learn,'' said Pope, a lecturer at Stanford University's school of education. ``Kids learn to cheat, to raise their hands even when they don't know the answers, to form alliances instead of learning the material we want them to understand.''


    Her attitude is shared by some parents, especially ones whose children are frantically competing at exclusive private and suburban schools. But fans of competition complain that it's been de-emphasized for most students. Some schools have dropped honor rolls and class rankings, and the old practice of routinely segregating smart students in separate tracks has given way to the heterogeneous ``inclusion classroom.''


    Lesson in cooperation


    Competition has long been out of fashion at education schools, as indicated in a 1997 survey of 900 of their professors by Public Agenda, a non-profit public-opinion research group. Only a third of the professors considered rewards like honor rolls to be valuable incentives for learning, while nearly two-thirds said schools should avoid competition. By a slight plurality, the professors preferred giving students a single grade for team projects instead of separate grades for individual projects.


    To some critics, that cooperative philosophy is one reason that so many boys like Dash are bored at school. ``Professors of education think you can improve society by making people less competitive,'' said Christina Hoff Sommers, author of ``The War Against Boys'' and a resident scholar at the American Enterprise Institute. ``But males are wired for competition, and if you take it away there's little to interest them in school.''


    In his new book, ``Hard America, Soft America,'' Michael Barone puts schools in the soft category and warns that they leave young adults unprepared for the hard world awaiting them in the workplace. ``The education establishment has been too concerned with fostering kids' self-esteem instead of teaching them to learn and compete,'' he said.


    The No Child Left Behind Act was an attempt to put more rigor into the system by penalizing schools whose students do not pass standardized tests, but it has had unintended consequences for high achievers. Administrators have been cutting funds for gifted-student programs and concentrating money and attention on the failing students.


    ``In practice, No Child Left Behind has meant No Child Gets Ahead for gifted students,'' said Joyce Clark, a planner in the Pittsburgh public-schools' gifted program. ``There's no incentive to worry about them because they can pass the tests.''


    Educational privileges


    ``The Incredibles'' might take comfort from a recent report, ``A Nation Deceived: How Schools Hold Back America's Brightest Students,'' by the John Templeton Foundation. It summarizes research showing that gifted children thrive with more advanced material and describes their current frustration in prose that sounds like Dash: ``When they want to fly, they are told to stay in their seats. Stay in your grade. Know your place. It's a national scandal.''


    But if they do fly, what happens to the children left on the ground? One of the report's authors, Nicholas Colangelo, a professor at the University of Iowa who is an expert in gifted education, pointed to research indicating the left-behind do not suffer academically or emotionally.


    Other scholars say that these children feel stigmatized and demoralized and, that in practice, a tracking system tends to discriminate against poor and minority students.


    ``The public generally seems to have caught on to the social undesirability of claiming educational privileges for students who are already relatively privileged,'' said Jeannie Oakes, a professor of educational equity at the University of California-Los Angeles. ``Superhero kids don't exist in such abundance that we need to develop special and separate programs for whole classes of them.''


    The movie never quite resolves the issue. In the end, Dash is allowed to race but is coached not to get too far ahead of the pack. The writer and director, Brad Bird, offered a less ambiguous answer in an interview. ``Wrong-headed liberalism seeks to give trophies to everyone just for existing,'' he said. ``It seems to render achievement meaningless. That's a weird goal.''


    He sounded very much like Colangelo, who says that children want to compete and can cope with defeat a lot better than adults imagine. ``Life hurts your feelings,'' Bird said. ``I think people whine about stuff too much. C'mon, man, just get up and do it.''


    JOHN TIERNEY wrote this article, which includes some reporting by John M. Broder, for the New York Times.



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  • Posted on Sun, Nov. 28, 2004


    Overburdened schools focus too hard on `right' answers




    The instructions were easy enough for a 7-year-old to understand: ``Choose a word from the box on the right to complete the sequence on the left.'' I watched as my second-grade daughter, Maya, read ``Bear, wolf, . . .'' then carefully checked her options in the box before writing ``fox'' on the line.


    She charged down the page, pausing only at No. 5: ``Work, office, . . .'' The answer the worksheet was going for was ``job.'' Maya chose ``fun.'' I let it slide. She'd already demonstrated that she understood the assignment. And secretly, I was pleased by her choice.


    My husband and I like our jobs, and our office environments reflect that. His has beanbag chairs and employees who have known Maya since preschool. Mine has stacks of magazines, a stereo and a hallway of people to visit.


    Offices are fun to this kid.


    But whoever marked Maya's paper didn't realize that. The homework came back with an ``X'' on No. 5. Even worse, she had to erase ``fun'' and replace it with ``job'' -- a bad workplace metaphor if I've ever seen one.


    I don't know where to direct my frustration with this. Not at the teacher, whom I respect a great deal, and who wrote me a friendly and apologetic note when I brought up the issue, even agreeing with my point of view.


    And not at the classroom aide, who's just earning her hourly wage.


    So should it be directed at a school that depends on parent volunteers to mark student homework? At a school district grappling with a multimillion-dollar deficit, where worksheets are used to reinforce concepts teachers might otherwise review with students themselves? Or at the worksheet publishers, whose products are so inferior that students themselves notice typos and mistakes?


    No, I suspect my frustration is with something much larger: with whatever -- myself included -- has already trained my daughter to shrug her shoulders and erase her answer without question, complacently accepting someone else's standard of right and wrong. Granted, in a second-grade classroom some answers have to be unequivocal. A quarter is 25 cents, not 10, and three plus two equals five. Although, as my daughter pointed out to me one night, three pairs plus two pairs equals five pairs, but it also equals 10 of something, right?


    Well, no. Not on a worksheet, it doesn't.


    I don't expect a public school system that's hustling for every dollar to teach my kid how to think outside the box. That's my job, and I know it. What troubles me is when there isn't room for creativity inside the box. Despite all the talk about different types of learning and multiple forms of intelligence, most of our kids are still being conditioned to think in limited, binary terms.


    I'm the product of public schools. I believe in public schools. My daughter's teachers are far more open-minded, her principal more involved and her elementary school better outfitted than mine ever was.


    Still, in purely cognitive terms, she's receiving the same second-grade education I received in 1972.


    Maybe that's not entirely a bad thing. After all, I've managed all right.


    But the world I stepped into when I graduated was significantly different from the world my daughter will inherit. In 1982, acts of terrorism were still confined to the Middle East, and the United States was exalted, rather than despised. We face far more uncertainty and ambiguity today, and we need new, creative solutions for managing this. Trying to eradicate it hasn't been the answer.


    At a time when innovative thinkers are desperately needed to solve our global problems, we shouldn't let children default into polarized patterns of thought. Correct and incorrect, right and wrong -- from there it's only a short step to forming rigid distinctions between order and disorder, good and evil.


    A whole world -- their world -- exists between the extremes. Let them start learning that now.


    HOPE EDELMAN wrote this story for the Los Angeles Times. She is the author of ``Motherless Daughters.''


     


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November 26, 2004


  • DECEMBER 6, 2004

    SPECIAL REPORT -- THE CHINA PRICE







    "The China Price"
    They are the three scariest words in U.S. industry. Cut your price at least 30% or lose your customers. Nearly every manufacturer is vulnerable -- from furniture to networking gear. The result: A massive shift in economic power is under way

    From the rich walnut paneling and carved arches to the molded Italian Renaissance patterns on the ceiling, the circa 1925 council chamber room of Akron's municipal hall evokes a time when the America's manufacturing heartland was at the peak of its power. But when the U.S.-China Economic & Security Review Commission, a congressionally appointed panel, convened there on Sept. 23, it was not to discuss power but decline. One after another, economists, union officials, and small manufacturers took the microphone to describe the devastation Chinese competitors are inflicting on U.S. industries, from kitchenware and car tires to electronic circuit boards.

    These aren't stories of mundane sunset industries equipped with antiquated technology. David W. Johnson, CEO of 92-year-old Summitville Tiles Inc. in Summitville, Ohio, described how imports forced him to shut a state-of-the-art, $120 million tilemaking plant four football fields long, sending Summitville into Chapter 11 bankruptcy protection. Now, a tenfold surge in high-quality Chinese imports at "below our manufacturing costs" threatens to polish Summitville off. Makers of precision machine tools and plastic molds -- essential supports of America's industrial architecture -- told how their business has shrunk as home-appliance makers have shifted manufacturing from Ohio to China. Despite buying the best computer-controlled gear, Douglas S. Bartlett reported that at his Cary (Ill.)-based Bartlett Manufacturing Co., a maker of high-end circuit boards for aerospace and automotive customers, sales are half the late-1990s level and the workforce is one-third smaller. He waved a board Bartlett makes for a U.S. Navy submarine-detection device. His buyer says he can get the same board overseas for 40% less. "From experience I can only assume this is the Chinese price," Bartlett said. "We have faced competition in the past. What is dramatically different about China is that they are about half the price."



    Where the Jobs Went
    "The China price." They are the three scariest words in U.S. industry. In general, it means 30% to 50% less than what you can possibly make something for in the U.S. In the worst cases, it means below your cost of materials. Makers of apparel, footware, electric appliances, and plastics products, which have been shutting U.S. factories for decades, know well the futility of trying to match the China price. It has been a big factor in the loss of 2.7 million manufacturing jobs since 2000. Meanwhile, America's deficit with China keeps soaring to new records. It is likely to pass $150 billion this year.

    Now, manufacturers and workers who never thought they had to worry about the China price are confronting the new math of the mainland. These companies had once held their own against imports mostly because their businesses required advanced skills, heavy investment, and proximity to customers. Many of these companies are in the small-to-midsize sector, which makes up 37% of U.S. manufacturing. The China price is even being felt in high tech. Chinese exports of advanced networking gear, still at a low level, are already affecting prices. And there's talk by some that China could eventually become a major car exporter.

    Multinationals have accelerated the mainland's industrialization by shifting production there, and midsize companies that can are following suit. The alternative is to stay at home and fight -- and probably lose. Ohio State University business professor Oded Shenkar, author of the new book The Chinese Century, hears many war stories from local companies. He gives it to them straight: "If you still make anything labor intensive, get out now rather than bleed to death. Shaving 5% here and there won't work." Chinese producers can make the same adjustments. "You need an entirely new business model to compete."

    America has survived import waves before, from Japan, South Korea, and Mexico. And it has lived with China for two decades. But something very different is happening. The assumption has long been that the U.S. and other industrialized nations will keep leading in knowledge-intensive industries while developing nations focus on lower-skill sectors. That's now open to debate. "What is stunning about China is that for the first time we have a huge, poor country that can compete both with very low wages and in high tech," says Harvard University economist Richard B. Freeman. "Combine the two, and America has a problem."

    How much of a problem? That's in fierce dispute. On one side, the benefits of the relationship with China are enormous. After years of struggling to crack the mainland market, U.S. multinationals from General Motors (GM ) to Procter & Gamble (PG ) and Motorola (MOT ) are finally reaping rich profits. They're making cell phones, shampoo, autos, and PCs in China and selling them to its middle class of some 100 million people, a group that should more than double in size by 2010. "Our commercial success in China is important to our competitiveness worldwide," says Motorola China Chairman Gene Delaney.

    By outsourcing components and hardware from China, U.S. companies have sharply boosted their return on capital. China's trade barriers continue to come down, part of its agreement to enter the World Trade Organization in 2001. Big new opportunities will emerge for U.S. insurers, banks, and retailers. China's surging demand for raw materials and commodities has driven prices up worldwide, creating a windfall for U.S. steelmakers, miners, and lumber companies. The cheap cost of Chinese goods has kept inflation low in the U.S. and fueled a consumer boom that helped America weather a recession and kept global growth on track.

    But there's a huge cost to the China relationship, too. Foremost is the question of America's huge trade deficit, of which China is the largest and fastest-growing part. While U.S. consumers binge on Chinese-made goods, the U.S. balance-of-payments deficit is nearing a record 6% of gross domestic product. The trade shortfall -- coupled with the U.S. budget deficit -- is driving the dollar ever downward, raising fears that cracks will appear in the global financial system. And by keeping its currency pegged to the greenback at a level analysts see as undervalued, China amplifies the problem.

    America's Eroding Base
    The deficit with China will keep widening under most projections. That raises the issue: Will America's industrial base erode to a dangerous level? So far the hardest-hit industries have been those that were destined to migrate to low-cost nations anyway. But China is ramping up rapidly in more advanced industries where America remains competitive, adding state-of-the-art capacity in cars, specialty steel, petrochemicals, and microchips. These plants are aimed at meeting insatiable demand in China. But the danger is that if China's growth stalls, the resulting glut will turn into another export wave and disrupt whole new strata of American industry. "As producers in China end up with significant unused capacity, they will try to be much more creative in how they deploy it," says Jim Hemerling, a senior vice-president at Boston Consulting Group's Shanghai office.

    That's why China is an even thornier trade issue for the U.S. than Japan was in the 1980s. It's clear some Chinese exporters cheat, from intellectual-property theft and dumping to securing unfair subsidies. Washington can get much more aggressive in fighting violations of trade law. But broader protectionism is a nonstarter. On a practical level the U.S. is now so dependent on Chinese suppliers that resurrecting trade barriers would just raise costs and diminish the real benefits that China trade confers. Also, unlike Japan 20 years ago, China is a much more open economy. It continues to lower tariffs and even runs a slight trade deficit with the whole world -- which makes the U.S.'s deficit with China all the more glaring. Hiking the value of the yuan 30% might help. But that's unlikely. For one thing, Beijing fears what such a shift would do to jobs -- and the value of its $515 billion in foreign reserves. The real solution is for the U.S. to reduce its twin deficits on its own -- but that's more America's issue than China's.

    Meanwhile, U.S. companies are no longer investing in much new capacity at home, and the ranks of U.S. engineers are thinning. In contrast, China is emerging as the most competitive manufacturing platform ever. Chief among its formidable assets is its cheap labor, from $120-a-month production workers to $2,000-a-month chip designers. Even in sophisticated electronics industries, where direct labor is less than 10% of costs, China's low wages are reflected in the entire supply chain -- components, office workers, cargo handling -- you name it.

    China is also propelled by an enormous domestic market that brings economies of scale, feverish local rivalry that keeps prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores (WMT ), Target (TGT ), Best Buy (BBY ), and J.C. Penney (JCP ). "The reason practically all home furnishings are now made in China factories is that they simply are better suppliers," says Janet E. Fox, vice-president for international procurement at J.C. Penny Co. "American manufacturers aren't even in the same game."

    Fox's point is important. China's competitive advantages are built on much more than unfair trade practices. Some 70% of exports now come from private companies and foreign ventures mainly owned by Taiwanese, Hong Kong, Japanese, and U.S. companies that have brought access to foreign markets, advanced technology, and managerial knowhow. Aside from cheap land and tax breaks in some areas, private Chinese manufacturers get minimal government help. "The Chinese government cannot afford to offer financial support to the export economy," says business professor Gu Kejian of People's University in Beijing. And as capital floods in and modern plants are built in China, efficiencies improve dramatically. The productivity of private industry in China has grown an astounding 17% annually for five years, according to the U.S. Conference Board.

    China needs U.S. imports, though not as much as imagined when Beijing agreed to join the WTO. U.S. exports to China have risen 25% to 35% annually in the past two years. But China's exports still outstrip its imports from the U.S. by 5 to 1. The U.S. sells about $2.4 billion worth of aircraft a year, and its semiconductor exports tripled in three years. Otherwise the U.S. looks like a developing nation. It runs surpluses in commodities such as oil seeds, grains, iron, wood pulp, and raw animal hides.

    Meanwhile, the Chinese keep expanding their export base. Chinese competition arrives so fast that it's nearly impossible to adjust through the usual strategies, such as automating or squeezing suppliers. The Japanese, South Koreans, and Europeans often took "four or five years to develop their place in the market," says Robert B. Cassidy, a former U.S. Trade Representative official who helped negotiate China's entry into the WTO and now works for Washington law firm Collier Shannon Scott, which wages dumping cases on behalf of U.S. clients. "China overwhelms a market so quickly you don't see it coming."

    "Shock and Awe"
    Georgetown Steel Co. is a case in point. The Georgetown (S.C.) maker of wire rods used in everything from bridge cables to ball bearings had battled Asian and Mexican imports for years. But last year it shut its 600-worker plant, citing a tenfold leap in Chinese imports, to 252,000 tons, from 2001 to 2003. International Steel Group Inc. (ISG ) has since bought the facility after U.S. anti-dumping duties on imports and a rise in global demand helped hike domestic prices. The Gardiner (Mass.) plant of Seaman Paper Co., a maker of crepe and decorative paper, is highly automated. Yet Chinese imports have grabbed a third of the market. It sells 81-foot streamers to big retailers for as little as 9 cents each. That's below Seaman's cost of materials. "We thought we could offset Chinese labor cost by automating, but we just couldn't," says Seaman President George Jones III.

    In bedroom furniture, 59 U.S. plants employing 15,500 workers have closed since January, 2001, as Chinese imports have rocketed 221%, to $1.4 billion -- half of the U.S. market. Prices have plunged 30%. Dumping certainly seems to be one factor: At its Galax (Va.) factory, Vaughan-Bassett Furniture Co. displays a Chinese knockoff of one of its dressers that wholesales for $105 -- below the world market cost for the wood. But the main competition comes from Chinese megaplants that sell directly to U.S. retailers and can get a new design into mass production in two months. The new Chinese factories of suppliers such as Lacquer Craft Furniture, Markor, and Shing Mark, some of them Taiwanese-owned, employ thousands and are so big they seem meant to build Boeing 747s, making most U.S. factories look like cottage industries. "The first wave is shock and awe," says John D. Bassett III, CEO of Vaughan-Bassett, whose sales and workforce have shrunk even though it has boosted productivity fivefold at its 600-worker Galax plant since 1995 by investing in computer-controlled wood drying, cutting, and carving gear. "American industry has never encountered [such] competition."

    As component industries and design work follow assembly lines to China, key elements of the U.S. industrial base are beginning to erode. American plastic-molding and machine-tool industries have shrunk dramatically in the past five years. Take Incoe Corp. in Troy, Mich., a maker of steel components for plastic-injection machines. "When the economy turned soft, we anticipated the business would come back," says Incoe CFO Robert Hoff. "But it didn't. We saw our customer base either close or migrate to China." The U.S. printed-circuit-board industry has seen sales go from $11 billion to under $5 billion since 2001. In that time, PCB exports from China have more than doubled, to a projected $3.4 billion this year, says market researcher Global Sources Ltd. (GSOL ) Most U.S. production of key electronics materials, such as copper-clad laminates, has fled, too. "The whole industry is hollowing out," says Joseph C. Fehsenfeld, CEO of Midwest Printed Circuit Services Inc. in Round Lake Beach, Ill.

    The migration of electronics to China began when the Taiwanese shifted plants and suppliers across the Taiwan Strait in the late 1990s. As recently as four years ago, though, the U.S. exported $45 billion in computer hardware. Since the tech crash, that number has slid to $28 billion as the industry headed en masse for China, which is even more competitive than Taiwan. "All electronics hardware manufacturing is going to China," says Michael E. Marks, CEO of Flextronics Corp (FLEX )., a contract manufacturer that employs 41,000 in China. Flextronics and other companies are hiring Chinese engineers to design the products assembled there. "There is a myth that the U.S. would remain the knowledge economy and China the sweatshop," says BCG's Hemerling. "Increasingly, this is no longer the case."

    A visit to Flextronics' campus in the Pearl River Delta town of Doumen vividly illustrates Marks's point. The site employs 18,000 workers making cell phones, X-box game consoles, PCs, and other hardware in 13 factories sprawled over 149 acres. The bamboo scaffolding is about to come down on an additional 720,000-square-foot factory nearing completion. Almost every chemical, component, plastic, machine tool, and packing material Flextronics needs is available from thousands of suppliers within a two-hour drive of the site. That alone makes most components 20% cheaper in China than in the U.S., says campus General Manager Tim Dinwiddie. Plus, China will soon eliminate remaining tariffs on imported chips. In the past five years, electronic manufacturing-services companies such as Flextronics have cut their U.S. production from $37 billion to $27 billion while doubling their China output, to $31 billion. That's likely to double again by 2007.

    "Gravitational Pull"
    China is even making its presence felt in the U.S. market for networking gear, a bastion of American comparative advantage. On Nov. 15, struggling 3Com Corp. (COMS ) in Marlborough, Mass., launched a data-communications switching system for corporate networks of 10,000 users or more. It claims twice the performance of Cisco Systems Inc.'s (CSCO ) comparable switch. At $183,000, 3Com's list price is 25% less. Its secret? 3Com is settling for lower margins and taking advantage of a 1,200-engineer joint venture with China telecom giant Huawei Technologies Co. This is the first high-end piece of networking gear sold by a U.S. company that is designed and manufactured in China. For the price of one U.S. engineer, the joint venture can throw four engineers into the task of making customized products for a client. Even if 3Com does not succeed, similar tie-ups are expected, which could drive down prices of high-end gear sold in the U.S. Says 3Com President Bruce Claflin: "We want to change the pricing structure of this industry." 3Com hopes this is the start of a whole line of networking gear designed and made in China for the global market. Without referring to China, Cisco CEO John T. Chambers says "we are starting to see a stream of good, very price-competitive competitors, particular from Asia."

    The next step for China is critical mass in core industries. Outside Beijing, Semiconductor Manufacturing International Corp. (SMI ) has just opened a chip plant fabricating 12-inch silicon wafers that experts say is just two generations behind Intel Corp. (INTC ) A foundry that makes chips on a contract basis, this plant won't compete directly with U.S. chipmakers. But with four more 12-inch wafer plants due by 2006 and many more fabs in the pipeline, the U.S. Semiconductor Industry Assn. warns that a "gravitational pull" could suck capital, people, and leading-edge research-and-development and design functions from the U.S.

    Digital technologies aren't the only areas where the Chinese have huge ambitions. In the past decade, U.S. petrochemical makers have invested in little new capacity. But at a three-mile-long site in Nanjing, 12,000 workers are erecting a $2.7 billion network of pipes and towers for China's Sinopec (SNP ) and Germany's BASF (BF ) that by next year will be among the world's biggest, most modern complexes for ethylene, the basic ingredient in plastics. An even bigger complex is going up in Shanghai. "The Chinese understand everything that scale means," says Fluor Corp. (FLR ) Group President Robert McNamara, who lives part-time in Shanghai and whose company has design contracts at both complexes. "When they target an industry to dominate, they don't mitigate."

    Can China dominate everything? Of course not. America remains the world's biggest manufacturer, producing 75% of what it consumes, though that's down from 90% in the mid-'90s. Industries requiring huge R&D budgets and capital investment, such as aerospace, pharmaceuticals, and cars, still have strong bases in the U.S. "I don't see China becoming a major car exporter in the foreseeable future," says GM China (GM ) Chairman Philip F. Murtaugh. "There is no economic rationale." Murtaugh cites high production costs and quality issues at Chinese car plants, as well as just-in-time delivery needs in the West, as impediments.

    Burning Rubber
    Don't tell that to Miao Wei, president of Dongfeng Motor Corp. On Nov. 7, Dongfeng and Honda Motor Co. (HMC ) announced that their joint venture will invest $340 million to boost output of Honda CR-Vs and Civics fivefold, to 120,000, by early 2006. The plant aims to achieve world standards by employing Honda's flexible manufacturing system. "Honda will sell some of the Chinese-built cars in Europe," says Miao. Nissan Motor Co. (NSANY ) is also talking about exporting with Dongfeng.

    China's carmakers are developing the suppliers that one day could sustain exports. Auto-parts maker Wanxiang Group in Hangzhou started as a tiny township-owned farm-machinery shop in 1969. Now it's a $2.4 billion conglomerate that supplies the Chinese assembly plants of GM, Ford Motor (F ), Volkswagen, and others and also exports 30% of its output. In two years, China will drop the rule that its auto plants buy at least 40% of parts locally. Wanxiang is getting ready: It is opening a $42 million plant loaded with U.S. and European testing gear. And since 1995, Wanxiang has bought 10 U.S. auto-parts makers. "Our goal is to acquire technology, management, and most important, to get access to overseas markets," says Chairman Lu Guanqiu.

    Some U.S manufacturers hope China will run out of steam. This year, factories in Guangdong and Fujian faced serious labor shortages for the first time. Red-hot demand has meant skyrocketing costs for China's producers, most of which rely on imported goods such as steel, plastics, and components. Energy shortages have forced manufacturers to shut factories several times a week. In almost any industry one can think of, vicious price wars are biting into already razor-sharp margins. "There are so many small companies competing that they crowd out all profit," says Beijing University economist Zhang Weiying. Indeed, given the low emphasis on profits and the unsophisticated accounting of many Chinese companies, often their pricing isn't based on a full understanding of costs. Having gotten as far as they can on cheap production costs, Chinese manufacturers must develop their own technologies and innovative products to move ahead -- areas in which they've made slow progress so far.

    The juggernaut will slow, but only slightly. While salaries for top Chinese designers are rising fast, they are still a fifth to a tenth of those in Silicon Valley. If China's wages rise 8% annually for the next five years, says a Boston Consulting Group study, the average factory hand will still earn just $1.30 an hour by then. If China allowed the yuan to appreciate by around 10% in the next year, productivity gains would more than offset the higher costs, figures China expert Nicholas R. Lardy of the Institute for International Economics. "I don't think revaluation will have a significant impact," he says.

    And Chinese producers are hardly standing still. In a recent survey of Chinese and U.S. manufacturers by IndustryWeek and Cleveland-based Manufacturing Performance Institute, 54% of Chinese companies cited innovation as one of their top objectives, while only 26% of U.S. respondents did. Chinese companies spend more on worker training and enterprise-management software. And 91% of U.S. plants are more than a decade old, vs. 54% in China. Shanghai-based TV maker SVA Group, for example, has opened China's first plant to make flat panels, a venture with Japan's NEC (NIPNY ) Corp. That is enabling SVA to secure a U.S. beachhead by selling liquid-crystal display and plasma TV sets through channels such as the online sites of Costco Wholesale (COST ) and Target. Starting price: $1,600 -- 30% below similar models by Royal Philips Electronics (PHG ) and Panasonic (MC ).

    More innovation. Better goods. Lower prices. Newer plants. America will surely continue to benefit from China's expansion. But unless it can deal with the industrial challenge, it will suffer a loss of economic power and influence. Can America afford the China price? It's the question U.S. workers, execs, and policymakers urgently need to ask.
     







    Shaking Up Trade Theory
    For decades economists have insisted that the U.S. wins from globalization. Now they're not so sure

    Ever since Americans began fretting about globalization nearly three decades ago, economists have patiently explained why, on balance, it's a boon to the U.S. Yes, some Americans lose their jobs, either to imports or because factories move to cheap-labor countries such as China or India. But the bulk of this work is labor-intensive and lower skilled and can be done more efficiently by countries that have an abundance of less-educated workers. In return, those countries buy more of our higher-value goods made by skilled workers -- for which the U.S. has a comparative advantage. The lost jobs and lower wages in the U.S., economists say, are more than offset when countries specialize like this, leading to more robust exports and lower prices on imported goods.

    Now this long-held consensus is beginning to crack. True, China is emerging as a global powerhouse, realigning many economic relationships. But in the long run a more disruptive trend may be the fast-rising tide of white-collar jobs shifting to cheap-labor countries. The fact that programming, engineering, and other high-skilled jobs are jumping to places such as China and India seems to conflict head-on with the 200-year-old doctrine of comparative advantage. With these countries now graduating more college students than the U.S. every year, economists are increasingly uncertain about just where the U.S. has an advantage anymore -- or whether the standard framework for understanding globalization still applies in the face of so-called white-collar offshoring. "Now we've got trade patterns that challenge the common view of trade theory, which might not be so true anymore," says Gary C. Hufbauer, a senior fellow at the Institute for International Economics (IIE), a Washington (D.C.) think tank. A leading advocate of free-trade pacts, he still thinks white-collar job shifts are good for the U.S.

    The great debate percolating among the country's top trade economists gained new prominence with a recent article by Nobel laureate Paul A. Samuelson in the Journal of Economic Perspectives (JEP). In the piece, the 89-year-old professor emeritus at Massachusetts Institute of Technology, who largely invented much of modern-day economics, questions whether rising skills in China and India necessarily will benefit the U.S.

    The reaction was swift. Experts such as Columbia University trade economist Jagdish N. Bhagwati, who countered Samuelson in the next JEP issue, resist the notion that the new offshoring could lower U.S. wages or slow growth of gross domestic product. After all, these economists have spent their professional lives ridiculing such conclusions as so much protectionist nonsense. Nevertheless, they aren't yet able to reconcile what's happening on the ground with the ideas they have so passionately defended. "This is a whole unexplored question that is very controversial, and nobody has a clue about what the numbers are," says Robert C. Feenstra, a prominent trade economist at the University of California at Davis.

    Global Labor Pool
    The central question Samuelson and others raise is whether unfettered trade is always still as good for the U.S. as they have long believed. Ever since British economist David Ricardo spelled out the theory of comparative advantage in the early 1800s, most economists have concluded that countries gain more than they lose when they trade with each other and specialize in what they do best. Today, however, advances in telecommunications such as broadband and the Internet have led to a new type of trade that doesn't fit neatly into the theory. Now that brainpower can zip around the world at low cost, a global labor market for skilled workers seems to be emerging for the first time -- and has the potential to upset traditional notions of national specialization.

    There are three ways this new development could disrupt the U.S. economy. If enough cheap, high-skilled workers become available around the world, competition may drive down U.S. wages for a wide swath of white-collar workers. Even economists who still see overall net gains agree that this is a potential problem. "For the first time, high-skilled U.S. workers are going to be exposed to international competition, though it's not clear how much it will hurt their wages," says Bhagwati.

    A second concern is how much of the gains from trade will flow through to U.S. consumers. Until now the pain of globalization has been borne by less than a quarter of the workforce, mostly lower-skilled workers, whose wage cuts outweighed the cheaper-priced goods globalization brings. But the other three-quarters of American workers still came out ahead, since they weren't affected by foreign wage competition. If blue- and white-collar employees alike are thrown into the global labor pool, a majority of workers could end up losing more than they gain in lower prices. Then the benefits of increased trade would go primarily to employers. "It's entirely possible that all workers will lose and shareholders will gain; you have to be concerned about that," says Harvard University trade economist Dani Rodrik.

    Even that wouldn't be enough to completely derail comparative-advantage theory, which holds that higher profits from trade should more than offset the lower wages. But again, for the first time, economists see another factor at play. As skill levels improve in cheap-labor countries -- for example, the new engineering class in India -- competition is coming on in the very products for which the U.S. has had a global advantage, such as software. If the new competition drives down prices too much, U.S. export earnings will suffer, and the entire U.S. economy could end up worse off.

    While experts such as Hufbauer and Bhagwati doubt it will ever come to this, the fact that they're even entertaining such concepts is an intellectual sea change on a subject long considered settled. When countries such as China can perform tasks in which the U.S. previously had a clear edge, "comparative advantage cannot be counted on to create...net gains greater than the net losses," Samuelson asserts in his new paper.

    The rethinking among economists could soon spill over into the policy arena. No one is advocating new trade barriers, which could be a cure that's worse than the disease. Nonetheless, the shaken views of so many prominent economists could prove to be critical. Throughout the 1990s, Washington embraced new trade deals in large part because of the virtual unanimity among experts that trade always benefits the U.S. If they're not so sure anymore, the public consensus that was unsteady to begin with could start to unravel.

    Two tests will come next year when U.S. membership in the World Trade Organization comes up for review, as does the President's so-called fast-track authority to negotiate trade agreements. "I'm worried that rising anxiety among higher-skilled workers will erode support for continued globalization in the U.S.," says Dartmouth University economics professor Matthew J. Slaughter.

    "A Right to Be Scared"
    How large might the white-collar offshoring trend become? The more jobs that go, the greater the impact on U.S. wages. Consultant Forrester Research Inc. (FORR ) in Cambridge, Mass., was among the first to spot the white-collar job shifts and has done the most detailed projections so far. It sees the pace of U.S. job flows abroad averaging 300,000 a year through 2015. This is probably conservative since Forrester has also found that the number of U.S. companies among the 1,000 largest that engage in some level of white-collar offshoring will rise sharply -- from 37% today to 54% by 2008. Already, some 14 million white-collar jobs involve work that can be shipped electronically and thus in theory could be moved offshore, according to a study by economists Ashok D. Bardhan and Cynthia A. Kroll at the University of California at Berkeley's Haas School of Business.

    The hit to wages could be powerful if that happens. Forrester analyst John C. McCarthy identified 242 service jobs as likely to be affected among the 500-plus major occupations tracked by the Bureau of Labor Statistics (BLS). He ranked each by the share of jobs employers are likely to shift abroad by 2015. His conclusion: The cumulative job outflow will total 3.4 million over that period. That comes to 6% of the 57 million people who work in these 242 occupations today.

    If that's in the ballpark, U.S. white-collar wages would get whacked, says Harvard University labor economist Lawrence F. Katz. Every 1% drop in employment due to imports or factories gone abroad shaves 0.5% off pay for remaining workers, he found in a study with Harvard colleagues Richard B. Freeman and George J. Borjas. So if job losses rise to 6% of the white-collar total, these workers' pay could be depressed by 2% to 3% through 2015, figures Katz. While a few percentage points over a decade or so may not sound dire, it's roughly as much as blue-collar workers lost to globalization in recent decades. "White-collar workers have a right to be scared," says Katz.

    Another way economists gauge the potential wage impact is to look at examples of how people fare when they lose a job and extrapolate for those who might get displaced by offshoring. Turns out that just 30% of laid-off workers earn the same or more after three years, according to a study of 22 years of BLS data by economics professor Lori G. Kletzer of the University of California at Santa Cruz. Only 68% even hold a job at that point, while the rest are unemployed, retired, or perhaps at home with children. On average, those reemployed earn 10% less than before, Kletzer found. "Clearly, offshoring will be bad for U.S. wages, given what the job displacement numbers tell us," says Princeton University economics professor Henry S. Farber, who has written extensively about displaced workers.

    But even if the incomes of more U.S. workers fall, won't the rest of American consumers benefit from the lower-priced goods and services globalization brings? Not necessarily, some economists now believe. Most studies of trade's impact on pay, including Katz's, assume that factory-job losses simply shift the demand for labor from one kind of worker to another higher up the value chain. So higher-educated workers gained much of what the less-schooled lost.

    But if white-collar offshoring swells enough, the resulting job losses could undercut a large swath of U.S. consumers. In part, this is a question of scale. There's little doubt that globalization is likely to continue to cut into the country's 14.5 million factory hands. Add in 57 million white-collar workers suddenly facing global competition, too, and more than half the U.S. workforce of 130 million could feel the impact. Then, economists conclude, the benefits of globalization would flow mostly to companies and shareholders who profit from the cheaper labor, with little pass-through to workers and consumers. "If a majority of Americans have lower wages from outsourcing, then capital would be the prime beneficiary, even if U.S. GDP goes up," says Harvard's Freeman.

    Domestic Disturbance
    Could the offshore phenomenon even dent America's overall GDP? Standard theory suggests not, but it's now another question nagging economists. Ricardo's insight that all countries come out ahead when they trade more with each other was updated in the early 1900s by two Swedish economists, Eli F. Hecksher and Bertil Olin. They showed that Ricardo's idea holds even if high-skilled countries such as the U.S. trade more with low-skilled ones such as India, with each country specializing in products in which they have a relative advantage. Thus, it's more efficient for the U.S., where about 60% of the workforce has some college education, to export products that use their skills and import low-end ones from cheap-labor countries. Conversely, India, where just a fraction of its 400 million-plus workers have gone to college, should grab the low-skilled work and leave higher-end products to the U.S.

    This theory doesn't square with today's outflows of programming and other higher-skilled jobs. "According to the Heck-sher-Olin model, we shouldn't be sending these jobs to countries with [so few skilled workers]," says University of California at Los Angeles trade economist Edward E. Leamer. But U.S. companies are doing just that because labor is cheaper and the Net makes it feasible to transport work done abroad back to the U.S.

    Still, most economists think the new offshoring is an overall plus. For one thing, they say, employers' cost savings should more than compensate for any wage damage. And by slashing the price of software and other goods, offshoring could power a new wave of U.S. productivity gains similar to those triggered by falling computer-hardware prices in the '90s, says a study by Hufbauer's colleague, IIE senior fellow Catherine L. Mann.

    She and others argue that countries will continue to specialize in what they do best. Sure, India or China are taking high-skilled jobs in programming, but the U.S. will still outperform them in, perhaps, drug research or nanotechnology. Instead of thinking about comparative advantage in broad strokes such as high-skilled and low-skilled, they say, it makes more sense to make finer distinctions and look at areas in which countries have industry- or occupation-specific advantages. "There will be specialization within industries, [which will bring] a lot of demand from India for our higher skills," says Bhagwati.

    Other economists, however, such as Leamer and Rodrik, believe that in the new global economy, advantages from these kind of micro-level specialties will be fleeting. After all, if the U.S. is better at aerospace research, there's no reason why China couldn't quickly ramp up college grads in that area, too. It's already doing that in telecom and servers.

    Leamer and other trade experts say the resulting price competition from rising stars such as China and India could overpower any economywide gains companies get from global sourcing. They point to a famous 1968 paper by, of all people, Bhagwati, who argued that a country can be made worse off if trade lowers the price of products in which it has a comparative advantage. Bhagwati called it the "immiserating" effects of trade. In discussing the idea with BusinessWeek, Leamer wrote a short proof showing how a downward spiral of lower labor costs leads to lower export prices, causing immiseration. Even Bhagwati concedes that his insight could apply to the U.S. today, though he thinks the chances are slim that it will. "Bhagwati showed back then that a country can grow and get poorer, which might be this story, though I doubt it," says Hufbauer.

    Indeed, it's possible that the U.S. already has suffered immiseration. Mann's study found that the offshore exodus of U.S. chip factories accounted for 10% to 30% of the decline in the prices of personal computers and memory chips in the early 1990s. These savings boosted U.S. multinationals' net exports of these products, and by 2000 the companies saw a $10 billion trade surplus in them.

    But did the U.S. as a whole come out ahead? Mann's study also shows that the country's overall trade deficit in these products plunged into negative territory in 1992 and has remained there ever since. So while large U.S. companies gained from moving chip factories abroad, the overall U.S. economy may have lost. "This looks like immiseration to me," says Leamer.

    Globalization, say most trade economists, ultimately should benefit the U.S. more than it hurts. But they can't yet show that to be true. Until someone comes up with a convincing explanation for what happens when the highest-skilled jobs move offshore, battles over globalization are likely to rage even hotter.








    Commentary: How To Level The Playing Field
    Here are some steps that could help the U.S. shrink its trade deficit with China

    China, says former U.S. Trade Representative Charlene Barshefsky, "is a tiger on steroids." So how do you live with the tiger? That question will become increasingly urgent as the Chinese-U.S. economic relationship deepens. Something has to be done to rein in ever-rising deficits without retreating from America's free-trade principles. Both sides have to give something. Here are suggested steps:

    GET THE U.S. FINANCIAL HOUSE IN ORDER. Americans need to save much more so they aren't relying on foreign lending to fund the federal government and to satisfy their huge craving for imports. In the fiscal year just ended, the U.S. government ran up a $413 billion budget shortfall. The current account, the broadest measure of trade and investment and capital flows, is headed for a $620 billion deficit this year. That means foreigners are essentially lending America nearly $1.7 billion a day to support its lifestyle. Much of that shortfall is being covered by the governments of China, Japan, and other Asian countries in the form of purchases of U.S. Treasuries. Naturally it's increasingly difficult for Washington to bargain on tough trade issues when it is also going begging to its trading partners for one more loan.

    TRY FRESH TACTICS ON THE YUAN. The U.S. has asked Beijing to let its undervalued currency strengthen and so reduce China's advantage in exports. China insists its banking system is too fragile to let the yuan float freely, as the U.S. advises. Nor will the U.S. get the 30% revaluation that some say would have a major impact on Chinese exports. But Washington could press for a substantial adjustment. Morris Goldstein and Nicholas R. Lardy of the Institute for International Economics suggest the yuan could trade 15% higher with no damage to China's banking system. That would be a start. It would also help persuade Japan and other Asian nations that are big contributors to the U.S. deficit to let their currencies rise. If China refuses? Take the issue to the World Trade Organization. Its rules prohibit countries from manipulating their currencies to secure a trade advantage.

    ENFORCE TRADE LAW MORE AGGRESSIVELY. The U.S. relies far too much on anti-dumping suits filed by American companies to level the playing field. The process is costly for small companies in particular and takes years, by which time the damage is done because Chinese producers move so fast into markets. The U.S. Commerce Dept. can file suits on its own when it sees key industries under attack. Commerce used this tactic successfully with Japanese chipmakers in the 1980s. It could use it again, especially if China started to dump goods in key industries, such as auto parts, stainless steel, and specialty chemicals. The U.S. can also be more aggressive in seeking WTO action. China backed down, for example, from applying higher taxes on imported semiconductors after the U.S. threatened to take the issue to the WTO.

    BEEF UP DEFENSE OF INTELLECTUAL PROPERTY. Software is something the U.S. should be exporting in huge volumes to China, one of the world's biggest growth markets for computers. Yet the U.S. business software alliance estimates that 92% of all software in Chinese computers is either unlicensed or pirated. That represents a loss to U.S. exporters of some $3.8 billion a year. Stolen software also helps subsidize Chinese engineering companies, machine toolmakers, and other industries that don't have to pay the licensing fees their U.S. competitors do. and it's not just software. Counterfeit pharmaceuticals and even fertilizers are joining the roster of pirated music CDs, books, movies, and video games. Beijing has brought some high-profile criminal cases. But in general it emphasizes small civil penalties that pirates shrug off. The U.S. until now has mainly jawboned China to do better. But Washington could bring the issue to the WTO and could seek sanctions for future violations.

    REOPEN THE WTO DEAL. When the agreement to let China into the WTO was negotiated, China was allowed to continue to protect certain strategic industries under the rationale that it was a developing nation. Even though China is lowering tariffs, duties remain high by global standards in some industries. Foreign companies are still compelled to manufacture locally and form joint ventures in cars, telecom, and construction and engineering services -- areas where America could be exporting.

    Beijing has been able to restrict the right of foreign companies to distribute within China on their own and is resisting opening up government contracts to foreign bidding. But China is growing up quickly and no longer needs these protections to stand on its feet. The U.S. has leverage as well. China is eager to have its "nonmarket economy" status upgraded. For complex reasons, that would make it easier for China to defend itself against anti-dumping cases. The U.S. could back that upgrade in status in return for a renegotiated WTO deal.











  • Posted on Fri, Nov. 26, 2004



    The dollar's woes worsen

    BANKERS GLOOMY; GOLD AT 16-YEAR HIGH

    Mercury News Wire Services

    The outlook for the embattled U.S. dollar worsened Thursday as the currency slid further against the euro and yen and bankers predicted it won't recover anytime soon.


    Gold, meanwhile, rose above $450 an ounce for the first time in more than 16 years, driven by investors looking for an alternative to the American currency.


    The dollar fell to a record low $1.3242 euros from $1.3186 late Wednesday and was quoted at 102.56 Japanese yen, down from 102.81. At one point it fell to 102.40, the weakest in more than four years. The current downturn has taken the euro from $1.20 about two months ago. It rose above $1.31 for the first time Tuesday.


    On Thursday, bankers at UBS AG, JPMorgan Chase, Merrill Lynch and Deutsche Bank predicted the huge deficit in the U.S. current account, the broadest measure of trade, will undermine the dollar. Also hurting the currency, bankers said, are expectations that policy makers will fail to halt the decline.


    A weekend meeting of the finance officials from the Group of 20 industrial and developing countries delivered no signal of concerted action to stem the tide.


    ``We are increasingly dependent upon an inflow of foreign capital,'' said Paul Volcker, a former chairman of the Federal Reserve, in an interview with PBS television late Wednesday. ``The problem is how long can this go on,'' he said. ``When something happens it tends to go further than you imagined, and that's the history of financial crises.''


    ``The dollar has to fall to a level where policy makers start to say enough is enough, but we don't believe that is going to happen for some time,'' said Paul Meggyesi, a currency strategist at JPMorgan in London. JPMorgan cut its estimates to 96 yen and $1.37 per euro from 100 and $1.30.


    Others are predicting the euro could hit $1.40 by the middle of next year. European Central Bank President Jean-Claude Trichet recently called the rapid increase ``brutal.''


    Still, the ECB has yet to intervene in currency markets in an effort to halt the dollar's fall. Lee Ferridge, chief currency strategist at Rabobank in London, said with the United States unlikely to join in such a move, he didn't expect the ECB to do so.


    ``I don't think the ECB would go it alone,'' he said.


    The dollar's decline against the yen may be stemmed by concern Japan will resume sales of its currency after an eight-month hiatus, said Kikuko Takeda, a manager of foreign exchange at Bank of Tokyo Mitsubishi in Tokyo.


    But for now, ``The dollar-bearish sentiment, not only against the euro but also other currencies, remains firmly in place,'' said Minoru Shioiri, senior manager of foreign exchange at Mitsubishi Securities in Tokyo.


    Kamal Naqvi, a precious metals analyst with Barclays Capital, said investors might push gold prices toward $455 or $460. Other analysts suggested it could go a lot higher if the dollar weakens further.


    ``Gold bulls should be dancing in the street,'' Barclays Capital said in an investment note. Gold, which is priced in dollars, has risen about 13 percent in the past two months.


     


     


     



    November 24, 2004

    EDITORIAL


    Inflation and Interest Rates







    If the Federal Reserve Board were free to manipulate interest rates solely in response to business conditions, it would make sense to stand pat in December, and avoid a rate hike despite recent signs of inflation. Unfortunately, Alan Greenspan, the chairman, doesn't have that kind of flexibility these days. Raising interest rates looks like the more prudent route - even though stagnating wages could really use a little help right now.


    A probable December rate increase is noteworthy in and of itself, but even more so for how it highlights the growing divergence in monetary and fiscal policy. By continuing to raise rates, Mr. Greenspan would be easing off the economic accelerator of rock-bottom rates. President Bush, meanwhile, plans to go full speed ahead with more tax cuts. For the Fed and the administration to be at cross-purposes does not bode well for the economy.


    The unexpectedly large 0.6 percent inflation spike in October was driven mainly by increases in the costs of oil and food - which have since abated. The spike was not in any way related to wage gains. In fact, wage gains have not outpaced inflation in eight of the last 12 months. Economists generally regard the price of labor as far more important than the cost of commodities when it comes to inflation. So all things being equal, Mr. Greenspan might choose to hold rates steady to spur hiring.


    Alas, all other things are not equal. As much as the job market might benefit from a pause in rate hikes, Mr. Greenspan is unlikely to take a break. For one, rates are already very low - a holdover from the Fed's effort to stimulate economic growth in the last few years. Mr. Greenspan needs more room to maneuver in the event of a body blow to the economy - an oil shock, say, or terrorist attack. The chairman has to get rates up, in case he needs to bring them down.


    That is particularly true since the Fed cannot count on other stimuli being available. Mr. Bush's fiscal policies - tax cuts, chief among them - have already busted the federal budget, and the outlook is for more deficit-financed giveaways. Nor can Mr. Greenspan fall back on a strong dollar. The weakening dollar, a result of global imbalances that are also traceable, in part, to the budget deficit, increases the pressure for higher rates because it is, in itself, an inflationary force that is gathering steam. Speaking at an international banking conference in Germany last week, Mr. Greenspan said that foreign investors who are financing America's huge deficits would eventually resist lending more to the United States. That, in turn, would cause the dollar to fall even further than its recent historic lows, risking an upsurge in American prices and interest rates.


    Given the policy bind, the Fed would be justified if it raised rates next month. That doesn't make a rate hike an unambiguously good policy. The Fed is being reduced to making the best of a bad situation.


     


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