Machiavellian Economics

I was on a tourist bus in Tokyo when I heard the tour guide announce to us gullible American tourists: "We are passing some orange groves that supply Tokyo and the surrounding areas. Notice how carefully trimmed the trees are. The trees are small, but they are packed with fruit. It looks like the orange industry is doing very well. But the truth is orange growing in the country is living dangerously. It is under attack from American oranges. The government of Japan must step in and protect the oranges, otherwise the orange farmers in Japan will be wiped out."

It was 1982. I could not believe my ears. Japan had just successfully killed television and radio production as well as the textile industry in the U.S., was in the process of killing the larger electronics industry, was flooding America with Toyotas, Hondas and Nissans, and was running huge trade surpluses against the U.S. Yet, the Japanese were talking about the need to protect their orange growers.

In Machiavelli's the Prince, the genius of deception advises his prince, "The prince must, as already stated, avoid those things which will make him hated or despised, and whenever he succeeds in this, he will have done his part, and will find no danger in other vices. He will chiefly become hated, as I said, by being rapacious, and usurping the property and women of his subjects, which he must abstain from doing and whenever one does not attack the property or honour of the generality of men, they will be contented; and one will only have to combat the ambition of a few, who can be easily held in check in many ways."

Machiavelli knew that the prince must behave properly at all times. No minor kicks, no vices, especially not in front of his subjects. The prize, the North Star, is much bigger. If the prince behaves well in public, he can get almost anything from his subjects.

Machiavelli's book was of course written for the benefit of rulers and not businessmen, yet if we just substitute "Japanese businessmen" for prince and "consumers" for subjects, we can easily see that the above passage is applicable to Japan's hoodwinking of the American consumers.

Japan orchestrated the systematic destruction of the most important manufacturing sectors in the U.S. without seeming to have done so. The Japanese executives and trainees who were sent to the U.S. to manage Japanese interests here looked and lived like handicapped aliens. They all spoke broken English. They all needed help from their fellow American workers. They all humbly sat in their corners and never bothered anyone. They were neophytes who appeared lost in their new surroundings. Their incomes were only marginally more than those of the average American workers.

Americans were not tempted to envy or despise those Japanese because they appeared to be struggling economically, along with the Americans they employed.

They were generous, and they showed their employees a good time whenever the occasion called for it.

What Americans did not know was that the Japanese they worked with were paid two salaries: their salaries in America that allowed them to live modestly but comfortably and the salaries paid by their home offices, which depending on their positions in the home office hierarchy, could be substantial or puny.

The commercial relationship between Japan and the U.S. in the 1970s and 1980s can be characterized as that of the elephant and the mouse. The wily Japanese were supposedly the mouse and the American economy was allegedly the elephant. But, with one important twist: the mouse was spreading a virus that the elephant would not recover from for decades.

It was a virus that weakened America's economic muscle and turned the American economy into a consumer and service economy. We became subjects of the Japanese manufacturing Prince but were made to feel that we were the rulers. It was a virus that turned American macho men to wimps.

While we gladly opened our markets to Japanese products, the Japanese virtually closed their markets to ours. They dumped their excess production in the U.S. and brilliantly explained why their products were cheaper in the U.S. than in Japan. They explained to us that the Japanese market had - and still does - many distribution layers that had been erected over the centuries. There were relationships that had survived the generations, including the Hiroshima and Nagasaki nightmares. There were middlemen in every corner of Japan that added to the cost of Japanese products as they negotiated the complex marketing infrastructure. This marketing infrastructure, the Japanese told us, was responsible for making not only Japanese made products very expensive in Japan but also American products and rendered U.S. made products non-competitive in the Japanese market.

We looked with awe at the cost of living in Japan - one of the highest in the world. What we did not know was that this was by design. The Japanese were willing to pay exorbitant prices for their own products to assure that Japanese products could be marketed cheaply - even at a loss - in other countries. That was how the Japanese would destroy manufacturing in the Americas, in Asia and in Europe.

America's exports had no luck in Asian, European and South American markets either. U.S. manufactures competed with "dumped" Japanese exports and could not compete on price and eventually quality. The Japanese victory in its trade war with America was complete.

If the Japanese had not built factories in the U.S., the trade imbalance with Japan would be much, much larger than it is today. Japan currently is the second biggest creditor of the U.S., holding close to $900 billion in U.S. debt. America's number one creditor? You guessed it - China, with more than $1 trillion of U.S. debt.

Before we go to China, we must make mention of the South Koreans and other minor players. They too have been practicing Machiavellian Economics at our expense. South Korea has virtually closed its markets to American consumer products just as they attempt to replace Japan as the biggest source of cars, televisions and electronic products that are marketed in the U.S. President Obama wants a trade agreement signed with South Korea so bad that he was willing to go before the South Koreans, hat in hand, to convince them to sign on the dotted line. South Korea, which is benefiting greatly from the status quo, does not appear eager to sign a trade agreement which will grant American businessmen the right under the law to market goods in South Korea under most favored nation terms.

This brings us to the Chinese. When the current Chinese industrial revolution started, the Chinese burst on the scene as coolies who were merely trying to earn a buck - literally. Chinese workers were willing to work for $1 a day and were almost robotic in their efficiency. They were the hardest workers in the world. The Chinese have built, over the centuries, a veneration for artisanship. They can build the best and cheapest Nike shoes, day-in and day-out, for years and for decades. They don't complain of boredom. They have Confucian pride in their craftsmanship. They could build the best Nikes in the world, earn $1 a day, and never complain.

They became the darlings of American business. Even as Chinese wage rates increased exponentially over the years, Chinese labor still cost much less than American labor, both unionized and non-unionized. The Republicans are quick to blame unionized American labor for the disparity between Chinese and American wages, yet China's wages also beat non-unionized American wages by a mile.

The Chinese are quick learners, and they learned quickly from the Japanese. They adopted Machiavellian Economics from the Nipongos, but improved on the method. Instead of shipping Chinese brands from China, or manufacturing Chinese brands in the U.S. using parts manufactured in China, the Chinese merely negotiated with the American multinationals to either locate those multinationals' plants in China or to employ Chinese sub-contractors. The Chinese also manipulate their currency by virtually pegging the yuan to the dollar and adopting monetary policies that would keep the exchange rate virtually constant. This way, American products will not suddenly become cheap in China. The Chinese have our goose cooked.

Americans go to Wal-Mart, Target and other chain stores all over the 50 states and buy American brands, not knowing if those products are actually made in the U.S. or made elsewhere. The answer, of course, is simple. They are not made in the U.S. They are, most of them, made in China. Some, like tires, are made in Malaysia.

For the nearly two decades the deception went along with silky smoothness. Then one day Americans noticed. Where are the American manufacturing jobs? If we are buying record quantities of cell phones and computers, nearly all of them American brands, why can't we find neighbors who are employed in those factories?

Machiavelli will always outsmart his subjects and will never be found out. Machiavellian Economics, however, works only to a point. The subjects - American consumers - eventually find out that they have been duped.

Can we, American consumers, go to an all-out declared war with the princes? No, it's a war that we cannot win. What we need to do is to turn the tables on all of these international princes. We must create advantages where none exist. We must exploit our weakness and turn it to an advantage. We must engage in deceptive trade practices without the princes knowing what's up in our sleeve.

How do we exploit our weaknesses and turn them into strengths? We must become the new Japan. We must create our own version of Japan's Ministry of Industry and Trade that will create strategies in international trade. The goal must be to become an export economy, not a consuming economy. The American Ministry of Industry and Trade will craft world distribution strategies, but will also help in the manufacturing end. Questions such as what is the right mix of robotics technology and American unionized and non-unionized labor will create the optimum advantage in final product cost must be answered - convincingly. How can the U.S. protect its manufacturing industries without appearing to be protecting them?

The American Ministry of Industry and Trade shall oversee the creation of giant American trading firms, patterned after Mitsubishi, Mitsui and others. These trading firms will have one overarching goal: the promotion of American manufactured products overseas.

A new marketing infrastructure will have to be created, assuring that products manufactured abroad will have a much harder time reaching the American consumers. We can justify this new infrastructure by announcing to the world that Americans need jobs and the only jobs American businesses can give them are the layers of distribution that must handle imports as those imports go through the pipeline.

We can do a lot of crafty and wily things, which I am not going to write about because such strategies must be kept a secret. We will of course be found out eventually, but by the time we are found out, it will be too late for the Chinese, the Japanese, the South Koreans and others who have been practicing Machiavellian Economics at our expense over the years.

We will be the new international princes, directing our invisible guided missiles at our unsuspecting targets - the Chinese, Japanese, South Koreans and Germans. We need to start this yesterday.