IBM sought a China partnership, not just a sale

In July 2003, Sam Palmisano, the chief executive of IBM, traveled to Beijing to explore the sale of the company's personal computer business. But he did not start by making the usual visit with executives of IBM's preferred partner, Lenovo, China's largest personal computer maker.

Instead, Palmisano first engaged in a bit of old-fashioned courtship. Before formally approaching Lenovo, he sought permission from the parents, by meeting privately with a senior Chinese government official in charge of economic and technology policy.

IBM was not merely looking to sell its PC business, Palmisano told the official, but had bigger aspirations of creating a global enterprise, with IBM contributing technology, management, marketing and distribution.

The idea, Palmisano explained, would be to build a modern and truly international Chinese-owned corporation. The move, he added, would demonstrate China's desire to take that next step toward economic maturity by investing abroad instead of merely serving as a manufacturing hub for the rest of the world.

The senior Chinese government official, Palmisano recalled, responded, "That is the future model for where we see China headed."

Inside IBM, the issue of whether to stay in the personal computer business has been debated for a decade. But the road to the Lenovo deal, according to IBM executives, began in 2000, shortly after Palmisano became the company's president and chief operating officer. He ordered an extensive review of the PC business and decided to stop selling IBM PC's through retail stores.

At about that time, IBM approached Lenovo for the first time, according to a person close to Lenovo, seeking to sell its PC business for $3 billion to $4 billion. At the time, IBM had let its investment bankers know that if an attractive offer came up for the PC business, it would certainly consider a sale. But IBM executives say that any discussion in 2000 was probably a prospecting overture by an outside adviser representing the company.

In May 2002, Palmisano directed John Joyce, then IBM's chief financial officer, to meet with Lenovo's senior management to sound out the company's interest in establishing a business relationship. Lenovo, according to IBM executives, was intrigued and had long been exploring ways to increase its international presence.

More than a year later, at the meeting in Beijing, the government official told Palmisano that a few years earlier the Chinese authorities would have been involved in such talks. But times had changed, the official said, and Lenovo and IBM could negotiate by themselves.

By October 2003, IBM resumed discussions with Lenovo. In March, Palmisano went to Beijing to meet with Lenovo's founder, Liu Chuanzhi, as well as its president, Yang Yuanqing, and the chief financial officer, Mary Ma. That was when Palmisano fully described what he had in mind. "I put it all on the table," he said.

Lenovo was definitely interested, though any such deal would be complicated. Many of the essential elements of the deal were hammered out over eight days in June, in a hotel near Raleigh, N.C., where IBM's PC business is based. The principal negotiators

included Joyce, who now heads IBM's services business, Stephen Ward Jr., an IBM executive who will become chief executive of the Lenovo PC business, and Yang.

There were other interested bidders, including one from an American buyout firm whose offer remained on the table until the end. And the Lenovo deal could have fallen apart. But apparently the Chinese option was the only one seriously pursued by IBM.

"There were simpler transactions we could have done," Palmisano said, adding, "What we wanted was not a divestiture, but this strategic relationship with Lenovo and China."

The sale of IBM's personal computer business to Lenovo for $1.75 billion, announced last Tuesday, is "a three-dimensional deal," Palmisano said. The sale provides IBM with a path to leave a business that is large but not profitable. It is also the latest step in IBM's shift toward services, software and specialized hardware technology from mainframes to microprocessors for computer game consoles, all of which promise higher profits than the fiercely competitive PC business.

Yet the most intriguing, and potentially most important, dimension of the deal for the company is that it is IBM's China card. The new Lenovo, folding in the IBM personal computer business, will be China's fifth-largest company, with $12.5 billion in sales in 2003, and the Chinese government will remain a big shareholder. IBM is eager to help China with its industrial policy of moving up the economic ladder, by building the high-technology engine rooms to power modern corporations and government institutions with IBM services and software.

The deal is not expected to face any regulatory hurdles. Although there is a requirement, dating back to the era of the cold war, for review of possible national security implications, officials in Washington told IBM executives in advance of the announcement that clearing it would not be a problem.

The pact could give IBM "an extremely important leg up in China," Laura Conigliaro, an analyst with Goldman, Sachs, whose investment banking arm advised Lenovo, wrote in a report last week. "Ultimately, this is the single most valuable benefit to IBM from this transaction."

The payoff for IBM, if any, will come gradually. The Lenovo deal, in which IBM will take an 18.9 percent stake in the Chinese company, is a sign of IBM's commitment to China. IBM is placing 10,000 of its employees, its brand for five years and some its prestige in Lenovo's hands. There is a lot more at stake than the $1.25 billion in cash and stock Lenovo is paying, and $500 million in debt obligations it will assume.

In China, IBM is using a variation of the globalization formula that has worked well for it in Japan, Europe and elsewhere. IBM patiently nurtures close ties with the government and becomes a premier employer and a stellar corporate citizen--so much so that it is eventually regarded more like a local company than an outsider.

"We don't have any special deal with the Chinese government or any other government really," Palmisano explained last week over lunch at IBM headquarters. "It's a much more subtle, more sophisticated approach. It is that if you become ingrained in their agenda and become truly local and help them advance, then your opportunities are enlarged.

IBM is no newcomer to China. It set up a business there 20 years ago, and there are now 4,200 IBM employees in China. In 1995, the company opened a research laboratory, which now employs 150 Chinese scientists. Five years ago, IBM established a Chinese software development lab, which today has 500 engineers working on Linux projects alone. (IBM is the leading corporate supporter of Linux, a free operating system that is an alternative to Microsoft Windows.)

With the Lenovo deal, IBM is forging even closer links with China. While there were other offers for its PC business, Palmisano pushed hard for this deal--more a bridge to another economy than a simple sell-off.

Palmisano, 53, who became chief executive in 2002, is the leader of a generation of executives groomed to run a corporation that is based in the United States but gets the majority of its revenue abroad, as IBM does today. Traveling extensively is part of the regimen, as are stints of living abroad.

Palmisano managed IBM's large business in Japan in the early 1990s. He traveled extensively in Asia, including China, and continues to do so as chief executive. He makes three or four trips a year to China on business, and last summer he spent two weeks traveling across the country with his four children. "It was so they could get a feel for the Chinese culture and what's going on there," he said. "China is going to be such a huge influence in the world in their lives."

IBM's departure from the personal computer industry, Palmisano insisted, does not mean that the PC business is a bad one. But it does signal that it is no longer crucial to IBM's strategy of emphasizing services, software and server computers for corporate customers.

In an e-mail message to employees last week, Palmisano explained how the company's strategy and the PC business had parted ways. Today, there are two ways to create long-term value for information technology customers and shareholders, he wrote: "Invest heavily in R&D and be the high-value innovation provider for enterprises, or differentiate by leveraging vast economies of scale, high volumes and price."

IBM is choosing the first path, and has decided that the PC business is inevitably on the second path.

Two Words: Tinannemen Square.

Two articles may help you see out from under that fedora, and see this thing more clearly Nick:

Growing U.S-China Trade Not Furthering Chinese Democracy

A new article in the August 23, 2004 issue of the weekly web magazine News Informant, poses the question “Does Trade With China Hinder U.S. Engagement With Its Government?” As U.S. trade with China grows, so has the interdependence of the two economies. However, in light of certain recent anti-democratic actions taken by the Chinese government, the question arises as to how much, and how effectively, the U.S. will prevail upon China to open up its political system, the way it did its economy. The Chinese government continues to impose harsh measures against personal, religious and political freedom of its citizens. Last week was probably the worst in more than a decade for the growth of democracy in China.

Chicago, IL (PRWEB) August 26, 2004 -- Last week, former leader Li Peng defended, in hindsight, the 1989 Tiannemen Square massacre. Chinese leaders announced its hard line against the return to Tibet of the Dalai Lama. The government arrested a pro-democracy candidate for election in Hong Kong. And Chinese police arrested a Buddha, seizing the temple.

Perhaps the most indicative statement about the current Chinese government’s feelings towards democracy was the publication earlier this month of a statement by former leader Li Peng of an article concerning the Tiannemen Square massacre of 1989. Hundreds of peaceful demonstrators were killed on June 3-4 of that year when army units fired on the student-led pro-democracy demonstrations. Li — who had declared martial law several days before — was widely blamed for the attack, and dubbed the “Butcher of Beijing.” In his article, Li defended the massacre, stating that “putting down that political disturbance ensured the long-term stability of the country and provided indispensable conditions for China’s future development and improvement,”

The democracy movement in Hong Kong received another blow with the arrest of Alex Ho, a candidate of the pro-democracy Democratic Party not endorsed by Beijing. Ho was arrested on August 19 and accused of procuring a prostitute. He was told that he would not be released until he signed a confession, and that if he did do so, he would be charged instead with rape. After Ho finally relented, he was not released as promised, but sentenced to six months in prison. Chinese authorities have the power to detain people without trial for as long as two years for many minor crimes. Ho may be released before then, but would still be ineligible now for election. Hong Kong has been struggling to maintain a democratic government ever since it reverted to Chinese sovereignty in 1999. The Hong Kong constitution developed by the Chinese government actually specifies an elected government, allowing changes to the constitution, beginning in 2007. There have been several other anti-democratic incidents in recent months with respect to Hong Kong.

Although, officially, the Chinese constitution protects religious freedom, the Communist government has historically banned all worship outside of government-sponsored “patriotic” religious organizations. From a human rights standpoint, the greatest threat came with the arrests of the 8 priests and the seizure of the new Buddhist temple. According to the BFA and a spokesperson for the U.S. embassy in Beijing, about 70 Chinese and seven American citizens were arrested in the raid. “The fire department kicked down the door and dragged them out,” a BFA member told Reuters, and two truckloads of “priceless religious artifacts and personal belongings” were seized as well. Police cancelled the ceremony and then boarded up the temple, citing safety concerns, according to the embassy spokesperson. In an unrelated incident about a month before, the Chinese government arrested eight Roman Catholic priests.

The Chinese government also clarified its demands of the Dalai Lama last week, saying that he must, among other things, renounce independence for both Tibet and Taiwan. The Chinese government has also stated that it will not negotiate the Dalai Lama’s return directly with him, but only through a representative. Chinese leaders in Tibet, a deeply Buddhist region, are not only concerned about the political affect of the return of the Dalai Lama, but have even banned photographs of the Dalai Lama. Anti-Chinese riots in Tibet led the Chinese government to impose martial law in 1989.

According to News Informant Editor Bernie Perlstein, “In the past week or so, the Chinese government has provided ample evidence of its disregard for human rights and democratic principles.” Partly, these actions may be the result of fear of public displeasure, he said. Rural poverty, great disparities of wealth, overcrowded cities and government corruption, as well as air pollution are major problems that cause outrage in the populace. Add the expected new round of inflation, and the government may believe that any yielding towards political freedom would make the country a tinderbox. But, he added, “The same governmental bureaucratic forces that resist change will also hinder solving China’s political and economic problems.”

Given the Chinese government’s disregard of human rights at a time when their trading with the U.S. continues to grow, will the U.S. government impose sanctions to spread democracy to Chinese citizens? Perlstein commented, “No one can be certain that efforts on the part of the U.S. government to defend Chinese human rights will be successful. All that can be said is that there will be no success if the U.S. does not try.”

Paul's COMMENT:

E.g., it will take forceful, persistent, and consistent across-the-board U.S. foreign policy--and trade--pressure/coercion to change things. Ala Reagan and his take-down of the Soviet Union. This was a near-thing, contrary to most understanding. Took both carrot and stick. And once the writing was on the wall, and they realized they were inalterably losing, they got desperate. The Moscow master-minds in their coup nearly unleashed WWW-III before they lost the ability to do so. We just got lucky.

Meanwhile, even from the Leftist/Libertarian side of our own counter-culture comes a surprisingly clear-headed understanding of what is happening to the Internet in China, for example, contrary to all the silly, confident assertions made in the 90's here among a few Freepers:

Sell Out: Blocking an Open Net --JonKatz, Slashdot.com on Tue Nov 27, '01 10:46 AM

Globalism ought to be a counterforce, democratizing the world and spreading technological and economic equality. Too often, it isn't. Take, for example, the corporatist American and European companies happily selling blocking software to countries like China and Saudi Arabia so their governments can pervert the Net to deny their citizens basic freedoms. This is a significant blow to the notion that technology will forge a more open world. And it might not be all that distant a threat. We have plenty of zealots [Bill O'Reilly] and fanatics [John Kerry & Ted Kennedy] right here, all itching for a model way of blocking a free Net.

Governments in Muslim nations, as well as China, have repeatedly made overtures to and done business with Net-filtering companies. But no nation has used blocking software as vigorously as Saudi Arabia, according to the New York Times. By royal decree, virtually all public Internet traffic to and from the kingdom has been funneled through a single control center outside Riyadh since the Net was first introduced there three years ago. If the Riyadh center blocks a site, a warning appears in both English and Arabic: "Access to the requested URL is not allowed!" Saudi Arabia blocks sex and pornography sites, as well as those relating to religion and human rights.

Now nearly a dozen software companies, most American, are competing for a hefty new contract to help block access to even more sites the Saudi government deems inappropriate for its country's half-million Net users. In fact, the Saudi government is helping to pioneer something once thought impossible -- a sanitized Net for an entire nation and culture.

American software companies are only too happy to help them do it. Software executives say they are only providing politically neutral tools. "Once we sell them the product, we can't enforce how they use it," Matthew Holt, a sales executive for San Jose's Secure Computing, told the Times earlier this week. Secure provides filtering software to the Saudi government under a contract that expires in 2003. The Saudi government is also reportedly talking with Websense, SurfControl and N2H2 of Seattle.

The Saudi government has already spent a fortune to design its centralized control system before permitting Net use a few years ago, selecting Secure Computing's Smart Filter software from four competing U.S. products. SmartFilter came with ready-made blocking categories like pornography and gambling and was also customized to exclude sites the Saudis perceived as bad for Islam, the royal family, or the country's political positions.

This is a radical assault on the spirit of the Net, of its open, point-to-point design, its great promise to democratize information. By allies, no less. And don't for a minute think there aren't plenty of fanatics and zealots in the United States who won't love the idea as well. Remember that the Harry Potter series is now the most banned book series in American libraries.

The Saudi government, along with other non-democratic countries, are notoriously technophobic. They are eager to participate in the emerging global economy, but desperate to stanch the free flow of information that might provide diverse information to their citizens. And they have no problem finding software companies, including American ones, that are happy to help extend censorship. The corporatist rule is simple -- maximize profits at all costs under virtually all circumstances.

Countries like Iraq, Saudi Arabia and China have been surprisingly successful at wiring up certain segments of their societies while controlling information deemed insensitive for political or religious reasons. The Net can, in fact, be used to make money and suppress freedom. These governments have undercut the great promise of globalism, prosperity, technology and democracy, allowing corrupt and anti-democratic governments to prosper, in part by censoring information -- something many of us thought the Net would make impossible.

This highlights the menacing way corporatism exploits technology, undermining the most basic American values.

"We have a really serious problem in terms of the American free speech idea," says Jack Balkin, a Yale Law School professor who specializes in the politics of Internet filtering. "But it is very American to make money. Between anti-censorship and the desire to make money, the desire to make money will win out." This is a profound blow to the whole idea of using technology -- especially the Net -- to force a more open society.

That's a bitter indictment of a nation that purports to be advancing democracy throughout the world, that's supposedly fighting a war to protect freedom. The reason money will always win out is corporatism, which subverts almost every other value in the name of profit, and which has made globalism a dirty word.

Both your economic analogies are dead-bang on. We never brought down the Soviets by what we are doing now.

Rather, we are aiding and abetting our own demise as the Chinese by giving them all of our technology and capital are AND WE ARE HELPING THEM DO IT.

As for Nick Danger, he is unaware of the ultra-nationalist anti-american hostility of the average chinese. They are literally propagandized into a state of unquestioning radical enmity against the U.S. and its people. My relatives who taught in Shanghai could not wait for their contract to be finished so they could get back to the U.S. They felt "used" and "dirtied" by the whole thing...and they could sense the deep-seated hatred for America that the government has inculcated...in virtually every student they had. And right now all the government-controlled/subsidized trade is doing is enabling and reinforcing the communist regime and its princelings. And with the vectors of their ascendancy, and our decline, I believe that we will likely collapse far sooner than 2020. Most likely 2010. We already can't do industrially what we did in the 80's to defeat communism. We couldn't launch another moonshot. We are being drained of technological life...and capital. We will have reached a critical threshold industrially, and start imploding. The communists will then take full advantage, and be in such a positon of success and economic/military strength, that no rebels will be able to oppose their regime from within.

They are still trying to make happen the idea that we will simply weaken over time in competition--our "wasteful" free vs. their unfree, and relinquish our ability to defend ourselves, and be buried, as Nikita Kruschev predicted.

Check out how analogously-reasoned is this Left-wing Canadian Economist, Marshall Auerback, who is working for David Wise & Associates Economic Consultants (Texas-based) I only disagree with him over the role of China's growth sustaining ours, and the vital need and impact of protectionism. I think he is 180-degrees off. As a practical illustration, The U.S. Steel Tariff worked for example, lowering U.S. Steel prices, and preserving our industry for a time.:

Auerback Report: Why Lenin was Wrong
Marshall Auerback
September 16, 2003

Problem: The Kindness of Strangers is Killing America

The Fed's flow of funds data that was released last week more than ever highlights America's acute dependence on the kindness of strangers, particularly those of the Asian variety. Globalisation has been turned on its head. Instead of the centre lending capital to the developing periphery, capital is flowing back to the centre—that is, the United States.

Discussion

Even poor nations are lending the United States huge quantities of surplus capital, mainly to keep America afloat as the world's buyer of last resort.

China is the new "bad boy" of the global economy, having displaced Japan as the aggressive emblem of a trading system ferociously out of balance. Congress has begun making increasingly loud protectionist threats as a consequence. Even leading US cheerleaders for freewheeling globalisation (including Federal Reserve Chairman Alan Greenspan) have begun scolding China for excessive ambitions, just as they once criticized Japan, to no avail. The National Association of Manufacturers issued a report warning that 2.3 million US manufacturing jobs have disappeared since 2000, largely due to international competition (not entirely from China). The United States risks losing "critical mass" in manufacturing, says the NAM. A Defense Department technology-advisory group confirmed that so much "intellectual capital and industrial capability" has been moved offshore, particularly in microelectronics, that the Pentagon is dangerously dependent on foreign producers to make its high-tech weaponry.

If the United States falters and can no longer acts as the engine of global growth, the entire system is in deep trouble. Of course, the corollary also applies: With the current account deficit is at 5% of GDP for the first time in history, America's dependency on Asia's central banking fraternity is gargantuan. China, Japan, South Korea and Hong Kong now own a combined total of about $696 billion in Treasuries at the end of June about 46 per cent of the outstanding stock of bonds. China alone now holds $290 billion in US government debt, more than any other foreign lender, according to Chen Zhao of the Bank Credit Analyst Research Group. "The flow of Chinese savings has enabled Americans to borrow and spend more," he explained in the Financial Times. "China is glad to see Americans going on another shopping spree. Its factories are cranking up production at an unprecedented pace.... China's exports to the U.S. jumped 35 percent in the first quarter" compared with the first quarter of 2002.

If the US were a developing country, there would already be widespread speculation as to how long before the IMF was rolled in to help. Compare the situation to that of Argentina: Argentina's problem was too much debt for too small an economic engine. When foreigners stopped investing in Argentina, the music stopped and there were no chairs. The fervent hope of US policy makers is that the US economy will surge, its debt repayment capacity will grow, as the country grows its way out of a looming debt trap dynamic. But the arithmetic is hardly compelling support for such a benign outcome.

It is true that the potentially dire effects on the level of activity since 2001 has been mitigated by a transformation in the stance of fiscal policy, accompanied by a radical change in attitudes to budget deficits, which have suddenly became respectable (even under an ostensibly "conservative, small government" Republican administration). The expansionary fiscal policy initiated by President Bush was reinforced by a further aggressive relaxation of monetary policy so that (real) short term interest rates have fallen almost to zero, thereby giving the consumer boom a last gasp. Yet, with all this help, the recovery from the recession of 2001 has not been particularly robust. Growth has generally been below that of productive potential, jobs have been disappearing, and there is a widespread sense that all is not well.

Today, the US private sector financial balance is almost back to neutral after a long stretch since 1997 in deficit spending territory. Because low interest rates encourage households to keep borrowing and spending, the private sector has yet to return to its traditional net saving position of 1-2% of nominal GDP. Virtually all of the improvement has been on the back of the largest fiscal stimulus in history, as opposed to genuine balance sheet repair.

The deepening trade deficit has confounded the ability of fiscal deficit spending to push the private sector back into a net saving position. That means fiscal policy has had to go alarmingly deep into deficit spending to prevent a private income growth collapse. This is inherently unstable: the rate at which foreign debt has been accumulating is such as to generate a further, accelerating, flow of interest payments out of the country, which might necessitate even larger budget deficits in subsequent years.

Such is the current state of affairs that we now have the reappearance of the "twin deficits" so feared by bond investors in the first half of the Reagan Administration. Investors used to worry greatly about this condition and the dollar's trend was largely established each month by widely scrutinized trade reports which highlighted growing imbalances, even though the external condition of the US was nowhere near as dire as today. Then, America was still a net creditor, the current account at its worst never exceeded 3% of GDP, and the geopolitical circumstances of the era largely ensured the maintenance of the status quo, no matter how economically untenable longer term. The nations of emerging Asia built up their manufacturing apparatuses during the Cold War when they abutted major sites of "communism", which gave the United States an overriding interest in fostering their state-led capitalisms in order to prove that capitalism was superior to the communist systems next door. By the start of the 1980s, when the U.S. began to move from competing in manufactures to dominating through finance-and importing a rising fraction of manufactured goods-capitalist East Asia was well placed to ride the surge of U.S. import demand and even to provide out of its growing financial surpluses the savings needed to cover escalating U.S. current account deficits.

Things have changed somewhat today in the post cold war era. Asia is no longer a cold war ally, but a "strategic competitor", particularly China. Yet, in the economic sphere the US still relies on this old cold war construct: Asia exports its goods into a relatively open American consumer market, and then recycles its savings back into Treasuries. But as countless analysts are now warning, the risk of an external creditor revulsion may finally force foreign investors to demand a higher required return (that is, higher interest rates and lower stock prices) in order to both continue holding their massive US dollar denominated assets, and continue to purchase any new financing issued by US public or private entities. It is possible such demands could derail the US economic re-acceleration, and this must be considered the major downside risk at the moment.

The challenge ahead with regard to US financial balances is pretty clear: the US trade deficit must be reversed before the fiscal deficit peaks in 2004.

There is no indication the Administration recognizes this challenge, or is even exploring options to address it, beyond the current protectionist rumblings in Congress and the ineffectual if not counterproductive jawboning of Asia, especially China, on the issue of currency pegging. In fact, threats of increased protectionism to counter China's alleged "unfair" pegged rate monetary regime, might well prove counterproductive, given the extent to which the Chinese are now continuing to provide the fuel to motor further US economic growth, the very dynamic American policy makers hope will allow them to escape their debt conundrum.

Further complicating the picture is that too much growth abroad, ostensibly helping the trade deficit, creates other potential problems. Clearly, America's interest rate structure is closely tied to how well growth and investment demand proceeds overseas. This is why the pickup in the Japanese economy is probably the biggest story in global finance, yet it is getting only moderate attention. If that nation ever really did right its economic ship and sail off on a three or more year period of strong growth, the amount of upward pressure the US would experience on market-based interest rates could be astonishing, particularly in the absence of genuine balance sheet repair.

Conclusion

Thus, there is a troubling circularity to US economic policy making. Growth, which is an essential prerequisite to continued debt repayment, is largely fueled by further debt accumulation. And the countries that continue to perpetuate this paradoxical state of affairs, notably China, still face unremittingly hostile pressure from American policy makers to revalue the currency, thereby potentially precipitating the sort of dollar crisis that could well induce sharply lower growth in the US as foreign creditors demand correspondingly higher risk premiums to compensate for a fall in the external value of the greenback.

Given the precarious nature of America's predicament, one would have thought that a prime objective of diplomacy would be to cement good relations with its largest creditors, so as to minimize these economic vulnerabilities. Yet, just two years after the September 11 attacks, the opposite appears to be the case. Traditional alliances in Europe are marked by increased friction; for all of the talk of new "friendships" with Russia, the global economic system's prosperity ultimately rests on the US-EU alliance which, if it really breaks down, will take the global economy down with it. Cancun appears on a knife's edge.

As in Europe, the United States today is finding a new coolness in its relations with old friends in Asia. Whether in Tokyo, Beijing, Jakarta, or Bangkok, the analysis of US objectives and motives is sharply at odds with the standard American rationale. In their view, the US wants a strong and prosperous Asia, but only on American terms - economically sound, politically obeisant to Washington, and largely accepting of the American economic model.

This is also being reflected in the country's current negotiating stance in the impending global trade talks at Cancun. The rights of foreign capital and corporations are to be expanded; the rights of sovereign nations to decide their own development strategies steadily eliminated. A country must not require multinationals to form joint ventures with domestic enterprises. It must not limit foreign ownership of its natural resources. Capital controls are to be abolished. National health systems, water systems and other public services must be open to privatization by foreign companies. Underdeveloped countries must, meanwhile, enforce the patent- rights system from the advanced economies to protect drugs, music, software and other "intellectual property" assets owned by wealthy industrialists. Any poor nation that dares to resist the WTO rule will face severe "sanctions"—huge cash penalties—and possibly de facto expulsion from the trading club. On the other hand, any talk of eliminating agricultural subsidies is quickly shot down and left as a vague subject for future negotiations.

America's hard-line stance might be understandable were its military dominance matched by comparable economic might. But such a position is far less tenable when the US is the world's largest supplicant for global capital flows and fighting an increasingly expensive global war on terror. It is premised on lopsided power play which presupposes that an economically vibrant, strong America can easily press the weak to accede to their terms or else get nothing back at the bargaining table, and very possibly lose their access to foreign capital or development aid. But who is it that is most dependent on foreign capital at this stage?

Asia in particular appears to have learned its lessons well from 1997: policy makers in the region have concluded he who holds the credit, gets to choose when to pull the rug out from under the dependent debtor, and on terms fairly non-negotiable. At best, then, the imperial debtor can try to be cordoned of his consumers of global goods from such blackmailing creditors, thereby undermining their ability to accumulate further claims against him. But since it is in no small part US based corporations or subsidiaries operating out of export platforms in China and other Asian nation, this would be a hard one to pull off without the imperial debtor power slitting its own throat. Lenin's "sell them enough rope and capitalists will hang themselves" theory was incomplete. As China may have figured out, you have to sell them the rope on credit to really hang the little piggies high (or, at the very least, to keep the protectionist wolves at bay).

But the nexus between China and the US is fundamentally unhealthy and ultimately points to the fragility at the heart of the global economy right now.

China's "kindness" is in effect killing America. By allowing the US to buy more than it produces and borrowing to do so, it will eventually force an ugly reckoning. With its ever-swelling trade deficits, the moment of painful adjustment draws closer, but the debt cycle is unlikely to stop until creditor nations conclude that the US debt position is too dangerous and start withholding their capital. Alternately, if China's overheated economy gets mired in financial disorder or inflationary pressures, as appears to be the case today, it might need to bring its capital home—thus pulling the plug on American consumers and the "buyer of last resort" for the global system at large. It would certainly be nice to think that Washington's policy makers would act to deal with this looming threat, but it hardly seems credible with a Presidential election around the corner. Nor would an open acknowledgement of America's current economic failings be the sort of thing one would expect from a President who makes press conferences against the backdrop of aircraft carriers in order to project an aura of supreme American might. The dollar is beginning to roll over, and the US markets are having so much relative difficulty making headway recently in the face of an extraordinarily accommodative monetary and fiscal posture. All of this suggests an underlying awareness on the part of the markets' of the grave challenges facing America in the

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