TCS Daily


The Lego-fication of Heavy Industry

By Nick Schulz - April 23, 2007 12:00 AM

President Bush recently reiterated his opposition to mandatory caps on greenhouse gases. He argued that unless rapidly rising economies such as China and India also agree to caps, then any steps the US takes are in vain. "Unless there is an accord with China, China will produce greenhouse gases that will offset anything we do in a brief period of time," Bush has said.

The administration's critics claim the president is using China as a convenient excuse to maintain the status quo. Let's assume Bush's critics are right and that his argument is a rhetorical dodge. And let's assume that when Bush leaves office his successor embraces a significant regulatory assault on production of greenhouse gases (either through a cap-and-trade program or through stiff taxes on carbon). What is likely to happen?

A glimpse comes courtesy of James Kynge's extraordinary book, "China Shakes the World: A Titan's Rise and Troubled Future - and the Challenge for America." Kynge tells the astonishing story of the Thyssen Krupp steel mill. This Ruhr River valley mill once employed 10,000 people in Dortmund, Germany. For many years after World War II it was one of the country's largest steel producers.

But competitive pressures from overseas killed the town's steel industry, and those jobs disappeared. Those German jobs may be all gone, but the German mill itself is still alive and kicking and churning out steel. But instead of doing it on the banks of the Ruhr, it is on the banks of China's Yangtze River.

Just a few years ago, over one thousand Chinese descended upon the Ruhr valley.

"They bedded down in a makeshift dormitory in a disused building in the plant and worked twelve hours a day, seven days a week throughout the summer. Only later, after some of the German workers and managers complained, were the Chinese workers obliged to take a day off, out of respect for local laws."

In less than one year, they successfully disassembled the plant and shipped the 275,000 tons of materials and equipment to China. A manufacturing entrepreneur and a former peasant farmer named Shen Wenrong had purchased the plant and reassembled it 5,600 miles away.

This is what could be called the Lego-fication of heavy industry. It made economic sense for Shen to do this because he had access to all the relatively inexpensive labor needed to run a big steel production facility; he just needed western technology. And so he bought it in Germany, broke it down as if it were a gigantic Lego set, and reassembled it in China. And he pulled this off faster and cheaper than it would have taken him to build an entirely new plant.

Serious discussions are now underway in Washington and other capitals about making the emission of greenhouse gases, such as those typically generated by heavy manufacturing industries, very costly. Supporters of increasing the cost of emissions argue that this will trigger innovation that will yield low or zero-emission technologies. And they may be correct in the long run.

In the meantime, what is likely to happen? If the cost of emitting is high enough, energy-intensive industries will thrive in areas where the cost of emitting is low. Today, that includes countries such as China. And if it is already cost-effective to dismantle and relocate heavy industry plants before severe emissions constraints are in place, we might see more such instances of that when the costs go up. The net effect on emissions will be unchanged, their point of generation simply moving somewhere else.

This is why some proponents of mandated emissions reductions besides President Bush acknowledge the importance of getting China on board if the United States proceeds with emissions restrictions. But how likely is it that China will go along?

Anything is possible. But after reading Kynge's deft and even-handed treatment of modern China, I am not optimistic that it is likely any time soon, for two reasons.

For starters, while there are many Chinese who are already rich or who are getting rich, the massive bulk of the Chinese population - more than the combined total of both Europe and the United States - is still enmeshed in extreme poverty. China's growth miracle, if it continues, will eventually pull these people out of poverty. But this will take a couple of generations, during which time their emissions will rise dramatically. China's short-run concern for its citizens' material well-being is likely to trump concerns about climate changes that could happen down the road.

Another reason is that China faces much more pressing ecological problems in the near term. Particulate air pollution is a large and persistent concern. And the nation's water problems are severe and growing. It will be costly to fix these problems. As China gets richer, it will begin to address them. But in prioritizing their environmental threats, these are likely to trump tackling climate change.

Would the United States and Europe be able to force China to lower its emissions? The only stick on offing is threat of a trade fight. Given growing protectionist sentiment in the United States, this prospect is not unimaginable. But given how costly trade restrictions can be in perpetuating human misery, this would be a large and nasty price to pay.

Nick Schulz recently wrote about eye-pod technologies.

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24 Comments

Are Low Emission Technologies Feasible?
As a private citizen, I've seen information from several sources that implies low emission technology is feasible? I haven't seen any valid reports about how low emission technology can work, and wonder if low emission technology can be constructed- or is it a "pipe dream" of would-be environmentalists like mass producing hydrogen electric automobiles.

low emission tech
There are plenty of low-emission technologies. The questions are cost and scale -- and political viability. Nuclear is a low-emission technology that has the necessary scale. It is fraught with political obstacles. Wind and solar are high cost and massive land footprint and need baseload backup. Hydrogen is many many years in then future. Plug-in autos will require baseload electric which means coal, nuclear and nat gas. The good news is in the long run the energy mix will become less carbon intensive no matter what we do. In the meantime we'll be fighting over carbon emissions on a risk benefit standpoint.

net emissions
The sad thing is that since US/European industries are more efficient and cleaner than Chinese industries.

Any production that is moved to China will result in more CO2 being produced, since Chinese industries are less efficient and more pollution being produced.

Kyoto, as currently written, not only can't work, it will definitely make the situation worse.

So let's hurry...
No developing nation in the world would (or should) slow down the expansion of its economy until the point is reached that its own people are elevated out of poverty.

What China and India are doing today will, indeed, work for them. It may take 30-40 years for their economies to catch up with America, Europe and Japan etc. But with their strong central governments, the rule of law and western style financial capitalism that outcome is inevitable.

However, when cheap labor is no longer available in China then we must all move the labor intense jobs into markets that are still trapped in poverty and where labor will still be cheap.

There are lots of nations with billions of people living under weak central governments, an unenforcible rule of law and no mechanisms whereby traditional financial capitalism might be deployed. It follows that these nations will be the new locations for such "legofied" heavy industries.

However, without strong central governments such economies will never join the club. Such nations will remain in poverty with permanent pools of cheap labor to be exploited by foreigners into perpetuity. Therefore, the dirty industrial practices we are so concerned about and the poor nations that cannot afford to clean up their practices must continue to pollute the Earth and to harbor the sort of angry populations we also worry about.

The alternative future is to develop a capitalistic paradigm that would functional in a nation with a weak central government. A model that will expand such an economy without (first enjoying) the enforcible rule of law. If we might ever hope to do this then we should figure out how to do it now.

We better hope these CO2 reductions don't take place in China.
If you constrain China and other developing nations then they will raise prices that will send backlash through out the Western World. China will have no choice but to use violence to control their population as US consumers spend billions more than necessary to keep uncompetitive industries in business that would normally compete with China. To make matters worse China will only accept these conditions if the US and Western World accepts harsher conditions. Then China will accelerate their military build up giving the militarists in the US a reason to build up.

Basically no-one wins. The Chinese will cheat, the US will cheat and the environment will not be saved because this whole carbon thing is a bunch of crap.

strong govts
Where did you get the notion that strong govts are required for economic development?

We didn't need one in the US?

pollution in red china
Sure those guys produce a lot of pollution, but as they keep getting richer(because of economic freedom, not strong government), they are already starting to get a handle of some of it. For exampe, waste water treatment is considered important now, so foreign as well as local companies are getting contracts to install that kind of stuff. Also re capturing some chemical stuff that was wasted before. In fact, westerners can invest in the companies that do such work thru places like Hong Kong and Singpore, and thus make money from china cleaning up and getting rich. I recommend that instead of all the complaining we always see so much of.

Mark...
The government and the people of the United States have been mobilized to fight one or the other state-of-the art war (pretty much) continually for the past 200+ years. When things slowed down we indulged ourselves with a world class civil war.

Such absolute, martial control of our own society by the State has become so much a part of the American Way that we might not be able to imagine civilized life without it.

America is the gold standard of modern warfare. Further, our mobilized economy won the Cold War virtually without firing a shot (directly at the Soviets). We can beat you with ordnance or we can beat you with money.

Any banking system, under the current paradigm, requires the predictable enforcement of the laws of property and contracts. Without those assumptions banks cannot secure their loans. Such rule of law demands a central government strong enough to sustain an independent judiciary that is generally not taking bribes or playing favorites.

This is especially central when small companies seek to secure working capital. Without access to bank credit most such operations cannot compete in the larger marketplace and expand their operations. When that happens the GDP simply does not grow very fast.

Granted that the economic world may have been quite different 100 years ago while our economy was maturing. But the modern mechanisms of financial capitalism are crippled without the rule of law and a strong central government. Such nations will never enjoy a competitive GDP under this model without a paradigm shift.

I'm guessing that you have never studied history
The idea that the US has been mobilized for war for all of our history is so laughable, that only someone educated in the public school system could possibly believe it.

Prior to WWI, soldiers in the US army were practicing with wooden rifles because congress would not spend the money to buy real guns and real bullets.

You assume that only a strong central govt can create the rule of law. bull squeezings.

The government...not the soldiers...
Mark,

It is the government and its control of society that we are talking about, here. The soldiers and the weapons themselves are logistical details.

Japan, for example, today from a dead start, could engage in a world class military operation inside six months and scale up big time from there. They could have the bomb in that time. This is because they have the underlying culture of government already in place and a modern industrial base standing by.

Only a government that is strong enough to collect sufficent taxes to hire and pay the judges and clerks of a judiciary with the state's attorneys of an executive branch can enforce its own rule of law. A weak central government with a weak economy suffers with judicial corruption as their legal professionals and administrative staffs are not paid very well. And they must make a living through bribes.

This is only one of the jobs the sovereign must do. If he is strong enough to pay and deploy his judges and government lawyers effectively then the state should be strong enough to do a lot of things very well. By definition, a nation that is able to field and manage a competitive modern army has sufficient control of its civilian population and sufficient government assets to work with. It is no coincidence that such nations are able to participate in global financial capitalism in the Western form (our game) even if they were recently living under socialist economics. And even if they are still politically Communists.

By this definition, North Korea has a strong central government (in spite of its weak economy) while the Philippines does not.

Creating the rule of law is very different from enforcing the rule of law. Every sovereign state has a constitution and laws. That part is easy. That's the first thing they do. Cripes. The Green Party has that much.

so a country can be heavily militarized, without bothering to have a military?
...

Ask again, please...
I didn't understand your question. Maybe I didn't understand your earlier question.

Nevertheless, my point is that a government is either strong enough to pursue its agenda or it is too weak to execute its own plans and to enforce its own laws.

Our government has been fully mobilized to do whatever it felt like anywhere in the world from the first moment we stepped away from Great Britain. We determined that we were too good to be under the thumb of the most powerful nation on Earth. We got ourselves into the game that same day.

As World War II approached and when we did not need to build fighter aircraft yet we built commercial planes. When we did not need to build tanks we built commercial trucks. We kept building capital and making money until the time was right. And then we made our move.

We won World War II and the Cold War due to our dominance regarding industrial capability. That is how modern weapons systems forced nations to start competing more than 100 years ago. Read about Teddy Roosevelt if you are confused about this aspect of the history of America.

If you think the United States did not understand this as we struggled to rule the world then you must think that we merely got lucky. In that case, we better hope our luck holds.

This is a trend...
Kaiser Steel's Fontana California steel plant was also relocated to China in 1993 by a team of 300 chinese workers (http://ludb.clui.org/ex/i/CA3008/).

This judiciary thing...
Do you think that our judiciary is incorrupt? First of all its afflicted with an abject disregard for the limits of its own power. Additionally, it is now wholly owned by a monopolistic cartel (trade organization) known as the bar association. Judges are almost never impeached (and Alcee Hastings suffered nothing from his impeachment) -are we to believe that the judiciary is unafflicted by corruption that afflicts every other walk of walk. Indeed, that Acton fellow must have been way off base with his belief that power tends to corrupt.

However, if we are to believe the late Chief Justice Rehnquist, the judiciary is terribly underpaid. His final report on the state of the judiciary was a rather self-indulgent begathon.


True...
Our system of government is self-perpetuating and self-serving. Of course, all judges start off as lawyers and they should be some of the best of the lying bastards.

Nevertheless, our judiciary is "able" to enforce the law, if we can afford to hire their lawyer brothers who are not quite good enough to be judges. Ultimately, we behave because we do not want to be sued and go through all that.

A country like the Philippines does not have enough of a tax base to pay its civil servants, government workers, appointed or elected officials a living wage. Gratuities are their normal form of compensation. They are living on tips. Like our waiters. We call this corruption. Fine.

The net effect on the economy is that banks cannot lend small companies the working capital they need to grow their operations up into the global game. The banks are unable to secure their loans with titles to property as collateral and with loan agreements that can be relied on. The laws of property and the laws of contracts are there...but you cannot bring those laws to bear.

The laws are not enforced. The companies cannot compete. The economy cannot grow. There is no money to pay the judges.

rule the world?
You said the America struggled to rule the world. Do you think they still do try to? Or do you think they were successful? Do you think America rules the other main nations in the world, like France, Japan, China? Does the US force say, Singapore, or New Zealand to do something it doesn't want? For example, US navy shipes cant even visit NZ ports because some have nuclear arms, and it won't say which. So has the US done anything to punish NZ? How does the US rule NZ.

banks in the PHIL
You say that the govnmt doesn't have a tax base to pay beaurocrats and thus the effect is that banks can't lend to small companies. That doesn't follow, the banks and the government are not the same thing. In fact foreign banks have lots of money to lend, right? Then you say that banks can't secure their loans because property rights can't be enforced. So your economics is very stange in all this. In fact, maybe the phil does have enough tax money coming in to support the court system and police, but instead they are squandering themselves, doling it out to cronies, etc. So lower level guys are courrupt as a result of the top elites being corrupt.

Chosing our fights...
South Chicago is clearly under the jurisdiction of the Mayor of Chicago. Nevertheless, his cops seldom go down there after dark. No sense making trouble.

Similarly, if one of our friends (New Zealand) has a law regarding nuclear weapons inside its territorial waters and we respect its sovereignty...then it is probably not in anyone's best interest to confront them over this issue or to impose ourselves on their good graces.

Dietmar...this is why you are not running things in the world. You would just go looking for trouble, wouldn't you?

Punish New Zealand. Really.

Let them harbor al-Qaeda, however. Things might change.

OK, I went too fast and skipped over a couple things...
Small companies typically need to leverage their successful operations into larger markets by growing faster than they are able to generate their own working capital.

Global markets assume that players can deliver industrial scale quantities once their products gain acceptance.

Without the availability of bank financing in the Philippines our small companies are not able to get into the global game.

Small companies drive rapid GDP expansion by growing into medium sized companies.

Small, local players are not able to earn competitive profits until they can export into wealthy, global markets. Consumers in the Philippines cannot afford high quality, high margin goods.

Banks cannot secure loans to small industrial companies with titles to property (as collateral) or with enforcible loan agreements because the judiciary in the Philippines is crippled with inefficiency and corruption.

The central government in the Philippines cannot establish and maintain a strong, independent and honest judiciary because its tax base is inadequate.

Without a rapidly growing GDP and a much more robust economy the government cannot generate the tax revenues to strengthen itself enough to change these things.

This chicken and egg dichotomy is characteristic of many underdeveloped nations around the world. If we can solve these problems in the Philippines then there are many more venues to expand such a paradigm into.

The alternative is to allow foreigners to come into our nation to exploit our workers, to drink our beer and to dance with our young women. Some of us think that this is an abomination. And we will not stand by to watch it continue unchallenged.

I don't know which Asian nation you call home, Dietmar. But I would hate to think that you went there only to drink and to dance.

Blah, Blah, Blah...
Forest, your obsession with American "militarism" is getting tiresome. Since when does the government "control" society? Where do you get such BS?

Furthermore, capitalism is NOT about strong governments. In fact, strong governments tend to distore capitalism. People do just fine in forming their own economic models when the government GETS OUT of the picture (only limited regulation is necessary to reign in the abuse, and that should not require a strong government, just one with some enforcement powers). Furthermore, you whole arguments about the small tax base being responsible for poor economies is the silliest thing I have ever head. Since when do taxes IMPROVE economies? The problem is investment and free markets, not taxes. The Phillipines would do much better if the government would get OUT of the picture (except to wipe out the Marxist rebels).

Capitalism can do just fine with a relative weak central government, thank you!

-Bob

Bob...
If my stuff is tiresome then, please go read something else.

If you are one of these libertarians on the Right who thinks that civilization could get along just fine without sovereign governments doing what must be done then you will do just dandy living with the commune dwellers on the Left.

There are two words for that, Bob. Stone Ages. Another two words would be: Social Anarchy.

We certainly would not have 6 billion people living on this planet without the modern civilizations that military imperialism created and that strong governments sustain.

Perhaps you are one of these characters who think that the human population should fall back to a few thousand scattered tribes of hunters...or that men might not survive at all.

In any case, you are either quite young or you have not been paying attention to the way the world works all these years.

"Capitalism can do just fine with a relative weak central government..."

Not the US form of financial capitalism with a hard currency and industrial banks. Not any capitalism that can compete in the global arena. Oh, yeah. Prisoners swapping cigarettes for magazines. That kind of capitalism.

But give me your examples and we can talk.

Perhaps you didn't read this far...and that would be fine with me too. Thanks.

To Bob re Forest
That guy Forest, whom I often rebut, I'm sure has some sort of hidden agenda. He uses terms that are not part of any kind of main stream school of thought, and even uses odd terms like 'financial vs. military capitalism', and partnership relationships, etc. So he must be advocating some very off shute movement like 'social credit' or whatever. And he can't answer principaled rebuttles, but ignores them and continues to speak down to everyone. He for sure likes strong governments, and bad mouths austrian economics which only advocates free markets.

skipping over
Yeah, like you skipped over answering why foreign banks can't lend to filipinos. Any underveloped country that wants to get ahead will allow foreign banks to operate, even red china does.

This paragraph is also very strange,"The alternative is to allow foreigners to come into our nation to exploit our workers, to drink our beer and to dance with our young women. Some of us think that this is an abomination. And we will not stand by to watch it continue unchallenged."

We know that when countries try to isolate themselves, like Burma used to and the commied countries they can't get ahead, then when they open and even invite, and even almost beg for foreign investment then they get ahead. Most countris have learned that, even vietnam, so none of that jibes with your comments and the above quote by you. Do you really think that the phil. can progress with no outside business operating there? What about foreigners investing in phil companies? I also have shares in PLDT, but won't invest in Ayala Land, or First Philippines because they are overvalued right now. Is that also expoilting them?

Forgive me, my friend...
Dietmar,

I have been using you. Sorry. I find that you ask great questions. Your sense of what you don't understand is pitch perfect. You inform me regarding which elements of my work are difficult for bright people to understand.

After all these years of immersion in the processes of managing and consulting in the global arena all this stuff seems obvious to me. Nevertheless, much of it is counter-intuitive. I feel like everyone should understand how it all fits together...but most people simply don't.

Therefore, I need someone who is trying to pay attention enough to challenge this stuff intelligently. So I am able to expand on the parts that are the most difficult.

Dietmar, you have noted that I am not parroting someone else's "school of economic theories". If the economists had it figured out then we would not be having this conversation. Their "theories of everything" never hold up. Our economists cannot solve their models because they do not have perfect information and (in any case) their algorithms cannot be taken to completion. So they guess. Sometimes they get lucky.

However, many such economists never actually worked in management or finance. So they are as naive as schoolboys.

I am trying to work through these problems. And we are just talking here. You have been very helpful.

I do not mind at all that you are also an opinionated tool. You seem to enjoy that role. Bless your heart. Someone else has to sleep with you. Thanks.

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