The current battle overthe Senkaku/Diaoyu Islands between China and Japan is revealing a number of important truths about the state of the world that Asia-Pacific leaders ought to take to heart and act upon.

First is the fact that its security commitments to Japan are entangling the United States in the internal politics of both Japan and China over issues that are of secondary importance for Americans.

Second is the fact that World War II is not yet over. Indeed, in both China and Japan, the embers of its dying fires are being fanned for domestic political gain by nationalist leaders hoping to capitalize on popular sentiment or to distract attention from other sensitive political issues. This is only possible because the grievances of the war have never been fully resolved either by serial Japanese apologies that have been widely perceived as qualified or by a willingness on the part of new generations of Asians to move on by absolving new generations of Japanese of blame.

Third is the fact that by increasing China's wealth, integration of its economy into the global system has also dramatically increased China's power and given it the ability to use intimidation both as a tool for obtaining satisfaction of grievances and as a safety valve to relieve domestic political pressure. This, of course, also means that contrary to expectations, globalization has not yet, turned China into a liberal, capitalist state run with a significant degree of transparency if not democracy. Despite having become the world's second largest economy and its largest trading state, China is still capable of instant mobilization of mobs to attack foreign factories or surround the autos of foreign diplomats in the service of perceived domestic and foreign policy needs. In other words, the line between public and private policies and activities is fuzzy to non-existent.

These facts suggest the need for a re-think of U.S. policy and deployment in the Asia-Pacific region. They also suggest a way out that could be a step toward changing some of these facts on the ground.

With regard to U.S. Asia/Pacific policy, the recent adoption of the concept of the so called Pivot to Asia should be revisited. This pivot mainly entails more deployment of U.S. military forces in the region and a broadening and deepening of U.S. commitment to support the claims of its allies whether justified or not. It more or less inevitably means more U.S. involvement in disputes like that over the Senkakus and more U.S. unnecessary confrontation with China over things that matter very little to Americans.

There is no payoff for America in this. Keeping the Senkakus firmly in Japanese hands will not further open the Japanese market by one dollar's worth nor will it inhibit the various policies most Asian countries use to entice direct foreign investment and technology transfer nor will it inhibit such countries from doing ever more business with China while doing less with America. Indeed, it may actually accelerate such activity by showing that America will insulate the rest of Asia from the possible negative consequences of becoming more dependent on China.

Washington could push everything in a very different and more constructive direction by urging Japan voluntarily to request adjudication of the question of ownership of the islands by the International Court of Justice in the Hague.

In the first place, Japan's claim is more than a little questionable. As Han-yi Shaw, a research fellow at Taiwan's National Chengchi University points out, various Japanese documents seem to indicate that the islands were seized as war booty by Japan when it also took control of Taiwan as a result of the Sino-Japanese War of 1895. Indeed, the Japanese group that leased the islands from the Japanese government at the time mention in letters and notes that the islands came into their possession as a result of the victory of the Japanese Imperial Army.

A Japanese request coupled with willingness to transfer control of the islands would constitute the most powerful and genuine of apologies by Japan while it would also remove the Senkakus from the slate of domestic Japanese political issues.  It would also put China in a potentially revealing position. Any refusal of arbitration would undermine the sincerity of China's assertions as well as its attractiveness as an economic partner. Successful arbitration would be a giant step toward finally ending World War II and toward fostering true globalization in the Asia-Pacific region. It would also obviate any need for further U.S. involvement of any kind. So it would be a win-win-win solution.

Nineteenth century free trade crusader and main opponent of Great Britain's Corn Law tariffs Richard Cobden wrote that "free trade is God's diplomacy and there is no other certain way of uniting people in the bonds of peace."

Washington must now hope that that notion will prove true. Otherwise it may have to decide whether to back its allies in war with China as well as which of its allies to back as they go to war with each other.

The precedents are not promising. From 1900-1910, the world economy became more globalized and integrated than it ever had been and than it would again be until about 1995. In 1909, Norman Angell published The Great Illusion, a book warning of the potential damage to the global economy and therefore of the madness of any policy of going to war. Indeed, Angell argued that war was unthinkable. Unfortunately, it turned out in 1914 to be all too thinkable despite the high degree of global economic integration.

More recently, New York Times columnist Tom Friedman predicted in his book, The Lexus and the Olive Tree, that no two countries with McDonald's restaurants would ever go to war. That turned out to be one of Tom's less fortunate predictions when the United States and its allies began bombing Serbia during the Bosnian War of the early 1990s. Not discouraged, Tom doubled down in his follow on book, The World is Flat, by arguing that no two countries that share a global supply chain will go to war.

Well, China has just sent six ships to patrol the waters of what Japan claims are its  Senkaku Islands, of what China says are its Diaoyu Islands, and of what Taiwan says are its Diaoyutai. This is in response to the Japanese government's purchase of the islands from private owners in a move aimed at avoiding conflict with China by preempting the acquisition of the islands by the archnationalist Mayor of Tokyo, Shintaro Ishihara. Meanwhile, just to keep things interesting, South Korean President Lee Myung-bak recently made an unprecedented visit to what Seoul claims are its Dokdo Islands (rocks would be a better description) and what Tokyo claims are its Takeshima islands. This was in the context of various exchanges between Korea and Japan regarding the need for an apology for World War II by Japan's emperor before he would be issued an invitation to visit Korea and the statement by Japanese Prime Minister Noda that there is no concrete evidence of the Japanese military forcing Korean women to become "Comfort Women" during World War II.

Of course all four economies ( Japan, South Korea, Taiwan, China) are locked into the iPhone and other common supply chains and Japan, South Korea, and China are talking about negotiating a three way free trade agreement while also agreeing to join in the Comprehensive Regional Economic Partnership free trade deal now being negotiated between the members of the Association of Southeast Asian Nations, Australia, China, Japan, Korea, India, and New Zealand.

So far at least, all the supply chain cooperation and economic talks have not seemed to deter or dampen a rising furor over the disputed islands. The situation is particularly awkward for the United States because it is committed by its security treaties with Korea and Japan to defend both countries in the event of conflict. Thus, in the case of the Dokdo/Takeshima islands, the problem for Washington would be to decide whether to defend Korea or Japan. Or perhaps it would be the U.S. Army defending Korea and its claims and the U.S. Navy defending Japan and its claims. In the case of the Senkakus, the United States has not interest of its own in them and certainly no wish to go to war with China over them. But it is in effect being driven by the mayor of Tokyo (famously the co-author along with Sony co-founder Akio Morita of the book, The Japan that Can Say NO) into a position that could easily lead to a U.S.-China face off.

The rising tensions have actually introduced a higher element of risk into the supply chains and are a factor in the consideration by some companies of relocating some manufacturing back to the United States and to other non-Asian locations.

As similar developments did in 1909, these events also raise the question of whether rather than God's diplomacy, trade is the devil's workshop. Before the relatively recent Japanese, Korean, Taiwanese, and Chinese economic miracles, there was no discussion or interest in these god forsaken rocks and shoals in the western Pacific. Over the years, the United States has enabled these countries to become rich by trading with them, investing in them, and transferring technology to them. Indeed, Washington has acquiesced in an asymmetric trading relationship in which the United States played the role of buyer of last resort as these countries pursued export led growth strategies. As this trade made them rich, Japan, Taiwan, Korea, and China all became more nationalistically sensitive and aggressive about their claims no matter how materially insignificant.

It's hard to say at this moment how things will work out. We just have to hope that Tom has it right this time about the supply chain thing. 

Are Free Trade Agreements (FTAs) really about free trade or are they just war by other means?

The 14th round of negotiations for the Trans Pacific Partnership (TPP) was launched last week in the Virginia suburbs of Washington D.C. If concluded, the deal would establish what it calls "free trade" between the United States, Canada, Mexico, Peru, Chile, New Zealand, Australia, Malaysia, Brunei, Singapore, and Vietnam. It would be the biggest FTA of which the United States is a member.

Just the week before, however, agreement on the start of negotiations for a Comprehensive Regional Economic Partnership (CREP) was announced in Siem Reap, Cambodia. This deal would be between the ten members of the Association of Southeast Asian States (ASEAN) plus New Zealand, Australia, India, China, Japan, and South Korea. In other words, six of the TPP countries would be in CREP and that could grow to eight if Japan and Korea join TPP as has been rumored. So the outliers would be the countries of the Americas (United States, Canada, Mexico, Peru, Chile) and the Asian giants, India and China.

But wait. It gets even more complicated. The annual meeting of the Asia Pacific Economic Cooperation (APEC) (one wants to say "forum" but it really just stops with Cooperation) is has just concluded in Vladivostok. This twenty one member grouping of Asia Pacific countries pledge in 1994 at Bogor, Indonesia to achieve free trade and investment between its developed country members by 2010 and between all members by 2020. So presumably all the members of CREP and TPP except India (which is not a member of APEC) already enjoy free trade among themselves or will do so by 2020.

Nevertheless, the apparent desire for free trade is so strong that still other groupings are moving ahead with other agreements. Even as they fight over who owns which reefs, rocks, and small islands in the waters between them, China, South Korea, and Japan are committed in principle to negotiating an FTA among themselves. China also has an FTA with ASEAN and Japan has a comprehensive economic partnership agreement with ASEAN.

Of course, all of these countries have long been members of the World Trade Organization (WTO) and thus, presumably, already pledged to universal free trade.

So why couldn't they all complete the Doha round of WTO free trade talks? If the developed countries of APEC have achieved free trade already in 2010, how was that freer than the trade of the WTO and why do they need yet more free trade agreements? Or did they not really achieve free trade? How will the free trade of CREP be different from the free trade of the TPP? Why can't the two groups, already with enormous overlap among their members, simply combine and form one big free trade area. Or better yet, extend to the whole of the WTO and achieve truly universal free trade?

Of course, the answer is that it's not about free trade at all, or at least, it's very little about free trade. In Siem Reap last week, U.S. Trade Representative Ron Kirk said that the TPP and CREP are not competitive, but complementary. That is simply not the case. They are totally competitive, not economically but diplomatically and strategically. All these arrangements are about exercising influence. None of them deal with the really key elements of trade and investment. Many of these countries pursue export led growth strategies and manage their currencies to be undervalued as a way of subsidizing exports. Many also operate indigenous industry and technology development policies and make technology transfer a condition of market access. Many also offer big tax breaks and other incentives to lure foreign investment and technology transfer. Despite all the free trade deals, the fact is that the markets of many of these countries are among the most managed and difficult to penetrate in the world. And most of these countries run persistent trade surpluses. Yet, these issues are never on the negotiating agendas.

With regard to the TPP, U.S. officials have told me that the main purpose of the deal is to demonstrate American commitment to Asia and to make a statement that "we're back." Of course it would be nice if it expanded U.S. exports, reduced the U.S. trade deficit and created jobs. But that's not the main point.

It really is pretty much war by other means.

In his speech to the Democratic National Convention on Tuesday , former Ohio governor Ted Strickland contrasted what he called the economic patriotism of President Obama with what he described as Mitt Romney's predilection for vulture capitalism in his role as the founder and CEO of Bain Capital.

Noting that some of the companies Romney and Bain had invested in were named "outsourcing pioneers", Strickland emphasized that Obama had saved good American jobs during the recent Great Recession by rescuing the Detroit auto makers even as Romney was calling for them to go bankrupt. After referring to Romney's personal investments abroad, Strickland said Obama" is betting on the American worker" while Romney "is betting on a shell corporation in Bermuda".

This dichotomy does capture a significant element of the race. I know from conversations with the president in which I have been involved, that he does have an instinct for making it in America. I have heard him ask his top advisers: "why can't we make batteries, wind turbines, solar cells, and high speed trains in America?" His Middle Class Task Force focused a lot of attention on how to revitalize manufacturing in the Mid-West and his administration has provided financing and regulatory support for a variety of innovative alternative energy job creating efforts.

Both Governor Romney's career as a private equity business manager and his minimalist philosophy of government indicate that he is a true disciple of the modern shareholder value business doctrine widely taught to MBA students at places like Harvard Business School, of which Romney is a prominent graduate. For most of American history the ruling doctrine was stakeholder value. The idea being that the corporation is chartered by the state in order to provide benefits to the society as a whole as well as to the shareholders of the corporation. That being the case, it was thought that the corporation should be managed to assure the welfare of its various stakeholders such as workers, suppliers, customers, and local and national communities as well as shareholders.

Over the past thirty years, however, this view has been displaced  by the doctrine of shareholder value which holds that the shareholders are the residual risk bearers of the corporation and that it should therefore be managed to maximize their earnings. In practice, because earnings are measured on a quarterly basis this tends to mean maximizing earnings on the short term. Not only is this the general doctrine of the business schools today, but it is quintessentially the doctrine of Wall Street and especially of the managers of private equity operations. Romney, of course, would argue that by maximizing earnings through outsourcing or layoffs in some areas he was creating jobs in other areas. This may well be true in some instances, but it is, of course, not the same thing as seeking to assure the welfare of workers and other stake holders as the CEOs of the 1960s-70s did.

But if Obama has economically patriotic instincts, he has often ignored them and listened to conflicting advice. For one thing, giving health care legislation priority over job creation efforts was a huge mistake of his first term. Yes, he rescued Detroit, but he waited a very long time before doing so, and, as a result, the cost was far higher than it needed to be. Another mistake has been the failure to counter the mercantilist globalization policies of many U.S. trading partners who subsidize their exports as well as direct investment in their countries by U.S. corporations while penalizing U.S. exports in a variety of ways. A huge failure to change in a meaningful way has been the president's easy adoption of then notion that geopolitics is more important than American economic competitiveness. During his first trip to China, Obama agreed that America would assist China in developing its own indigenous commercial jetliner. Why? Isn't America the prime producer of jetliners? Why would it want to teach China how to make them? Well, the State Department said it was because we needed China to help us in dealing with North Korea and Iran among other geopolitical issues.

Even as I write, another round of negotiations is set to begin tomorrow on the Trans-Pacific Partnership free trade agreement. If concluded ,this deal would almost surely cost American jobs. I say this because the deal doesn't cover currency manipulation, subsidies for direct foreign investment, or anti-trust issues. When I asked the White House why we are proceeding to try to conclude such a deal, I was told that it is to prove our commitment to our allies in Asia. That these allies may feel better about us will be cold comfort to middle class American workers whose jobs are uncertain and whose wages continue to stagnate.

Nor is the record of the Democratic Party terribly reassuring in this regard. Bill Clinton gave a highly-touted speech defending the administration's economic policies last night. Well, it was Clinton who brought China into the World Trade Organization on the basis of the argument that doing so would open China's markets and reduce the U.S. trade deficit. It was Clinton who gave us Bob Rubin (pure Wall Street and shareholder value) and the financial deregulation that resulted in the crisis and Great Recession of 2008-10.

So if Obama wants to convince workers and the middle class that he's on their side , he'll have to do more than have Ted Strickland talk about his economic patriotism.   

Last week's Silicon Valley jury finding that Samsung has infringed Apple patents has been presented in the U.S. media as a tremendous Apple victory that will assure its dominance in the smart phone market for years to come while cutting the legs from under Samsung.

But I'm not so sure. Of course, winning is always better than losing, and Apple will certainly gain significant benefits from the decision, especially in the immediate future if it can succeed in having the sale of certain offending Samsung products banned in the U.S. market. However, for the longer term it is important to keep in mind several salient facts. First, the United States is not the only smart phone market in the world, and, as of this year, is not even the single largest market. That would be China. Second, Samsung's global market share of 32.6 percent is nearly twice that of Apple at 16.9 percent. Third, it is not surprising that a Silicon Valley jury with American engineer patent holders on it would find in favor of Apple. But it should be noted that at about the same time, a Seoul jury found in favor of Samsung in another Apple-Samsung dispute and a Tokyo court dismissed Apple's complaints in yet another Apple-Samsung intellectual property battle in Japan. Courts and juries in other countries may well take a much different approach to intellectual property protection than those of the United States. So that Samsung could win in the rest of the world despite losing in America.

Thus, the litigation strategy is not a slam dunk for Apple. But its biggest vulnerability is not so much infringement of its intellectual property as the fact that it is so dependent on outside suppliers for its parts and their technological development. Indeed, Samsung is its biggest supplier, accounting for an estimated 30 plus percent of the content value of Apple products.

Whereas Apple's strategy has been to outsource the development and production of parts and components and to concentrate on conceptualization, design, software, and integration, Samsung has adopted the opposite tack. It believes deeply in the ultimate convergence of technologies and in the innovative potential of that convergence. It therefore has invested heavily in developing cutting edge technological and manufacturing technology in all of the parts and components of its products and is the world's biggest producer and supplier of most of them. Thus, ironically, Apple is dependent on Samsung in some ways for its technology.

A good example of the situation may now be developing.   Apple is apparently planning the launch of a new iPhone later in the month. Sharp is one of its main electronic display suppliers, but Sharp is reported to be late with deliveries because of difficulties in mass producing the newest type of displays. Samsung, in contrast, is a leader in the new display technology and makes its own. So while Samsung may, in the short run, have to design and build around Apple's look and feel patents, the Korean giant may have the greater hard technology development capability in the long run.

At the same time, it's superior and rapidly rising market share and production volumes will give Samsung greater economies of scale than anyone else. It will thereby reinforce its position as the low cost producer and will thus be able to increase pressure on its competitors.

Apple clear won a battle. But the war is far from over. 

In a recent lament to friends, William Holstein, author most recently of The Next American Economy: Blueprint for a Real Recovery, wondered why the United States now seems unable to imitate countries like Germany, China, South Korea, and Singapore in taking steps to control its own economic destiny.  

He used the case of A123 Systems, Inc. as the trigger for the broader question. The company is an entrepreneurial U.S.-based effort to develop the advanced lithium ion batteries that are expected to power much of our future. Over the years, the U.S. government has made loans to the company of about $200 million, but now has approved the sale of the company and its leading edge technology to Wangxiang corp., one of China's largest auto parts makers.

I didn't find this deal in the least surprising. Indeed, I predicted something like it three years ago at a White House meeting called to deliberate ways of revitalizing U.S. manufacturing as a means of improving the lot of the American middle class. Some administration officials were urging that loans and other incentives be given to development of clean energy technologies like batteries, wind turbines, and solar cells. I pointed out that other countries like Germany, China, South Korea, and Japan were already doing that and that if we were serious we'd have to at least match their incentives. I doubted that we would do so because many of the White House economists were opposed to any such "industrial policy" action of "picking winners and losers." So, it turns out that my premonition was correct. The U.S. government may have made some loans available to A123, but they were a pittance compared to what other countries have made available to their producers.

Wangxiang may well turn out to be the salvation for A123. The Waltham, Massachusetts company's executives say there will be no transfer of technology to China and that the Chinese investment will enable it to get over a rough patch and maintain production and jobs in the United States. But Holstein's question is why there even needs to be a rescue and why the rescue can't be American instead of foreign.  There are two basic answers.

One is that there is presently in the United States no concept of a national economic interest that is separate from and above the wish lists of the myriad of industries and interest groups. Unlike most Asian countries, the United States has no Five-Year Plan and unlike Germany it has no national level consultative mechanism among labor, industry, and government for achieving consensus on national economic performance. America's professional economics community has, for the most part, embraced an extreme laissez faire doctrine that eschews concern for the structure or the economy and what it produces. This sentiment was well captured in the comment of one Reagan-Bush era economist who said: "potato chips, computer chips. What's the difference? They're all chips." A number of economists have denied making that comment. So perhaps it is apocryphal. But, even so, it perfectly captures the essence of the reigning economic orthodoxy. A number of leading economists have said that America does not need a manufacturing sector and this view finds wide expression in the notion of a primarily services based economy.

As a result, U.S. bureaucratic and political leaders are not guided by any principles of an independent American economic interest as they devise legislative and international negotiating agendas. Time and again the question of what we want is asked at the Department of Commerce and at the Office of the U.S. Trade Representative. Always the answer is the same. It is in the form of a counter question - what do the U.S. companies want. On rare occasions, that is supplemented with the question of what U.S. labor wants. But in either case, the implicit assumption is that the interests of the companies and the unions are the same as the American interest. That is not the situation in other leading countries.

The second reason is that as the heads of global companies U.S. CEOs are subject to pressures and feel responsibilities wholly divorced from American national interests. Holstein asks why something like the 1980s Sematech industry/government consortium that helped revitalize the U.S. semiconductor industry in the face of the Japanese challenge can't be done today in batteries in the face of the Chinese challenge. The answer is that in the 1980s, Japan did not allow more than minimal U.S. semiconductor industry participation in the Japanese market. The U.S. semiconductor CEOs faced a situation in which they could not sell or invest more than minimally in the Japanese market while they were under aggressive attack in the U.S. market. In this situation, their interest was to survive in the U.S. market and they felt and acted like American companies threatened with extinction. It was easy then to define the interest of the semiconductor companies as the same as the interest of America. This is not so in the case of China now. Global companies can invest and operate in China, and, in fact, are under great pressure to do so. To the interest of the global company and that of the United States economy have been divorced.

Until either of these situations changes, there will be no more Sematechs and companies like A123 Systems will likely need to be rescued by foreigners.    

Did you see that Rubert Murdoch sold the Wall Street Journal to a Chinese group which has remade it into the Great Wall Journal with editorials straight from the Ministry of Commerce in Beijing?

Okay, I'm kidding, but if you read the Journal's editorial, "China Trade Benefits," yesterday, you could be excused for wondering if some such deal is in the works. Basing its comments on a new report by the U.S.-China Business Council a group that of necessity acts as an apologist for China), the Journal argues that U.S. exports to China are not only booming but generating extraordinary economic growth in the districts of many of the very congresspersons (Nancy Pelosi, Chuck Schumer, Frank Wolf, etc. ) who have been calling for a tougher U.S. policy on trade with China.

For example, congressmen Frank Wolf of Virginia, John Shimkus of Illinois, and Joseph Pitts of Pennsylvania have all backed legislation calling for action against China's currency manipulation. Of course, despite the fact that China intervenes in the global currency markets every day and has accumulated a dollar reserve trove of over $3 billion, the Journal speaks of "alleged currency manipulation." But it's main point is that exports to China from the districts of the congressmen have risen over the past decade by 536 percent, 586 percent, and 640 percent  respectively.

These numbers are cited to suggest that exports to China are a main driver of economic growth in these districts and that in backing the currency legislation the congressmen are somehow acting irrationally and contrary to the interests of their constituents. But this is a case in which there are lies, damn lies, and statistics. Presented just as percentages out of context with either the base on which they are being calculated or the numbers for imports, these export statistics look impressive. But they are not. They are calculated on a very small base. Going from $1 to $5 is a five hundred percent increase, but $5 in a U.S. economy of $15 trillion and a Chinese economy of about $6 trillion is very small potatoes.

Moreover, America has an enormous trade deficit with China of about $250 billion annually and that has grown and become a larger percentage of the trade over the past ten years. So no matter how big the percentage increase in U.S. exports, the increase in imports has indisputably been greater and that means that far from creating net new American jobs, the trade with China is subtracting from net new American jobs. So the Wall Street Journal sounds Orwellian when it claims the very opposite of the truth.

Indeed, the Journal emphasizes that 55 cents of every dollar Americans spend on "made in China" products actually goes to Americans who "design, ship, and market these products." It further argues that imports from China raise American standards of living be checking price increases on consumer goods.

Okay, that sounds good at first, but somehow it doesn't seem to add up. I mean, if the goods were made in America the 55 cents would still go to the Americans who do the designing, shipping, and marketing, but another 45 cents would also go to Americans to do the producing. So how is it that the imports are actually creating new job and benefits? By holding down consumer prices says the Council and the Journal along with many economists. But what all these people always miss is that the imports also check wage and salary increases. Economists and policy makers are fond of speaking of consumers and the necessity of pleasing them. But the vast majority of consumers are also workers, and while they certainly like low prices, they also like to have jobs and living wages. But U.S. trade with China is costing more in lost jobs and generally lower wages than it is gaining through lower prices.  Until these reports and editorials begin to deal with the costs of trade as well as the benefits, they will always be of limited value.

Finally, the Journal, in a bit of classic double speak, calls on Washington to continue to press China to open its markets, but warns that any hint of protectionist action could be disastrous. Just think for a moment about the totally nonsensical nature of this formulation. In the first place, if the American free trade doctrine is so superior, why would we have to press the Chinese to adopt it? Why wouldn't they automatically adopt it as a way of further spurring their own growth? The answer is that they would if they thought it was superior. But they don't and therefore they won't and therefore American pleading with them to become more like Americans is utterly useless. Unless, of course, one is prepared to be a bit of a tough negotiator, more or less along the lines of the Chinese. They don't hesitate to insist on use of indigenous technology or to manage their currency and do a lot of other protectionist kinds of things. But the Journal says we must avoid imitating them at all cost lest we face Armageddon.

Well, as a former trade negotiator in the Reagan administration, I can tell you that begging is not negotiating. The bended knee is not a comfortable long term position. The advice of the Wall Street Journal and the U.S.-China Business Council in this regard is completely oxymoronic and impractical for America. But it is quite helpful to China.

Murdoch really ought to check on where his editorials are coming from: Wall Street or the Great Wall?

The headlines are currently dominated by South Korea and Japan's dispute over a set of tiny islands, but having just returned from a trip to South Korea, what impressed me was how Korean industry and technology is doing to Japanese industry what the Japanese did to U.S. industry in the 1970s-80s. What's interesting is that it's for many of the same reasons.

In the 1970s-80s, American industry often came out first with new technologies and products like transistors, color TV, and video recording. But it lost out to the Japanese in actually commercializing the products and especially in making and selling them. Over the past thirty years, the Japanese have been first with products like the Walkman, DVDs, advanced memory chips, and flat panel television, and they subsequently dominated these markets globally. More recently, however, the picture has changed. In 2004, Sony had the first e reader with electronic ink, and Japan's mobile phone makers were light years ahead in smart phone technology. But it has been Amazon, Apple, Google, and Samsung that have actually commercialized and sold products like the Kindle, iPhone, Android, Galaxy, and the most advanced semiconductor memories.

Indeed, Sony, Sharp, and Panasonic managed to lose a combined $20 billion last year and Sharp is now tottering on the brink of bankruptcy as Sony reorganizes yet one more time and Panasonic withdraws from consumer electronics. It looks so much like Detroit and Silicon Valley in the 1980s.

One problem for the Japanese has been that like the U.S. market of the earlier period, today's Japanese market has become too big and comfortable. It was always highly protected, both formally and then later informally. But initially it was not large enough to support competitive scale manufacturing. So Japanese producers had to design and produce with the world market in mind so that they could capture the exports necessary for achieving economies of scale. But as it became one of the world's largest markets , Japanese producers found that they could make a nice living by focusing mostly on the domestic market. Thus the mobile phone makers developed Japan-only standards and produced spectacular phones that were unusable in the rest of the world. They thus squandered their technological leadership by locking themselves into the odd ball Japanese market.

Another problem has been the exchange rate of the yen versus the Korean won and the Chinese yuan. Several factors have combined to drive the yen to record heights in recent years. One is loss of confidence in the Euro in global financial markets. Investors have been forced to seek other reserve currencies and the yen is one into which they have poured funds as they have shifted out of Euros. In addition, Japan has been the recipient of a large and growing flow of dividends and interest payments on its overseas investments. These, of course, have to be changed in to yen when they get to Japan, and that exchange has also been pushing the yen higher.

The strong yen has increasingly made Japan based production uncompetitive in global markets. It has been interesting to watch this because for years, the competitive problems of American industry were always described in Tokyo as issues of quality, service, delivery, and productivity. But it now seems that no more than American producers can Japanese producers make profits or invest in R&D and new production facilities in the face of a very strong currency.

The currency problem is exacerbated by the fact that China, Korea, and a number of other Asian countries have continued to intervene in currency markets in ways aimed at helping their exporters. Japan, has also intervened in attempts to drive the yen down, but it has not been able fully to offset the effect of the other factors at play in the market.

The final factor, as several Korean executives explained to me, is that Japanese business has lost its dynamism and willingness to take risk. To remain at the cutting edge of the memory chip industry or the flat panel display industry takes massive and timely investment. Six months too late, and the investment will be wasted because competitors will already have gotten down the cost curve with economies of scale and will have taken a dominant market share. But the investment required just for a single factory can be on the order of $7-10 billion. This is company betting territory.

In the old days, the Japanese out-invested the Americans, partly because they had an implicit guarantee of government protection and support, but also partly because the industrial pioneers of Japan's post -war recovery saw themselves as risk taking samurai committed not just to making a profit but to remaking Japan. Now, a second and third generation of Japanese executives has become more bureaucratic and risk averse. Today, it's the Koreans who are placing the big bets.

Of course, it could all go wrong. But, for the moment, they're running the table.