When I was in Hong Kong in December, the one store I was told I had to go to was a place called Shanghai Tang; other bloggers have apparently received a similar message.. The people telling me to do this were right -- I'm not much into clothes stores, but even I was impressed by the quality and style of their merchandise. I wound up buying lots of nice things for my wife, which almost -- but not quite -- made up for me leaving her alone with the kids for nine days. Rest assured, Americans do not need to jet to Hong Kong to sample the store -- there's both an online catalog, and a store in Manhattan.

I bring this up because Shanghai Tang is the topic of Linda Tischler's cover story in this week's Fast Company. The story strongly suggests that China will be moving up the global supply chain to luxury goods very soon:

If, as global market watchers from Wall Street to Tokyo have claimed, this is the China Century, then Shanghai Tang may just turn out to be that century's banner--China's first global, upscale brand.

For this exuberant and increasingly entrepreneurial nation, it would be a natural evolution--and a stunning one. As China enters the modern economic market, it has gone from being the low-cost factory for Wal-Mart to the purchaser of big-name brands (think Lenovo's recent acquisition of ThinkPad from IBM). The third stage will be for China to create brands of its own, becoming a center of design and innovation capable of fielding products that can compete in quality, style, and prestige with anything from Paris, Milan, or New York. "The opportunity for Shanghai Tang right now is huge," says David Melancon, North American president of brand strategy firm FutureBrand. "They could be the first big luxury brand out of Asia."

Out of Asia, yes--and in it, too. While the global luxury market is already big--$168 billion a year, according to Bain & Co.--and growing at a rate of 7% per year, "big" doesn't begin to describe the potential market for glitzy goods in China itself. A quarter of a century ago, there were no millionaires in China; by the end of 2004, there were more than 236,000, Bain says. And Patrizio Bertelli, the CEO of another fashion house that's hungrily eying the market--Prada Group--figures that China could overtake the United States as a market for luxury goods by 2020.

In the meantime, the profits China's homegrown brands earn at home will help finance their forays into the rest of the world. Add in the cheap labor close at hand (an edge over many Western luxury labels, which are made in Europe), and the Guccis and Armanis could be facing competition like they've never seen before.

It's no surprise, says le Masne de Chermont, that the company's principals have been recruited from the carpetbagging global creative class. The brand's founder, British-educated David Tang, is from Hong Kong, that most Western of Chinese cities. [creative director Joanne] Ooi is American; Camilla Hammar, the marketing director, is Swedish. [CEO Raphael] Le Masne de Chermont, who is French, honed his luxury branding skills at Piaget before being deployed by Richemont, whose portfolio also includes Mont Blanc, Chloe, Dunhill, and Cartier, to fix its ailing Shanghai Tang brand.

"We're a melting pot of multicultural people who work on the same vision: a Chinese lifestyle brand that's relevant," he says. As for native Chinese, he says, they're starting to understand branding and sophistication, too. "They are so eager to learn, you cannot imagine."

While the privately held Richemont is cagey about divulging numbers, le Masne de Chermont says that the Madison Avenue's store's revenue is up 50% in 2005. Overall, Tang grew 40% last year, mostly in Asia, home to 70% of its stores. And it's profitable, though not quite yet in the United States.

But while le Masne de Chermont has plans to roll out additional U.S. shops, he's not as obsessed as his predecessor was with making it in America. The red-hot future of his business, he points out, is in Asia. "Can you imagine 1 billion Chinese getting into capitalism?" he says with undisguised glee. "It's unstoppable!"

A final note: I'm genuinely surprised the New York store is not yet profitable -- to my admittedly uncouth eye, the clothes and accessories are world-class and, compared to other luxury brands, very reasonably priced.

UPDATE: Reena Jana did a story on Shanghai Tang for Business Week last December that's worth checking out as well.

This is David Barboza's conclusion in the New York Times after looking at shifts in the global supply chain:

Hundreds of workers at a sprawling Japanese-owned Hitachi factory here are fashioning plates of glass and aluminum into shiny computer disks, wrapping them in foil. The products are destined for the United States, where they will arrive like billions of other items, labeled "made in China."

But often these days, "made in China" is mostly made elsewhere — by multinational companies in Japan, South Korea, Taiwan and the United States that are using China as the final assembly station in their vast global production networks.

Analysts say this evolving global supply chain, which usually tags goods at their final assembly stop, is increasingly distorting global trade figures and has the effect of turning China into a bigger trade threat than it may actually be. That kind of distortion is likely to appear again on Feb. 10, when the Commerce Department announces the American trade deficit with China. By many estimates, it swelled to a record $200 billion last year.

It may look as if China is getting the big payoff from trade. But over all, some of the biggest winners are consumers in the United States and other advanced economies who have benefited greatly as a result of the shift in the final production of toys, clothing, electronics and other goods from elsewhere in Asia to a cheaper China....

The real losers, it seems, are mostly low-wage workers elsewhere, like the ones at Hitachi who lost their jobs in Japan, along with workers in other parts of Asia who suffered as employers began relocating plants to China. Blue-collar workers in the United States have also lost out....

Foreign expertise has been critical as manufacturing supply chains become increasingly complex, involving countries' each producing components that are then shipped to China for assembly. Such a system can render global trade statistics misleading, and some experts say that a more apt label would be "assembled in China."

"The biggest beneficiary of all this is the United States," said Dong Tao, an economist at UBS in Hong Kong. "A Barbie doll costs $20, but China only gets about 35 cents of that."

Asian exports to the United States have actually slipped over the last 15 years....

The migration has left footprints in trade statistics. In 1990, Japan was the United States' dominant trading partner in the Pacific, and Asia accounted for 38 percent of all American imports. Last year, China was the dominant Asian trader. Its trade with the United States has risen some 1,200 percent since 1990, even as the Asian share of American imports slipped to 36 percent.

What changed from 1990 to 2005 is that many goods became a lot cheaper as China took on a greater and greater role as the world's basic factory floor.

So apparently an Al Qaeda plot to use shoe bombs to hijack a plane and fly it into LA's Library tower was thwarted in 2002. A few things are interesting about this:

1) Using shoe bombs are apparently the terrorist equivalent of walking under a ladder.

2) Al Qaeda's outsourcing operations haven't gone all that well. According to ABC News:

Six months after the 9/11 attacks, al Qaeda found itself under siege in Afghanistan. So Khalid Sheik Mohammed decided to contract out the Los Angeles attack. He turned to a terrorist named Hambali, the leader of an al Qaeda affiliate in Southeast Asia.

"Rather than use Arab hijackers as he had on September the 11," Bush said, "Khalid Sheikh Mohammed sought out young men from Southeast Asia whom he believed would not arouse as much suspicion."

ABC News has learned Hambali recruited at least four men, including a pilot. Al Qaeda came up with a plan to break open a secure cockpit door using shoe bombs like those worn by al Qaeda operative Richard Reid before he tried to blow up an airliner in 2001.

"They are able to figure out what are the obstacles in front of them and figure out ways around those obstacles and they can do it in real time," said Dick Clarke, former White House counterterrorism czar and now an ABC News consultant.

Disaster was averted when one of Hambali's hijackers was captured in early 2002 by officials in an unnamed country, and he began identifying other members of the plot. Within five months, Hambali was arrested.

Clarke, in the quote, wants to make it appear that Al Qaeda is ultra-nimble and adaptive, and so therefore hard to defeat. This overlooks the fact that any group Al Qaeda outsources to is likely to be more incompetent than Al Qaeda. So this story puts me in a much better mood than Clarke.

3) Time's Brian Bennett and Matthew Cooper speculate on the politics of the disclosure: "The timing of the foiled plot's disclosure, coming as it did as the Administration defends its controversial wiretapping program, struck many observers as more than a little curious." None of these observers are actually named, but the rest of the paragraph suggests that while the reveal was political in the global sense, I tend to doubt it was consciously timed to deal with Bush's current difficulties on the anti-terrorism front:

[A]nother senior Administration official told TIME: "The speech was about international cooperation and to show that actions taken have real consequences." Said the official, "You intrepid journalists can deduce whether there's a connection between the NSA program and (the West coast plot). Was there a domestic component?" The answer, given that all the alleged cell leaders were captured overseas, would seem to be no.

But at the same time the Administration was chest-thumping about this victory in the war on terror, [counter-terrorism czar Frances Fragos] Townsend had to acknowledge that it is grappling with one of the worst examples of non-cooperation. Over the weekend, 13 convicted Al Qaeda members being held in a Yemeni jail escaped, including the reputed mastermind of the October 2000 attack on the U.S.S. Cole. Townsend acknowledged that the jailbreak is "of enormous concern to us, especially given the capabilities and the expertise of the people who were there." All 13 had been housed together, she said, and "we are disappointed that their restrictions in prison weren't more stringent." When asked why the U.S. wasn't keeping closer tabs on how the Al Qaeda prisoners were being incarcerated in Yemen, a U.S. law enforcement official said, "that assumes the Yemenis care what we think."

Still, the U.S., which has been caught off guard by everything from the flooding of New Orleans to the victory of Hamas, seemed stupified to discover that the Yemenis were allowing the Al Qaeda prisoners to be housed together and to communicate freely. The lax security measures stand in sharp contrast to the isolation of prisoners kept at American controlled facilities in Guantanamo Bay and around the globe.

Denise Grady has one of those stories in the New York Times that's worth emphasizing because the news is so good:

The number of cancer deaths in the United States has dropped slightly, the first decline in more than 70 years, the American Cancer Society is reporting today.

Much of the decrease is because of a decline in smoking and improved detection and treatment of breast, colorectal and prostate cancers, according to the society.

The decline occurred in 2003, the latest year for which figures are available. There were 556,902 cancer deaths, 369 fewer than in 2002. Deaths fell in men by 778, but rose by 409 in women.

"Even though it's a small number, it's a notable milestone," said Dr. Michael Thun, head of epidemiological research for the society.

Dr. Thun (pronounced tune) said the death rate from cancer had been falling by slightly less than 1 percent a year since 1991, but even so, the actual number of deaths kept rising because the population was growing and aging.

"The decrease from 2002 to 2003 means that the decline in death rates had become sufficiently large that it was bigger than the aging and growth of the population," Dr. Thun said.

"You would predict this is a trend that may have a few bumps but will continue," he said.

Dr. Robert A. Hiatt, deputy director of the Comprehensive Cancer Center at the University of California, San Francisco, said, "From the beginning of the century it's been going up and up and up, and this is the first time we've turned the corner."

Readers may have noticed that I haven't posted on the whole cartoon business. To be honest, I didn't think it was that big a deal. Clearly, some Muslims disagree.

So, comment away. Click here or here for useful timelines.

A lot of blogs have posted deep, deep thoughts about the state of Islam and the perceptions of Muslims in the world. I'm afraid I can't muster anything beyond two quick, cryptic observations: a) there's a difference between a democracy and a liberal democracy, and it's clear that the Muslims exercised by this cartoon do not distinguish between the two at all, and b) this is neither the first or the last time we're going to see protests of this nature.

UPDATE: This Andrew Sullivan post seems pretty powerful to me.

Edward Alden, Jeremy Grant and Raphael Minder report in the Financial Times that the WTO has just issued a ruling on genetically modified foods:

The World Trade Organisation ruled yesterday that European restrictions on the introduction of genetically-modified foods violated international trade rules, finding there was no scientific justification for Europe’s failure to allow use of new varieties of corn, soybeans and cotton.

The ruling was a victory for Washington in a long-running dispute that has pitted US faith in the benefits of the new crops against widespread consumer resistance in Europe.

It was immediately welcomed by US farmers and the biotechnology industry, but castigated by environmental and consumer groups who charged the ruling was a blatant example of international trade rules running roughshod over democratic decisions aimed at protecting consumer health and safety.

A US trade official, briefing reporters on the confidential decision that was released to the countries involved in the dispute late yesterday, said: “We’re please with the outcome. We’re not at the end of the road, but it’s a significant milestone.”

The EU would not comment on the ruling, which Brussels could appeal against, after the final report is issued in a few months.

The US, along with Canada and Argentina, launched the case in 2003 hoping that a favourable ruling by the WTO would prevent European-style restrictions on GM foods from spreading to Africa, China and other parts of the world. “One of the reasons we brought this case was because of the chilling effect the EU moratorium has had on the adoption of biotechnology,” the official said.

The immediate practical effect of the ruling is unclear. The European Commission halted the approval of new GM varieties in 1998, but began limited approvals again in May 2004, after the US launched the WTO case. Nearly two dozen applications remain in the pipeline.

The WTO decision also found against separate national bans established by Austria, France, Germany, Greece, Italy and Luxembourg, which have refused to allow even those GM varieties approved by Brussels. Those national restrictions have remained in place even after the moratorium was lifted in 2004.

1) The effect on the EU is pretty much nil. They'll appeal, and probably lose their appeal, and then face punitive sanctions from the US, Canada, and Argentina. Just as with hormone-treated beef, the EU will suffer the sanctions rather than comply, given public attitudes about GM foods in Europe.

2) The effect on the US -- and biotech firms -- is slightly better than nil. They won't be able to crack open the EU market -- but the decision will serve as a useful precedent in dealing with the rest of the world, which does not want to be the target of WTO-approved sanctions. Countries that rely heavily on ag exports to the EU won't budge, but it could have a effect on other countries.

3) The effect on the WTO is slightly worse than nil. Every time the WTO issues a ruling and the response is non-compliance, it takes a hit. That's what is going to happen here. [So they should have ruled the opposite way?--ed. No, they made the right call on the merits of the case-- it's just that I'm pretty sure the WTO would have preferred not to rule on this case at all. For them, it's a lose-lose situation.]

4) The effect on environmental NGOs depends on what you believe they want. In terms of outcomes, the effect is pretty bad, because it increases the likelihood that more states will allow GMO use. In terms of process, the effect is pretty good, because they'll be able to use the WTO ruling to raise lots and lots of money.

5) I have no idea how this will affect human-animal hybrids.

The BBC World Service commissioned a survey to gauge public attitudes towards different countries in the world. My new favorite web site, worldpublicopinion.org, has a summary of the findings:

A major BBC World Service poll exploring how people in 33 countries view various countries found not a single country where a majority has a positive view of Iran’s role in the world (with the exception of Iranians themselves).

Views of Iran are lower than the US, although the US continues to get low marks, as does Russia. Views of China, France, and Russia are down sharply compared to a similar BBC World Service poll conducted at the end of 2004.

Japan is the country most widely viewed as having a positive influence, and Europe as a whole gets the most positive ratings of all....

In 24 of the 33 countries polled, majorities (in 14 countries) or pluralities (in 10) say that Iran is having a negative influence in the world. In five other countries a plurality says that Iran is having a positive influence, but in three of these the proportion who say this is less than a third. On average across the 33 countries just 18 percent say Iran is having a positive influence while 47 percent say Iran is having a negative influence....

Steven Kull, director of PIPA says, “Iran may imagine that there are many people out there rooting for it as it defies the big powers with its nuclear program. But this poll suggests that the number of people behind it is quite small and swamped by much larger numbers who are worried about the direction Iran is going.”

Of course, if you look at the table below, the U.S. doesn't have a lot to crow about either:

UPDATE: Just to clear up one confusion in the comments thread -- Europe did not earn a more favorable rating because Europeans were included in that measure. If you read the methodology document, you'll see that they were excluded from their own rating, just like the USA.

Most of the free-trade agreements put forward by the Bush administration over the past five years have made a lot of foreign policy sense, but have been pretty marginal in terms of their economic impact.

Last week, however, the U.S. and South Korea announced that they intended to negotiate an FTA over the course of this year. USTR representative Rob Portman said, "This is the most commercially significant free trade negotiation we have embarked on in 15 years," and he's not lying -- you'd have to go back to the start of NAFTA for an FTA that would have as big an economic impact.

Kudos to Portman for finally taking up the ROK's offer to negotiate. I'm also intrigued whether this was timed to prod the EU, India, and Brazil into moving forward on Doha.

Milton Friedman gave a wide-ranging interview with New Perspectives Quarterly editor Nathan Gardels last November. One of Friedman's answers intrigued me:

NPQ | Perhaps the Scandinavian countries are a model to look at. They are high-tax but also high-employment societies. And they have freed up their labor markets much more than in Italy, France or Germany.

Friedman | Though it is not as true now as it used to be with the influx of immigration, the Scandinavian countries have a very small, homogeneous population. That enables them to get away with a good deal they couldn’t otherwise get away with.

What works for Sweden wouldn’t work for France or Germany or Italy. In a small state, you can reach outside for many of your activities. In a homogeneous culture, they are willing to pay higher taxes in order to achieve commonly held goals. But “common goals” are much harder to come by in larger, more heterogeneous populations.

The great virtue of a free market is that it enables people who hate each other, or who are from vastly different religious or ethnic backgrounds, to cooperate economically. Government intervention can’t do that. Politics exacerbates and magnifies differences.

Check out the rest of the Friedman interview as well -- the dark matter controversy comes up.

Yesterday afternoon, I was thinking that the Super Bowl had recently been on a decent run of gripping games. Between 2000 and 2005, three of the contests (St. Louis/Tennessee, New England/St. Louis, New England/Carolina) had been pretty gripping games, a vast improvement over the Super Bowls I remembered from childhood.

So much for the nice run -- this one was a stinker punctuated by the occasional nifty play. How much of a stinker? The lead Chicago Tribune sports columnist wrote an entire article about a play that wound up not affecting the final outcome.

As for the ads -- well, to quote Kieran Healy, "I hope next year Burger King Corporation just make a pile of 2 million dollar bills and set it on fire, rather than taking the roundabout method of pointlessly wasting money they opted for this year." On the upside, I did win $100 from a friend who was convinced that Karl Malden had appeared in one of the NFL Mobile ads.

I've got an advanced degree in economics, and I'm here to tell you that the official numbers on the U.S. economy are just plain strange.

On the one hand, in the fourth quarter of 2005, GDP growth slowed to a crawl. On the other hand, that had little effect on U.S. labor markets, since the Bureau of Labor Statistics reported on Friday that the economy has generated more than 200,000 net new jobs a month, and that unemployment is now down to 4.7%.

On the one hand, the U.S. trade deficit shows no sign of reversing itself; on the other hand, some economists insist that dark matter is not being counted.

On the one hand, European work fewer hours than Americans. On the other hand, it's possible that Americans have more leisure time than Europeans.

The latest: Time frets on it's cover that we may be losing our edge.

Except that Michael Mandel says on the cover of Business Week that the economy is stronger than conventional statistics indicate (link via longtime reader Don Stadler):

[W]hat if we told you that the doomsayers, while not definitively wrong, aren't seeing the whole picture? What if we told you that businesses are investing about $1 trillion a year more than the official numbers show? Or that the savings rate, far from being negative, is actually positive? Or, for that matter, that our deficit with the rest of the world is much smaller than advertised, and that gross domestic product may be growing faster than the latest gloomy numbers show? You'd be pretty surprised, wouldn't you?

Well, don't be. Because the economy you thought you knew -- the one all those government statistics purport to measure and make rational and understandable -- actually may be on a stronger footing than you think. Then again, it could be much more volatile than before, with bigger booms and deeper busts. If true, that has major implications for policymakers -- not least Ben Bernanke, who on Feb. 1 succeeded Alan Greenspan as chairman of the Federal Reserve.

Everyone knows the U.S. is well down the road to becoming a knowledge economy, one driven by ideas and innovation. What you may not realize is that the government's decades-old system of number collection and crunching captures investments in equipment, buildings, and software, but for the most part misses the growing portion of GDP that is generating the cool, game-changing ideas. "As we've become a more knowledge-based economy," says University of Maryland economist Charles R. Hulten, "our statistics have not shifted to capture the effects."

The statistical wizards at the Bureau of Economic Analysis in Washington can whip up a spreadsheet showing how much the railroads spend on furniture ($39 million in 2004, to be exact). But they have no way of tracking the billions of dollars companies spend each year on innovation and product design, brand-building, employee training, or any of the other intangible investments required to compete in today's global economy. That means that the resources put into creating such world-beating innovations as the anticancer drug Avastin, inhaled insulin, Starbuck's, exchange-traded funds, and yes, even the iPod, don't show up in the official numbers....

[O]ver the past seven years the economy has continued to evolve while the numbers we use to capture it have remained the same. Globalization, outsourcing, and the emphasis on innovation and creativity are forcing businesses to shift at a dramatic rate from tangible to intangible investments.

Mandel's story does offer an explanation about the fourth quarter numbers:

[T]he conventional numbers may be understating the strength of the economy today. The BEA announced on Jan. 27 that growth in the fourth quarter of 2005 was only 1.1%. In part that was because of a smaller-than-expected increase in business capital spending. However, employment at design and management-consulting firms is up sharply in the quarter, suggesting that businesses may be spending on intangibles instead. Indeed, the consumer confidence number for January zoomed to the highest level since 2002, as Americans became more optimistic about finding jobs.

So, maybe the economy is much more robust than commonly thought. But there are three caveats to this that I can't quite shake. First, I very much want this to be true, which means that I might be accepting Mandel's suppositions too quickly.

Second, I still remember this Stephen Roach op-ed from 2003, which also pointed out the screwiness with existing data -- except that Roach thought the metrics under discussion were being too optimistic about labor productivity gains. Roach and Mandel are focusing on the same productivity figures -- but Mandel thinks it shows that other numbers are screwy, while Roach thinks the productivity figure is inflated. I'm not sure Roach is right either -- but it's worth bearing in mind that inaccuate data can cut both ways in trying to figure out the current economy.

Third, even if we're exporting knowledge capital in the form of FDI, we're also importing significant amounts of knowledge capital -- in the form of science and engineering Ph.D. students. What happens when those figures are thrown into the mix?

A week or so ago I referenced a David Rothkopf blog post from Davos about a Tom Friedman faux pas. It turns out the post was in error. I'll just reprint what Rothkopf e-mailed me:

Several elements of this Davos Diary were picked up and run in other places, which is gratifying. However, in one instance, it is embarassing. In the item on the panel on Middle East nuclear proliferation chaired by Tom Friedman of the New York Times, it suggests that Friedman made a statement that suggested that none of the nations in the area should have nuclear weapons and that this was a source of embarassment re: Pakistan's Pervez Musharraf, who was on the panel and whose nation does. Had the entry stated that it was Afghanistan's President Karzai who made the statement, it would have been accurate. That is what I intended to write and what my brain actually recalls having written. Being as how it was the truth and all. If it came out of my head otherwise or was somehow altered along the way, I apologize. Readers of the blog may recall I sustained several blows to the head along the way and anything is possible. Suffice it to say, Friedman ran the panel wonderfully with a light and informed touch and Karzai's misstatement was humorous and even he responded to his error with somewhat more grace than I have responded to this one.