China's government has sentenced two of its citizens to life in prison for their role in securing prostitutes for hundreds of male Japanese visitors in the southern city of Zhuhai last autumn. The Chinese government is also pressuring Tokyo to turn over the Japanese businessmen who allegedly requested the prostitutes. This story made headlines around the world, and fits well with how the world press typically covers Sino-Japanese relations. Regrettably, such incidents recur with enough regularity to feed the media machine that continues to stir a nationalism rooted in conflicting historical memories. Japanese Prime Minister Junichiro Koizumi's annual visits to the Yasukuni Shrine -- which is widely viewed as a symbol of Japan's former militarism -- is a conspicuous example of this. The publicity that the press gives to these visits has helped impede an invitation to Koizumi from China's leaders for a state visit. Recently, the discovery of mustard gas canisters left behind by Japanese forces during World War II has also served to keep memories of the Imperial Japanese Army's wartime conduct alive among older Chinese. Moreover, rival Sino-Japanese claims to the Senkaku (or Diao Yutai) Islands resurfaced last year when the Japanese government leased three islets in the chain from private parties. The action, purportedly undertaken to reduce the prospect of landings and demonstrations by Japanese right-wingers, set off a brief, though frenzied, reaction in China, as well as in Hong Kong and Taiwan. Meanwhile, differences over Taiwan also foster tensions periodically, such as when former Taiwanese President Lee Teng-hui sought to visit Japan for medical treatment. But this is not the whole story. Although such incidents reveal a troubling level of mistrust between the Chinese and Japanese that is not merely a product of media coverage, it is noteworthy that both governments have worked consistently, diligently, and with considerable success to resolve such problems and contain their political fallout. Of course, official relations between the two countries are marked by much political and economic competition -- some of it healthy, some of it a possible harbinger of future strategic rivalry. The competitive strain in Sino-Japanese relations is especially visible in energy politics. Demand for oil in Asia is growing rapidly, and with China and Japan increasingly dependent upon imports, each has naturally sought to improve its energy security by diversifying sources of supply. Both countries covet access to Russian reserves, especially those located in the Angarsk fields of Siberia. Last spring, China appeared to have locked up a Russian commitment to build a pipeline to service the China market at Daqing. Japan, however, raised the ante with new offers of financial incentives. Its bid for an alternative pipeline to Nakhodka to serve Japanese, Korean and other markets remains alive, creating another point of competitive friction. In their rivalry for leadership in promoting Asian regional cooperation, meanwhile, China has taken an early lead. Nearly two years ago, China trumped Japan by offering a Free Trade Agreement to the members of the Association of Southeast Asian Nations, while front-loading its own tariff concessions. But this backdrop of contention and competition masks emerging collaborative aspects of Sino-Japanese relations that are profoundly important. For example, trade and investment flows continue to expand rapidly. Bilateral trade topped $100 billion in 2003, as Japan's exports to China increased by more than 10 percent, fueled by semiconductors, electrical equipment and automobiles. Meanwhile, China replaced the United States as Japan's biggest source of imports, and is now one of the few non-members of the Organization of Petroleum Exporting Countries with which Japan runs a trade deficit. Similarly, direct investment by Japanese firms is increasing as they relocate production facilities to China to capitalize on lower labor costs and high-quality engineering talent. Of course, there is no assurance that today's expanded commerce will preclude eventual strategic rivalry, or succeed in erasing lingering wartime animosity. But both countries now place a premium on extending their economic interdependence. Ultimately, the historical wounds that have long divided China and Japan, and the more current diplomatic flash points that the global media inevitably trumpet, tell only part of the Sino-Japanese story. There are economic and geopolitical rivalries between China and Japan that dwarf in importance the high-profile insults to national pride that make headlines. But there are also compelling economic and political inducements toward cooperation that prevent these rivalries from developing into full-blown crises.

Silicon Valley cannot be replicated-not even in the US, leave alone India.

But there is no underestimating the complex and high end nature of information technology work that's increasingly being done in India.

There is almost nothing that is not doable, except certain high investment, high value manufacturing, like microprocessors.

This year stands out for the speed with which India, still very much a poverty ridden developing country, has emerged as a partner of mature econom-ies in a wide ranging field that covers information technology, business processes and research and development.

Unsurprisingly, such a major development has been accompanied by drama, excitement, anguish and misunderstanding. The rapid acceleration in trends, which in some cases date back to over 10 years, has given little time to players on both sides to rationally assess and adjust to new realities.

Some don't seem to know what has hit them and have therefore gone on to make unrealistic assumptions.

In the west, particularly in the US, there is a backlash against outsourcing to countries like India, China, the Philippines and Russia, with India being the most visible and so taking most of the rap.

Correspondingly, there is an element of euphoria in India in the belief that it has arrived. Some are making unrealistic assumptions that it is on the way to becoming a new Silicon Valley to the world.

Significantly, the knowledgeable and those who are in the vortex of change have a realistic view of what exists on the ground and an enlightened foresight of the shape of things to come.

In this survey of opinion leaders in the information technology industry, we try to come to grips with the new, rapidly emerging reality what is the exact nature of the high tech work taking place in India in information technology and what are the precise contours of the emerging cross border partnerships?

First, the Silicon Valley red herring. Sridhar Mitta, managing director of the incubating firm e4e Labs, almost snorts at the mention of Silicon Valley.

He recalls how the good professors at Stanford University started to get too many visitors who came and asked the same questions what makes Silicon Valley tick and can we replicate it in our country?

They undertook a methodical study for a couple of years and helped define the uniqueness of the creative process that occurs in a small geography 30 miles by 10 miles, near the Californian city of San Francisco.

To Mitta, the Valley's defining characteristic is that some of the best brains in the world are concentrated in a small geography. "It is an innovative high tech cluster. There is an ecosystem of companies which add value to each other."

In Silicon Valley people are willing to share ideas and are not worried about theft. Business discussions are concluded very fast as people want to get on with a project. A project can be started in a week.

There is no concern over individual ideas being stolen as it is assumed that if you are bright you will have many more worthwhile ideas. In the Valley, people don't care about religion, creed or nationality. "There is only one religion, business," Mitta says.

Another industry insider concurs. "Silicon Valley is not a service, but a risk taking model, whereas the Indian software model is largely based on cost effective and efficient delivery of services," he differentiates.

Many of tomorrow's problems are first defined in US universities and then get crystalised as business opportunities. "Firms in the Valley work closely with those universities to quickly grasp the business ideas that emerge from diagnosing and solving a technical problem, for example."

Where does Indian expertise and capability stand then? "The Indian environment still lacks the original ideas that create the new business models. This is because of the lack of proximity to markets," the industry insider explains.

"Once an engineering problem is defined, it can be executed in India." The key and growing Indian competency now is that it has crossed the technical hurdle, there is little that cannot be technically done in India.

If Silicon Valley scores 100 for the purpose of our present discussion, Mitta gives Bangalore 15.

"Bangalore has passed criticality in technical prowess but is still abysmally low in interaction. The culture of networking is better in Bangalore than in the rest of India but nowhere near what exists in the Valley. Here a major part of the load is carried by multinationals which guard their secrets very jealously," Mitta says.

Bangalore also scores on its educational institutions which can deliver the raw materials or skills. Like the Valley, it has some of the best brains, relatively speaking, and some companies have reached criticality of size. Some complex work gets done here in a serial way within companies.

"I know that a US company can start a complex work group here which involves doing many things, though not all. But I don't know what the company on the floor above mine is doing," notes Mitta.

Subroto Bagchi, COO of MindTree Consulting, who is based in the US, explains that in the 1990s people thought that any work that required a high degree of customer knowledge and collaboration, design and architecting had to be done exclusively in the US.

"Anything that required innovation had to be done near the water cooler. So now there is hardware, software and wetware the coffee machine and what's between your two ears, as most of the human brain is water."

But the big change has come with the availability of high bandwidth which has made the water cooler virtual.

"If earlier we looked at India for just development or maintenance work, now we are able to look at co-development and co-architecting," Bagchi notes.

Till two human beings meet, trust is not established. Innovation-related activity, co-development and co-architecting are not done by two entities but by two human beings.

Two techies have to accept each other as "buddies" before they can innovate together. "That happened after Y2K. It established the cross cultural comfort. In a nutshell, India has become legitimate," Bagchi adds.

Higher value add projects are now coming to India and company boards across the world are increasingly being asked, 'What is your India strategy?' Investors in venture capital funds are asking them, 'What are your plans for India,' and they in turn are asking companies 'What are your India development plans?'

The software insider says India's current role is to "complement" not "replace" Silicon Valley. "If present trends continue, maybe India can equal Silicon Valley in seven to 10 years. But the approach cannot be 'We versus they.'"

Another authority adds his support to this scenario, making a deft distinction between what is on and not on.

Says Madhukar Angur, David M French distinguished professor at the Flint School of Management, University of Michigan: "Today almost nothing is too high-tech for India. In technology (IT, designing, R&D) India has taken significant strides. It is pretty close to self-sustaining growth. But it is not quite there. So MNCs will look at India as a location for startups but not standalone ones."

So they will also seek out partners, as Intel has done with startups like Tejas Networks.

The cooperation and joint development approach is underlined by K P Balaraj, managing director of WestBridge Capital Partners.

He feels that "the vast majority of the work being done by start-ups in India is led by teams located in the Valley. What is changing though is the timing of an India ODC (overseas development centre) which is being set up much earlier in the life cycle or even at the seed stage."

What is more significant is that as multinationals which follow the example of early leaders such as GE, TI, Intel, Oracle and others start to do more cutting edge work here, there will be a large base of India-based engineers and managers who will have the experience of building and bringing a world-class product to global markets, primarily the US.

"From this base, we will see a future generation of product entrepreneurs emerge who will have the vision and market credibility to attract high quality VC funding for their plans," Balaraj adds.

Innovation means developing new technology or products. Product development in India is already taking place but as a secondary exercise.

Sanjay Kalra, CEO of the HCL-Deutsche Bank joint venture DSL Software, explains the sequence of what came first and then what followed. At any point of time more than 70 percent of spending takes place on sustaining investments in existing technologies.

This, like work on new technologies, also requires high end work that is innovative. But a majority of the effort is in tasks that are process and procedure bound.

In such tasks, innovation is focused on how to deliver the subcontracted tasks better (process improvement, quality).

High end startups are now beginning to allocate and locate a high percentage of employees (or contractors) in India.

In the past it was the large technology players that leveraged the lower costs and high availability of talent. The smaller startups would contract to small and large players on a need basis.

But of late a lot of smaller startups are also beginning to factor in India as an integral part of their business plans right from the beginning.

What is more, several start-ups are now using India as the base to also conceptualise and then produce in India for markets in Asia.

The good news on products is that Intel is in India in a big way and is going in for the joint effort startups that hold the key to the future. Intel's own agenda, says Ketan Sampat, president of Intel India, is to establish leading edge design capability.

Says Sampat: "At Intel's development centre (its largest non-manufacturing site outside the US), we are engaged in some of the most advanced development activities not just in India but anywhere in the world. For example, the flagship next-generation enterprise processor that Intel will have in volume production is being designed entirely in Bangalore."

But he sees an important milestone that has to be crossed Indian firms still have not broken into the ranks of product companies with their own intellectual property and branded product lines.

"The i-flex's of the world are still too few and far between," Sampat says. So Intel Capital, the company's strategic investment programme, has been an investor in several Indian technology companies. Sampat mentions the investment in Sasken Technologies.

"Its product GSM/ GPRS software stacks complements our "Manitoba" (wireless Internet on a chip) product and it has customers worldwide."

He also mentions another telecom company, Tejas Networks. "It is starting with the Indian market which is sizeable now and is using it as a springboard to the global market."

Sanjay Nayak, CEO, Tejas Networks, sees only the beginnings of high end startups in India, like his company. "It will take some time before we see a major shift in startups originating in India, though the enablers are all there."

The most common trend is to have an "engineering backend" in India of a US originating startup. Within this, the major amount of work that is being done is "software" centric not much system design or hardware design work is done.

He expects that "once we have a few success stories of high-end product companies from India, it will accelerate the trend." In the past, countries like Israel and Taiwan have witnessed such trends.

Srini Rajam, chairman and CEO of Ittiam, another startup product company, sees high end start ups becoming increasingly dependent on designs done in India.

"There is a strong push coming from the investors of the start ups to locate a large part of their design team in India or source their key designs/IP from Indian companies, in order to improve R&D budget utilisation and time-to-market."

He sees early revival worldwide in one segment-the semiconductor and embedded systems. "This is in turn is enabling the growth of chip design, embedded software and system design activities in India."

Several factors are likely to encourage more high end work to come to India and help it become an increasingly important partner of Silicon Valley.

First, the reverse brain drain or brain gain that has been taking place in the last few years, especially since the tech bubble burst in early 2000 and the recession that set in in Silicon Valley.

One person who has been plotting it carefully is Rafiq Dossani, a senior research scholar at the Asia-Pacific Research Centre of Stanford University.

"My guess is that 6,000 jobs have been lost from Silicon Valley in IT to India. Looking ahead, the flow will depend on both opportunities in India and here."

The Silicon Valley economy is picking up rapidly and hiring should soon increase, feels Dossani. In addition, it remains unbeatable on new product development because of its global reach of talent and proximity to markets.

So the younger and more innovative will be attracted to the Valley. India will continue to attract those in the 30-40 age group interested in raising families in India and those interested in a rapid rise up the executive ladder through a stint at a senior level in India.

Also, a key security factor is enabling high end work to shift to India, argues Angur. India will be a country of choice for location of partnerships on considerations of economic stability.

"Multinationals gamble on technology but are cautious on geography. Even China and Taiwan have a security downside. India-Pakistan relations is indeed perceived as a security risk but still India is on the preferred US list."

He sees a significant historical parallel. Technology and IT will be to India what the automobiles industry was to the US.

"One out of every three in the US has something to do with automobiles. The IT revolution has the seeds of becoming something like that. In the immediate future mutlinationals will consider India more and more for high-tech startups and there will be more high tech jobs."

Bagchi shares a deeper insight rooted in Indian history and social development. India, he feels, has two cards up her sleeve: "One is the power of diversity and two the power of pluralism, imparted to it by its institutions."

The future of the global economy is in more trade but post 9/11, the west is also looking for a sense of comfort a degree of security and cultural fit.

How many countries are there with world class capability in IT services from which an American company can source? Out of the choices available, how many countries are both diverse, so that there is a democratic-cultural fit, and believe in institutional pluralism - executive, judiciary, legislative system? "These institutions give a guarantee of continuity," he says.

To become an innovation partner to Silicon Valley, an economy must innovate. Innovation is invariably linked to diversity. The US has been at the cutting edge of technologies because it has such a pro-immigration policy.

"We did IT services for 15 years and moved up the value chain. But the next big value chain is about innovation. That innovation depends on the fertility condition on the ground. That condition is necessarily about diversity," Bagchi adds.

JAKARTA, Indonesia - Even here in Indonesia, where there is a strong tradition of tolerance, there is a war going on between radicals and moderates for Muslim hearts and minds. You can see that war in the police armed with automatic rifles, manning anti-vehicle barriers in front of my hotel and every other large Western-linked building in Jakarta. In August, Islamist terrorists blew up a suicide bomb in front of the Marriott Hotel here and are threatening to hit a long list of targets that includes schools attended by Western children. These are the same bombers who killed more than 200 people in Bali last November. The war is being fought on Indonesia's campuses, particularly secular universities where students are intrigued by radical Islam. Activists from Indonesia's liberal Islamic movement disdainfully call them "born-again Muslims'' and hold provocative campus forums with titles like ``There is no such thing as an Islamic state.'' At a religious boarding school in Yogjakarta, one of tens of thousands of pesantran spread across this vast country, they teach that the Koran is to be understood, not just rotely chanted in Arabic. "We are not frozen in those Koranic verses,'' director Tabiq Ali said. ``Interpretation depends on our own thinking.'' You can even see the war in a steamy best-seller about a Muslim woman whose faith was shattered by the hypocrisy of Islamic radicals who preached righteousness while sleeping with her. The subject of the book, a Yogjakarta university student, now fears retribution. This is a war we cannot afford to see lost. Indonesia is not only the largest Muslim nation in the world, but it could also become a base for radical Islam to spread throughout Southeast Asia. Alternately, Indonesia's struggling democracy could set an example for others in the Muslim world. "You have all the ingredients that could make this place the first Muslim majority democracy that works,'' says Sidney Jones, a leading expert on Islamic terrorism in Southeast Asia. ``And you have all the dark forces eager to push Indonesia in the opposite direction. The question is where does it come out.'' What can the United States do in this war? So far our efforts have focused almost entirely on aiding the pursuit of Jemaah Islamiyah, a Southeast Asian terrorist group linked to al-Qaida. Initially, the government denied it had a home-grown problem and was wary of seeming to follow American dictates. But after the shock of the Bali and Marriott bombings, the authorities have captured many of the terrorists and successfully prosecuted them. Ultimately, however, Indonesia needs to build a modern society. While the rest of Asia, from India to Vietnam, vibrates with the energy brought by the information technology revolution, Indonesia feels like a stagnant backwater. Its economy limps along, plagued by poverty and corruption. The key is a woefully underfunded educational system. Unlike Pakistan's madrassah system, the religious schools are integrated into the state system, and many offer a secular curriculum along with religious teaching. But in the pesantran that I visited, one in a city center and the other in the countryside, I found classrooms that offered little more than whitewashed walls and wooden desks. Computers are few in number and science labs primitive, if even existing. State schools are better equipped but still backward. Why not wire every school to the Internet, build science labs and, most importantly, train teachers? A recent report on U.S.-Indonesia relations by the U.S.-Indonesia Society and Stanford University's Asia-Pacific Research Center urged a significant effort to fund education. President Bush picked up on that idea, announcing a U.S. educational aid program during his October stopover here. But he alarmed Indonesians by tying the initiative to the war on terror. The U.S. ambassador had to make the rounds assuring Indonesians that the U.S. was not out to dictate curriculum in its religious schools. More troubling is the pathetic amount of money he offered -- most of it funds shifted from existing programs -- only $157 million over 6 years. Says former Ambassador Paul Cleveland, who heads the U.S.-Indonesia Society: "You would get more democracy out of $1 billion spent in Indonesia than $20 billion spent in Iraq.''

WASHINGTON - Take Jamey Bennett. When he first began selling his LightWedge personal reading lamp a few years ago, everything was made in China. Then the headaches began: Numerous conference calls in the middle of the night. Shipment delays because of a dockworker strike in California. And many problems related to language differences. The problems became so acute that Bennett transferred the manufacturing to Virginia two months ago.

"Managing a significant manufacturing effort in China remotely with a business of our size is very difficult," Bennett says.

"Firms that just believe that this is going to be simple ... very often get burned," says Martin Kenney, a University of California-Davis professor who recently completed a study of firms doing work in India. "This is a very, very complicated business activity, and there are a thousand ways it can go wrong."

Examples of the perils of moving work abroad keep cropping up. Last month, Indiana said it was halting a contract with an Indian company to upgrade its computer system for its unemployment benefits office after politicians and others started an uproar about the work leaving the state, not to mention the country.

Dell recently shifted some of its computer call center work from India. After moving some of its appliance call center work to India a few years ago, GE in May moved the work back to the Phoenix area. It found that workers in India, who don't own many appliances, couldn't relate to the customers' problems. U.S. workers can take more calls because they resolve issues faster, boosting productivity.

Highlighting how sensitive the topic of moving work outside the USA is, spokesmen for Dell and GE declined to comment. But Dell CEO Michael Dell recently told USA TODAY his company sticks with U.S. employees for many jobs for their skills.

"Most of our (employees) are in the U.S., and it's probably going to remain that way for a long time," Dell said. "The fear of jobs moving from one country to another, at least in our case, is probably greater than the reality."

That doesn't mean the trend will go away. Repetitive and low-skilled manufacturing and services work will likely continue to be sent abroad. But some firms' experiences suggest the hysteria about work going outside the USA may be overblown.

'Lost in the translation'

Several major issues confront businesses when they shift manufacturing outside the USA:

?Culture, language. U.S. firms are finding the do-it-now culture of the USA and some American tastes don't easily translate overseas.

Wells Fargo chief economist Sung Won Sohn says companies he has come in contact with have complained of productivity problems. A U.S. furniture importer has had a tough time persuading his overseas manufacturers to "distress" furniture, a popular style in some U.S. markets that evokes an antique feel. His workers don't see the point in taking a new product and making it look older.

And there are language issues. Although many people overseas speak English, phrasing and other issues can crop up when English is not the first language.

"Quite a bit was sort of lost in the translation," LightWedge's Bennett says.

A Dell spokesman told the Associated Press the company was shifting some corporate clients from Bangalore, India, to Texas, Idaho and Tennessee after receiving service complaints.

Gary Beach, publisher of CIO Magazine, recently was on the phone with a Dell agent in Bangalore for 11/2 hours after having problems with a notebook computer. "The guy was very polite, but he had to go to his supervisor after 65 minutes," Beach says. "It was a change in power options in your control panel. You had to switch to 'always on.' ... Duh!"

-Expertise. Many countries are churning out well-educated engineers, scientists and others while some foreigners are coming to the USA to be educated and then return home. But such education often does not replace experience.

Bethlehem, Pa.-based Air Products and Chemicals makes liquefied natural gas machinery in Wilkes-Barre, Pa. The firm has no plans to move the factory, even though none of the products is sold in the USA.

"We have spent a number of years building up this plant, making major investments and also building up a skilled workforce," spokeswoman Kassie Hilgert says. "Both the workforce and the technology are not transferable to anywhere else in the world."

Kenney notes that some of the businesses overseas are so new that there are few trained managers who know how to properly oversee both service and manufacturing operations.

-Shipping. Some manufacturers are finding the time, money and extra regulatory burdens associated with shipping products to the USA prohibitive. Those issues were compounded after the Sept. 11 attacks, because import regulations were strengthened.

Sanjay Chandra, co-founder of American Leather, a furniture producer in Dallas, does all manufacturing in-house. With hundreds of combinations of styles and fabrics and other attributes to choose from, the firm waits to produce the furniture until orders are received and prides itself on getting the products shipped out in a matter of weeks. Shipments from China are estimated to take about six weeks, after production, according to manufacturers.

"Special order, quick ship doesn't really lend itself to foreign manufacturing because of the time issues," Chandra says.

The shipping headaches may grow. Under rules starting this month, importers are required to electronically send lists to the government in advance of shipments, to help Customs and border protection agents identify high-risk cargo that deserves special attention because of terrorism fears. That is upsetting some importers who say the lists will cost them time and money if there are delays at the borders.

The challenges of importing were also highlighted a little more than a year ago when dockworkers in California were locked out during a labor dispute, stranding Asian imports at sea. The 10-day action that led to the closure of 29 docks was estimated to cost the U.S. economy up to $2 billion a day and forced some manufacturers who rely on foreign parts to shut down.

Keeping supplies flowing

The dockworker strike persuaded Alan Schulman, owner of Glentronics, to stick to his supply method. Schulman, who sells battery-operated, backup sump pumps, has suppliers both overseas and near his headquarters in Wheeling, Ill. When the dock strike started, he was able to switch to his local supplier and continued without any interruptions.

"I always want Plan B."

There are numerous other issues that U.S. firms are bumping into when it comes to working abroad. Many companies find themselves holding more inventory in case there is a supply disruption. That means added costs, because more inventory requires extra space, financing and, sometimes, employees.

"Supply Chain 101 says the most important thing is continuity of supply," says Norbert Ore, who organizes a regular survey of manufacturers for the Institute for Supply Management. "And when you establish a supply line that is 12,000 miles long ... you have to weigh the costs of additional inventory and logistics costs vs. what you can save in terms of lower costs per unit or labor costs."

Shipping business abroad also means relinquishing some control, which for some business owners is easier said than done. And, unless you own the facility and have an employee on-site, fixing any problems that require in-person work involves a lot of time and money. The contracts to set up facilities abroad can also be lengthy, involving months of negotiations and lawyer and consultant costs.

Regional conflicts, such as the periodic clashes between India and Pakistan, also must be considered.

Some move despite challenges

Despite all those issues, for some, moving work abroad is the way to go.

Wall Street giant Goldman Sachs estimates that of the 2.7 million U.S. factory jobs cut in the last three years, 1 million have been relocated abroad.

A wide range of service jobs, such as customer call centers, medical billing and architectural drafting, are also moving outside the USA. In the next 15 years, U.S. employers will move about 3.3 million white-collar jobs abroad, Forrester Research predicts.

The main motivation: money. UC-Davis' Kenney and co-author Rafiq Dossani of Stanford University estimate a call center worker who costs clients $12.47 an hour - including equipment and other costs - in Kansas City costs $4.12 an hour in Mumbai, the Indian city formerly known as Bombay. Indiana originally went with the Indian company after its bid for the computer work came in at $15 million, $8 million below the closest competitor.

After working in Asia and Europe for 15 years, Philip Ison, president of Ison International, bought an upholstery factory in Tennessee in 1999 and shut it down after two years.

"There was just no profit margin to be made," he says. "With all of the headaches between health insurance, workman's comp, OSHA, you can just keep on going down the list. It's not economically feasible to produce something here that takes a lot of labor."

Ison now produces furniture in Romania and ships the products to Norfolk, Va., before selling in the USA.

"With the Internet and the communication systems that are available at this point in time, it's no big deal to sit here and run the factory," he says.

But while some jobs may continue to be sent overseas, it's clear that others - especially those requiring special skills, quick turnaround times or customer contact - will stay in the USA.

"Most companies believe it's going to be easier (to shift work)," says Rudy Puryear of Bain and Co., who has consulted with clients on setting up operations abroad. He says he's seen some firms pull back two or three years after shifting to foreign workers or suppliers. "It is a buyer beware situation."

Perhaps no other country has more to lose from North Korea's acquisition of a sizeable nuclear arsenal than China. The existence of such weapons would not only endanger the city of Beijing but also provoke a regional arms race in which Japan, South Korea, and possibly even Taiwan would eventually develop their own strategic deterrents. Given these facts, it is surprising that China has not acted more forcefully to persuade Pyongyang to terminate its nuclear program.

The explanation for this reluctance is the importance Beijing attaches to regional stability. If the North Korean regime were to collapse, a refugee crisis would ensue as starving people flooded across the border into northeastern China, and the way would be opened for South Korean and American troops to advance up the peninsula towards Beijing.

If the Bush administration wants to enlist Chinese help against Pyongyang, therefore, it must first assuage these very reasonable concerns.

China's importance to the United States stems from the absence of other sources of leverage over Pyongyang. Military action against North Korea is an unattractive option because Kim Jong Il and his generals could retaliate massively. Promises of long-term economic aid in exchange for Pyongyang's renouncing its nuclear aspirations also offers little hope. Kim has a long record of consenting to such deals and then surreptitiously reviving his armament efforts.

What is needed is an intermediate form of suasion. China is the only power that possesses this sort of leverage. According to South Korean analysts, in 2002 China supplied 31 percent of North Korea's imports and accounted for 37 percent of its exports. In addition, each year Beijing gives several hundred thousand tons of food aid to its troublesome neighbor, and, now that the United States and Japan have suspended their oil shipments, provides the preponderance of its fuel.

Beijing has occasionally used its influence to express discontent with North Korean behavior, and, by all accounts, the diplomatic dialogue between the two states has also become more acrimonious of late.

However, Beijing will presumably not press Pyongyang much further unless it is assured of the Bush administration's goodwill. In practice, this means that Washington must identify and alleviate China's specific geopolitical concerns. If Beijing fears a refugee crisis, then the United States and its allies must promise to help finance the care of the displaced and perhaps to absorb some significant number of North Korean emigrants. If Beijing fears the approach of American military forces, Washington should consider promising to limit U.S. activities north of the demilitarized zone.

While demonstrating that the United States is willing to accommodate China's needs, the Bush administration must also prove that Pyongyang's policies represent an immediate threat to East Asian stability. To do this, Washington needs to engage more frequently and more conciliatorily in diplomatic talks with Kim and his representatives. For with each abortive discussion, each rejection of reasonable American gestures, the North Koreans push Beijing closer to the conclusion that they pose an unacceptable danger to China's national security interests.

The effect of this policy of dual engagement with China and North Korea would almost certainly be positive. As Beijing's attitude towards Pyongyang hardened, the world might see a sharp reduction in its oil shipments, the deployment of more troops to the North Korean border, or overt discussions with the United States about the future of the peninsula. This would be the strongest possible signal to Pyongyang, short of war, that the world will not tolerate its emergence as a major nuclear power. If, on the other hand, he remained intransigent until the intensified pressure caused North Korea to collapse, Washington and Beijing would still be relatively well situated to deal with the ensuing challenges.

It is through the joint resolution of serious challenges that potential rivals like the United States and China learn to trust each other. If there is a silver lining to the North Korean cloud, it is this opportunity to improve bilateral communications in anticipation of future exigencies.

The writer is a fellow at the Asia-Pacific Research Center, Stanford Institute for International Studies.