Huffington Hysteria

HuffPo has so much to offer us, but an article run in today's business section can only be described as hysterical. View it here.  It describes the dire consequences of the decline of the industrial side of the U.S. economy.

In reality, there is no such decline except in relative terms. With less than 5% of the world's population, the U.S. accounts for almost 25% of the world's industrial output. China, with 24% of the world's population accounts for about 18% of the world's industrial output.

Additionally, U.S. industrial output has grown every year since 1990 (at least) even through the current recession.

SOURCE: http://investing.curiouscatblog.net/2010/02/17/usa-china-and-japan-lead-manufacturing-output-in-2008/

Industry is not going away. What will go away are the number of jobs provided in the manufacturing sector. As advanced economies automate and robotize their industrial plants, fewer and fewer people will be needed to work in them. This is roughly analogous to the 19th and 20th century decline in the number of farm workers or number of deck hands needed to move a given amount of freight tonnage on a ship across an ocean. (Think labor intensive sailing ships versus the mega cargo ships of today that can be operated with a handful of crew members.)

And consider this from MSNBC: "Whereas a Chinese industrial worker produces $12,642 worth of output... in the United States, a manufacturing employee produced an unprecedented $104,606 of value in 2005."

China's growth has been meteoric, no doubt. But, with 1.6 billion people, it's output is relatively puny on a population basis, and by default much of what China produces is consumed at home. (Japan and Germany lead both America and China when it comes to this population-to-manufacturing ratio. Although it should be noted that the manufacturing fraction of the U.S. economy is much smaller than either China, Japan or Germany, which means our economy is much more diverse.)

The United States must stop looking at China's new-found, if narrowly distributed, prosperity not strictly in Yin terms, but in Yang terms as well. It is a new, vast market to conquer and we have many, many goods (and services) China wants and needs.

Obviously, our government needs to be more vigilant about China's unfair trade practices - the renminbi needs to float, for starters - and we must be vigilant about the constant influx of shabby products the Chinese send here.

Reciprocity is the key word and Washington has to step up on the trade issues, even in the midst of all the other wailing and gnashing of teeth rising above the Capitol.

While we certainly have room for expanding our manufacturing capabilities, now is not the time to be acting as if we're on an industrial-strength bad acid trip. Better to ask ourselves what new industries and markets lend opportunity for expansion. Green Tech? Transportation?

The latter is an interesting case and shows why we feel as if we're stumbling. The U.S. dominates aircraft manufacturing. But we are dead last in manufacturing of heavy and light rail components. Why? We have a thriving airline industry at home, but have little in the way of passenger rail service. That's the main reason we have so little in the way of a rail manufacturing sector. Other countries have put increasing importance on rail, creating new manufacturing opportunities in their home countries but abroad as well.

Lack of progressivism hurts us in business as well as social achievement.

The China Recall Syndrome

As China warns the United States that America has more to lose in a "trade war," we are left scratching our heads. Last year we were in the trade hole with China to the tune of $227 billion, better than 2008's $268 billion deficit, but no reason to send in the brass bands. (That's almost a half a trillion deficit in two years.)

What is more insulting is that often the products that China sends our way are not just poorly made, but downright dangerous. The Fisher-Price lead-painted toys recall cost that company between $40 and $70 million. If you think that kind of hit made China's manufacturers sit up and take notice, you're mistaken.

In the last month or so, everything from children's bicycle bells with lead paint to power packs that can burst into flame and explode, to kids hoodies with dangerous drawstrings around the neck to remote controls for gas-heated fireplaces and hockey sticks have been  recalled. (By no means should these be compared to the massive recall of Toyota products, but the response of Toyota - weak in spirit, but concrete in action - should be compared to the companies from China, which has no response except for the recalls. There were also salmonella precipitated recalls of food here recently.)

The biggest culprit in China is the incredibly low net profit margin on goods produced there. It runs in the range of 1 to 2%. Developed countries run around 6 to 9%.

This is part of a grand scheme to capture ever larger shares of markets and amounts to legalized dumping. Couple that with the manipulation of China's currency, the yuan, and we have a prescription for conflict. Toss in the impossibly low wage scales in China and the perfect import-export storm has developed.

This is a liberal cause because for decades now, through Democratic and Republican administrations, the expression Free Trade has been bandied about as if the universal panacea. Simultaneously, unions have been denigrated and demonized by economists from slightly left of center to the far right. Only truly leftist economists have completely understood and explained the value of unions.

Germany, which is second now to China in total manufacturing exports - having just slipped from first place - is about 34% unionized in its industrial sector. The United States runs about 12%. So, the issue isn't unions and efficiency.

Additionally, unions prevent under-priced, shoddily-made goods from entering the country they operate in. Multinationals with the assistance of their minions in government relentlessly persecute unions. Yet, consistently, right to work states, mostly in the American South, have consistently lower wages and purchase a higher proportion of goods from countries like China. Why are we racing to the bottom?

Right to work? How about right to compete on an equal footing? How about the right to a decent wage and legitimate benefits? Our governments have sold out our manufacturing workers.

This, in spite of the fact that American factories are the most efficient in the world along with Japan's and Germany's.

Related posts:

http://nyliberalstateofmind.blogspot.com/2010/03/cutting-trade-imbalance-with-china-in.html

http://nyliberalstateofmind.blogspot.com/2010/03/counterfeit-country-and-american-jobs.html
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The Counterfeit Country Part 2

What can a closed society really produce? That which is safe, proven, nonthreatening. Thus it is with China.

Even modestly open societies such as Japan and South Korea are more capable of innovation than a closed system like the one in China.

Taking the idea of copying to its ultimate extreme, in January a Counterfeit Mall opened in Nanjing (click). It's a stunningly offensive idea, although not much more than Canal Street in New York, where many of the same fake brands made in the same shoddy way are sold under the nose of New York City authorities.

Why should we care? As the currency of advanced countries becomes more enmeshed with intellectual property, that currency becomes the source of our wealth. Agree or disagree with the value of the real liquids in PepsiCo's products, or the quality of Izod shirts, the people who own those brands have spent decades investing in their images, enhancing their desirability. And they've spent billions.

Moreover, products that rely almost solely on intellectual development - movies, books and music - take an enormous economic hit when illegal or pirated copies flood the market worldwide. One can argue that George Clooney or The Beatles don't really need the extra dollars that the fakes drain away. But, that money also ends up not going to small bit players and staff, and importantly is not re-invested in the companies that produce our intellectual or cultural products. So, lower earners, from the go-fer getting coffee for the main actors, to the gaffers, electricians and so forth are penalized by not having unrealized profits plowed back into new productions. Jobs are literally stolen.



Here are a few other examples of counterfeit brands and some of the not so pretty effects counterfeiting engenders. Click on the brand name:

Godiva   Nokia   Colgate  The Case For Cognac  Chinese Car Copies  

Hand Trucks   Tubular Steel  Various brands   Fake Eggs

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The Counterfeit Country and American Jobs

See "My Home Town Video" at end of post.

Aside from its unapologetic manipulation of its currency, Dark Ages-style wages and working conditions, and import tariffs that make it impossible for any country to have a reasonably balanced trade relationship with it, China is the epicenter of the production counterfeit products.

Indeed, China is the producer of 86% of all counterfeit products in the world.

$500,000's worth of (American company designed and licensed) Chinese-made knock off shoes found their way to Budapest last week.

Illegal American faux-label vodka with 120 times the normal amount of ethanol was marketed in Great Britain in 2009, causing 4 deaths.

The FDA of Nigeria in conjunction with 7 other African countries' enforcement agencies in 2009 seized a large consignment of counterfeit anti-malarial generic medicines with “Made in India” and "Made in USA" labels and later found that the fake drugs had in fact been produced in China. (There is a colder current involved in this one - the drugs are purposely made to be below acceptable standards in order to undermine India's drug market share in Africa.)

$3 billion worth of fake movie DVDs, based on the intellectual property of American studios, were distributed worldwide by Chinese counterfeiters in 2008. The figure is expected to leap by another half billion in 2009. 

Worse still, from the point of view of U.S. companies, is the fact that 80% of all software used on computers in China is counterfeit or illegally copied. (Amazingly, this is down from 90% in 2004.)

A United States patented rolled metal process for the making of fine filaments used in the making of circuitry boards in all kinds of electronics products is used freely in China in spite of the fact that companies from 12 other countries pay their fair share of licensing costs. This costs the American companies of the jointly-owned patents over $27 million per year in lost fees.

The Re-innovation Of Innovation

To add insult and further injury to the damage already stemming from this counterfeiting, China is promoting something they call "indigenous innovation." Sounds benign enough, doesn't it?

But the devilish detail is that the new law, Order 613, mandates that in order for foreign intellectual property (IP) to be put on a government procurement list, the IP must be developed, or owned and trademarked by a Chinese company or government agency.

Foreign Affairs Ministry Spokeswoman Jiang Yu said this:

China’s indigenous innovation includes original innovation and integrated innovation as well as the re-innovation of innovation that is introduced, digested, and absorbed. Indigenous innovation activities are open, and come from within enterprises. The indicators for accrediting indigenous innovation products are not based on the nature of the enterprise, but on whether the enterprise carries out innovative activity and gains products that have indigenous intellectual property rights.

Essentially, "re-innovation of innovation" means stealing.

Every software developer, content provider, film and music publisher in the rest of the world is against this. However, so far, national governments seem to be particularly disinterested.

It's time for the Obama Administration to step up and put real teeth into sanctions on China. American jobs, which are in notorious short supply these days, are being stolen.

While unions in the U.S. aren't free of sin, in prior generations they served as the front line in the battle against unfair trade practices by underhanded competitors.

Jobs mean everything to unions. And jobs mean prosperity. Having a skilled workforce does us not one iota of good if it can't work because of what amounts to piracy by an unfriendly government.

By gutting the unions and battling against active re-unionization, or by permitting "right-to-work" laws in many (mostly Southern) states, conservatives in the United States have taken the union foot soldiers away from this battlefront.

Now we reap the consequences of past right wing deeds.

Cutting The Trade Imbalance With China In Half - Now

In 2009 our trade deficit with China was about $227 billion dollars. We sent them about $69.5 billion in goods and services and they sent us $294.4 billion.

The world's largest retailer, Wal-Mart Stores Inc, says its inventory of stock produced in China is expected to hit $22 billion this year, keeping the annual growth rate of over 20% consistent over two years.

Xu Jun, Wal-Mart China's director of external affairs recently said that China is Wal-Mart's most important supplier in the world. I looked further into this.

A spokesman in New York from Mr. Xu's bureau (also named Xu) said "If Wal-Mart were an individual economy, it would rank as China's eighth-biggest trading partner, ahead of Russia, Australia and Canada."

Furthermore, over 70% of the commodities sold in Wal-Mart are made in China. (Commodities such as textiles, toys, hardware, etc., as opposed to raw commodities like coffee, steel, etc.)

No China, no Wal-Mart.

But, aren't there other countries - Vietnam, South Korea, Mexico - Alabama and Mississippi - who can make the products Wal-Mart wants to sell? Certainly, but China engages in practices that create low prices for the American, European and other "western" markets (called first importers) on the backs of countries regarded as secondary importers (places like Pakistan, African nations, Brazil, Chile, and so forth).

One method is called an "arbitrage opportunity." Here's how it works.

Let's say Wal-Mart has the need for 1 million Dick Cheney bobble-head dolls. Wal-Mart strikes the design and owns the copyright. They transmit the design to China with the understanding that the Cheney bobbleheads (predicted to be wildly popular) will be landed in Los Angeles for 63 cents each.

BUT China has the right under the deal to make another 1 million Cheneys that can be sold anywhere except in Wal-Marted countries (the so-called secondary importer markets). These are sold to distributors or big retailers for $1.39 each by the Chinese manufacturers. Wal-Mart has done the marketability research, designed the schematics for production, tested the products, and rolled them out.

The average price for the full run of manufacturing is $1.01 per piece. Of course, Wal-Mart has only paid 63 cents and so when they sell them for $3 retail, there is a profit of $2.37, whereas those in the secondary importer markets have paid more than double to the manufacturer in China.

What are the net results for the United States? A very cheap Dick Cheney bobblehead doll, obviously. But also a loss of potential manufacturing opportunities.

Could we make the bobblehead dolls for 63 cents here? Probably never, especially if they require the hand painting of an arched eyebrow on Cheney's face. Might we be able to make them for the $1.01 average? Almost. We could probably make them for $1.10 or somewhere around that. Because our low-skill factory workers have to make $12 to $15 per hour as opposed to the $12 per DAY a worker makes in China.

But, the full story is really hidden in the second half of the 2 million bobblehead doll run. The Chinese engage in what is poetically called "quality fade." A few minutes after the 1 millionth doll for Wal-Mart is made, a cheaper spring that makes Cheney's head bobble is substituted, a cheaper grade (or even toxic grade) paint is used, lower quality shipping materials are employed, etc. So, within the second million, not only is the price charged higher to wholesalers, but the profit margin, because of shabbier workmanship and materials, is even stronger for the Chinese manufacturer.

In manufacturing, the United States makes big, complex products. Airplanes, turbines, tractors, computers, autos, etc. All products from the first to the very last that rolls off the line must be of as high quality. We don't expect Boeing to be cutting a whole lot of corners on the 800th plane of an order.

The import tariff + VAT taxes on finished goods going into China is anywhere between 22% and 40%. Between the US and EU, which many economists consider high but realistic given protectionist urges, the taxes run about 14% total either way on average.

Free Trade anyone? Essentially, we can't sell anything in China that the Chinese make themselves.

Death by a thousand cuts. Read the labels of the things you buy.