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.

Back To Europe and the Basics of Liberal Foreign Policy

American overseas preoccupations of the last decade have centered on terrorism, the wars in south Asia, and the paper tiger of China, America's next great fall guy. Meanwhile our long, deep roots with Europe have centered around war aims, overt and covert and the bickering over climate change.

Together, the United States and the European Union together account for about $3 trillion in exports, and well over one third of the entire world's economic output despite having only 12% of its population. (China by contrast contains almost 20% of the world's population and accounts for 14% of world GDP. Japan has about 1/10th the population of China and has a larger share of world GDP.)

So, what are our priorities regarding Europe (and Japan, and other western style democracies)? Clearly, if we were to simply follow the money, we would be spending an enormous amount of time tightening our already firm bonds to Europe. We would play down the consternation over China's "rise," remembering always that it still has 1.1 billion people living at subsistence level with whom they will eventually have to engage.

Further, we would pay close attention, to use Lincoln's words, to "the mystic chords of memory," that bind Europe to America and we to them. While we have navigated the streams of democratization in parallel, we also share an intellectual and artistic history, a battlefield history, a religious commonality with Europe. We share the burdens of colonialism. And, although Europe has largely ignored its part in the tragedy, we share the legacy of slavery.

But our view of Europe remains calcified and simplistic. It is a very fine place to visit. The Brits will always be our friends. Inexplicably, the French are eternally annoying, if less so nowadays. The Germans still wear the mantle of militarism, even if they have been ultras pacific since the war. And what good workers! The Italians are amusing and unstable. The Spanish are unemployed. The Scandinavians are blond and very advanced considering their size. The Greeks profligate. The new, eastern EU members are enigmas and still viewed as a bulwark against the Russian bear.

So what should we be doing?

First, loosen economic ties with authoritarian China, which does not play fair and takes all criticism of its regime and its self-centered economic policies as "meddling." Establish new rules concerning "free trade," turning our bent with developing countries into "fair trade."

Second, together with the EU we should identify with and be by the side of rising democracies and do all we can to work with them. India comes to mind, as do certain African nations, Brazil, Argentina and other "second world" democratic economic powers. India, in particular, offers enormous opportunity for Europe and the United States.

While both the United States and Europe hamstring themselves through dependence on foreign energy sources, we need to switch focus from the oil states to the states of the southern Mediterranean basin: Morocco, Algeria, Tunisia, Libya and Egypt. The West also must stay focused on a just settlement for Jews and Palestinians in Israel.

Regardless of the country the West deals with, we must insist on expansion of human rights, whether these concern religion, ethnicity, gender, or sexual orientation. Economic justice - still an issue at home - must be pursued worldwide.

Violations of established intellectual property rights laws must be enforced. Giving away our edge in technology, such as in computer science, space, robotics and the internet, is suicidal. Innovation is at the core of western success. And our spirit.

Through our communal technological prowess, the US, EU, Japan and the other westernized societies must solve the energy crisis. For a better environment, for a better life for the entire planet, but also to choke of the seemingly unending conflicts we find ourselves involved with in south Asia and northeast Africa.

The United States and the European Union need a large, common goal beyond prosperity in our friendly zones. It might be space, medicine, water and food purity, or transportation. But something larger and more transcendent than growing richer has to bind us together even more deeply.

This is where real liberalism counts.