On April 18, China won another battle in its one-sided trade war against the United States when America’s last remaining motorcycle maker, Harley-Davidson, announced plans to lay off 730 workers. These workers will join the approximately 2.3 million Americans who have already lost their good-paying manufacturing jobs to the Chinese strategy of selling to the United States without buying from us.
American workers have less money to spend on motorcycles because they have been losing good-paying jobs in the U.S. manufacturing sector and taking lower-paying and less productive jobs in the service and government sectors.
The Chinese motorcycle market is huge, about 24 million sold in 2007, up about 15 percent from the previous year. If China were willing to let their people buy Harley-Davidson motorcycles, then Harley-Davidson’s exports could keep its workers employed. Harley-Davidson would be expanding its sales with China and the United States economy would be growing with the Chinese economy.
However, even though Harley-Davidson opened a dealership in Beijing, China, in April 2006, sales are low because the Chinese government imposes three different trade barriers:
- China charges a 30 percent tariff on foreign vehicles, including motorcycles.
- China imposes what Forbes Magazine calls “ownership and riding restrictions in most large cities and on highways.”
- China manipulates its currency to keep the yuan low compared to the dollar. The Chinese have already accumulated more than a trillion dollars as a byproduct of these massive currency manipulations.
The key trade barrier of these three is the third one, because without it the other two would not work. If China just imposed a tariff on vehicles, for example, without accumulating a massive amount of dollars at the same time, then their currency would have risen in value verses the dollar, and their attempt to win market share in vehicular sales would cause them to lose market share in other areas. Peking University economics professor Heng-Fu Zou explained how this barrier works over the long-term in a 1997 paper, but most American economists still haven’t figured it out!
Predictably, these barriers and others by the Chinese government have been producing China’s growing trade surplus with the United States that is shown in the graph below:
In 2007, the US trade deficit with China in goods and services rose another $23 billion from $229 billion to $252 billion, meaning that the Chinese government stole about 200,000 more U.S. manufacturing jobs last year. Each of these jobs would have produced about $110,000 worth of GDP ($110,000 was the average value-added per manufacturing worker in 2006), making Americans much richer. Instead, most of these workers took much less productive jobs.
As a result of the U.S. trade deficits, which have been growing almost steadily since 1984, the United States has lost more than 4 million productive trade-related jobs. This is the principal cause of the wage stagnation and the worsening of our distribution of income during the past two decades.
The loss of industry after industry since 1984 has caused the dollar to fall about 40 percent against most European and Latin American currencies since 2002. The falling dollar, in turn, contributes to the astronomic prices of oil, gasoline and other commodities.
China’s massive accumulation of American dollars was loaned back to the United States, contributing to the housing bubble. These loans have driven American real interest rates (10-year Treasury bonds after subtracting for inflation) into negative territory, causing Americans to borrow for consumption instead of saving their money.
Were trade balanced, the increasing U.S. purchases of Chinese goods and services would be matched by increasing Chinese purchases of U.S. goods and services. Both countries would be growing together. Instead, the U.S. economy stagnates while the Chinese economy grows by 10-12 percent per year.
China is not the only country following the mercantilist strategy of selling to the United States without buying from us. Japan invented the strategy shortly after World War II. Almost every Pacific Rim country has been doing the same. India and many other governments throughout the world are just starting to do it. Mercantilism works so long as the victim country remains passive, and the United States government under Democratic and Republican administrations since 1984 has done nothing to stop the damage to the U.S. economy.
Harley-Davidson is hoping to sell motorcycles in China without building a factory there: In 2004, its CEO, Jeffrey Bleustein, told Motorcycle USA:
Harley-Davidson’s primary objective is to export our American-made motorcycles to China and to develop political and motorcycle industry alliances in anticipation of the market becoming more accessible. We do not believe it will be necessary for Harley-Davidson to manufacture its motorcycles in China in order to be able to sell them there.
With all but one of its factories located in the USA, it is one of the few remaining American manufacturers that still produces almost all of its products here. But Hillary Clinton, Barack Obama and John McCain are all ignoring the mercantilism being practiced by China and other Asian nations. In effect they are joining the Chinese government in telling Harley-Davidson to move its factories to China.
As we make clear in our book, “Trading Away Our Future,” there is a powerful way we could fight back. The international rules of trade allow the United States to impose quotas, tariffs or take other measures to correct a chronic trade deficit. In our book, we recommend the imposition of Import Certificates, a variation of a proposal made by Warren Buffet a few years ago, which would gradually limit our imports from China and other mercantilist countries to the level of their imports from us. China would have to dismantle its trade barriers, or they would lose sales to the United States.
Pacifism doesn’t work when fighting military wars, and it doesn’t work when fighting trade wars. The U.S. government passivity as the Asian governments have stolen industry after industry from us has placed the U.S. economy in peril. It’s time that the United States started to fight back.
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Dr. Raymond Richman is the president of Ideal Taxes Association. He is professor emeritus of public and international affairs at the University of Pittsburgh with a Ph.D. in economics from the University of Chicago. Dr. Howard Richman is executive director of a nonprofit (Pennsylvania Homeschoolers Accreditation Agency) and an Internet economics teacher. Dr. Jesse Richman is assistant professor of Political Science at Old Dominion University. They are the authors of “Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it’s Too Late.”