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Chinese bad news equals American status quo

Posted By Roger Simmermaker On 08/10/2010 @ 2:15 am In Commentary | Comments Disabled

A news article in The Wall Street Journal on August 2 titled “Growth in Chinese manufacturing sector slips” got me thinking: A slip in the manufacturing sector in China is big news, but in America it has been business as usual at least until recently (the manufacturing sector in America now fortunately is on the upswing for the first time in decades).

Make no mistake. What happens with the Chinese economy and more specifically Chinese manufacturing in the near future will have big implications for the United States and the broader global economy.

While China has become used to GDP growth of 10 percent or more annually for nearly three decades, America’s GDP normally languishes between 2 and 3 percent (however net exports in the fourth quarter of 2009 added 0.5 percentage points to the annual growth of 5.7 percent in GDP). In China, the second-quarter growth of 10.3 percent actually is cause for concern considering the year before it was pushing 12 percent.

This high-paced growth rate can’t last forever, and China knows it. The big question mark is what happens at the point when an unsustainable situation no longer can be sustained.

Wage rates for the typical migrant worker in China shot up 17.8 percent in the last year. At a Chinese Honda plant, manufacturing workers negotiated a startling (startling by U.S. standards, that is) 24-percent wage increase.

The global economy, which has allowed the near-instantaneous flight of manufacturing from one country to the next and has beaten down a once-stable, growing and prosperous American economy that once emphasized manufacturing, now threatens China with the same medicine as companies look to escape to lower-labor-cost countries for production.

When that happens en masse, the United States will face new challenges that will threaten what is left of our weak economic recovery. Here’s why:

  • China will seek to upgrade production and extract future growth from innovation and technology products rather than low-end production of toys and the like

  • Production of goods like toys and apparel won’t migrate to the United States, but to other countries that offer cheaper labor rates than China
  • China will become even less open to American companies seeking to invest there as their Communist-led government reserves even more Chinese production for Chinese-owned companies and Chinese workers
  • America’s exports to China, although currently increasing, will come to a halt and likely decrease, causing our job-killing trade deficit to grow even more

What is most troubling is that we, the United States, knew this was coming for years. We knew China’s economy could not grow indefinitely in the double digits, and we knew that our own persistent trade deficits were unsustainable as well.

As China abandons hundreds of thousands of workers currently employed in lower-end manufacturing that we unilaterally gave away decades ago for nothing in return and upgrades to higher-end manufacturing coupled with technology and innovation, America’s unemployment rate will continue to face upward pressure. Why?

When we disregarded America’s blue-collar workforce and were told a more prosperous American economy would result by switching from making products American consumers always would buy like clothes and toys to manufacturing advanced-technology products, which not all American consumers can afford, we were sold a bill of goods. The United States ran a trade deficit of $72.5 billion in advanced-technology products with China in 2009.

As changing technology churns out products like iPods, then iPads, and then something else, we continually must fight for a foothold in the production of these new devices, and it’s no secret that America almost always loses.

America has benefited from smart innovation and technology for home-grown inventions like the iPod and iPad, and we should be happy these are products invented by American-owned companies. Although the iPod is manufactured in China, it was engineered in America. Even though we don’t benefit from manufacturing this product, Apple employs 35,000 Americans in areas like research and development, design, engineering, testing and administration. That’s a good thing.

The problem is that perpetual importation of these products adds to our escalating trade deficit, which kills American jobs, drains U.S. Treasury tax coffers and slices into what would be a higher GDP.

What can we do to dampen the coming negative effects to our economy? We need only to look at what China is doing that is working for them right now, which actually is nothing more than what worked for us before we accepted becoming an accomplice in a contrived global economy.

We should concentrate more (meaning more than we are now) on government-financed infrastructure investments. Part of the problem here is that too many Americans perceive this as evil government spending. But when we allocate taxpayer funds for our nation’s roads, bridges, transit infrastructure, power grids, dams and drinking-water and wastewater-treatment systems, we not only create jobs; we enable commerce in our country to function more efficiently. The payoff for these investments will bring returns decades into the future through a more stable and dependable American economy.

As China switches to more advanced, higher-tech industries – the same ones we were told America would switch to and dominate decades ago when we foolishly began to regard American manufacturing as a has-been industry – we will be competing with rivals we helped create.

The Chinese currently are sitting on well over $2 trillion of American cash reserves, and they likely will seek to accelerate their appetite for buying American assets with money that used to be ours before we sent it to them thinking free trade was the greatest thing since sliced bread.

When this acceleration occurs en masse, once-great American-owned companies will become Chinese-owned companies, and we’ll be begging them to rent out our American labor to help them garner profits they will be repatriating back to China to further build their economy, their military or whatever else is in their national interest.

When we support foreign companies operating in the United States, even when their products are made or assembled in the USA, we still send our dollars to foreign lands through profits paid to foreign companies. This money may be, and many times has been, used to “invest” back into the United States.

When foreigners assume ownership of U.S. land and factories, they become our landlords. We essentially are letting them be the holders of the mortgage on our national treasury. Every time they return their profits to their foreign lands, and pay their taxes to their foreign governments, they dissipate our country’s wealth instead of creating it. What can we do about it?

For starters, we need more American investment and less foreign investment in America. To make this happen, we as consumers have to invest in America with our consumer dollars, and that means patronizing American-made products from American-owned companies. We only vote every two or four years at the polls, but we vote every single day with our dollars at the stores or on the Internet.

Buying American is the only way to guarantee that America’s wealth actually stays in America. Buying American starts with “We the People” and it needs to start now if you’re not doing it already. Awareness is the key.

If American consumers leave foreign products to rot on the shelves and instead opt for buying American products, there is not a political strategy that our legislators could devise that could thwart such an effort. This is why buying American is potentially more powerful than legislation. American consumers possess much more power over our economy than we realize. The only thing missing is how to apply that power, but ultimately it is power that resides with us.


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