Every once in a while, ManufactureThis sees something commendable in the mainstream press.  And so we were happy to note a piece by Gilbert Kaplan in yesterday’s Washington Post that was intended to “cut through the many myths” surrounding manufacturing in the United States.

Kaplan believes that an even “more damaging threat to the nation’s prosperity” than the troubled domestic banking industry is the “decline of the manufacturing sector.”  And Kaplan does ManufactureThis proud by citing some of the same stats that keep us awake at night—namely that U.S. manufacturing employment has fallen below 14 million for the first time since 1950, and that the country shed 49,000 factory jobs in April 2008 alone.  Losing roughly 50,000 good-paying manufacturing jobs in one month suggests a potentially stunning 600,000 industrial jobs lost in 2008.

With those cheerful points in mind, Kaplan sets out to explode some of the myths that have obscured public focus on the manufacturing debate.

For starters, Kaplan points out that American workers are not “paid too much.”  Not only are good manufacturing salaries a stabilizing hallmark of a First World economy, but they happen to be quite reasonable.  He observes that “Labor costs are already less than 10 percent of the cost of making many products, including steel and semiconductors.”  Instead, what hurts U.S. manufacturers isn’t labor costs so much as manufacturers having to compete with “currencies valued extremely low against the dollar.”  This artificial currency manipulation on the part of some of our trading partners makes U.S. exports “very expensive” for overseas consumers, a significant disadvantage in a tight global market.

Kaplan also dispels the myth that manufacturing belongs to the “old economy.”  Many pundits and candidates suggest that America’s primary business focus is transitioning to an ‘Information Economy.’  This overlooks the very basic fact that consumer demand remains strong throughout the world for high-tech equipment.  Unfortunately, though, the U.S. isn’t one of the main producers.  As Kaplan sees it, “very few high-tech companies are building new plants in the United States. The name on the box of the computer you just ordered may be Dell or HP, but the computer itself was probably made in Asia. The fancy light-up screens on your cellphone and iPod — liquid crystal display screens, or LCDs — are all made in China, South Korea, Singapore and Japan. Even our greatest semiconductor companies, such as Intel, are building new state-of-the-art facilities in China.” 

Additionally, Kaplan points out that U.S. private-sector companies can’t put as much money into technology and research and development as foreign governments do to build up their sectors.  Essentially, U.S. firms are competing against foreign governments.  The Chinese government has provided $27 billion in energy subsidies for its steel producers since 2001 and Kaplan points to the more than $12 billion that South Korea has invested in its semiconductor industry, which is “severely harming the U.S. semiconductor manufacturing base.”

Kaplan is to be saluted for making the very elemental observation that manufacturing needs to be tended and supported in the United States.  Most countries have a plan for supporting and embracing their crucial manufacturing sectors.  The United States does not, though, and it’s an oversight we may very much regret in the coming years.

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Yesterday, the House Homeland Security Committee voted unanimously to approved H.R. 5935, a bill requiring certain federal agencies to use American-made steel for public works projects.  Sponsored by Rep. Pete Visclosky (D-IN), the bill (known as the “America Steel First Act of 2008”) requires construction projects executed by the departments of Defense, Homeland Security, and Transportation to use 100 percent American steel unless an exception applies.

As ManufactureThis noted last fall, pipe made in China has been used in the construction of a border fence between the United States and Mexico. In response, Rep. Visclosky introduced the bill, explaining, “The American Steel First Act will combat unfair steel imports by requiring the increased use of domestic steel products in federal projects.  It will give our steel industry a boost, create much-needed American jobs, and save lives.”

  In April AAM field coordinator Mickey Bolt testified on this very subject before the Congressional Steel Caucus.  In his prepared testimony, he noted:
“While the American steel pipe and tube industry was closing down…DHS was using American taxpayers’ money to purchase pipe from Chinese manufacturers, securing the future of pipe workers in China, not the U.S.  This is wrong. In my view, the application of the Buy American Act was passed with the intent that American taxpayers’ money should be used to support American industries and American workers — and not to support subsidized industries in China.  The pipe that was used in the construction of the border fence should have been produced by U. S. manufacturers and by USW members, instead of being outsourced to China.  This example highlights the problem of giant contractors only being concerned with securing the cheapest goods to maximize profits, regardless of the quality of the product, or whether it was domestically produced.”

As ManufactureThis  earlier this week, dumped Chinese steel has adversely affected U.S. steel pipe producers.  Legislation requiring that national security work be sourced from reliable domestic producers seems a logical step toward retaining a strong American defense industrial base.  ManufactureThis commends the Homeland Security Committee for recognizing this.

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  BusinessWeek reports that an Indian company, Mindworks Global Media, has been contracted to provide copy editing duties for The Orange County Register.  The New Delhi firm will also begin handling page layout for a community newspaper owned by the Register’s parent company, Orange County Register Communications. 

John Fabris, a deputy editor at the Orange County Register, commented: “In a time of rapid change at newspapers, we are exploring many ways to work efficiently while maintaining quality and improving local coverage.”

This outsourcing of white collar editorial jobs points to an interesting new benchmark in the global age.  ManufactureThis wonders what the newspaper editors who trumpet globalization are thinking as they see some of their jobs sent overseas?…

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File this under “Less Than Encouraging”: the New York Times reports that the dodgy firm contracted to supply bullets and ammunitions to U.S. military efforts in Afghanistan has supplied both obsolete, decaying munitions from the former Soviet Bloc and “tens of millions” of rifle and machine gun cartridges manufactured in China.  The procurement of these munitions poses a “possible violation of American law.”

  In January, a federal contract worth up to $300 million was awarded to a little known Miami firm, AEY Inc., to supply munitions to Afghanistan’s army and police forces.  According to an investigation by the Times, “the company has provided ammunition that is more than 40 years old and in decomposing packaging…Much of the ammunition comes from the aging stockpiles of the old Communist bloc, including stockpiles that the State Department and NATO have determined to be unreliable and obsolete.”  Much of the Soviet stockpiles were supplied from aging munitions piles previously assumed to have been destroyed.

In addition to 40-year-old Soviet bullets, several millions rounds were purchased from Albanian stockpiles of Chinese-made ammunition.  In recent years, the U.S. has contributed $2 million to destroy excess small-caliber weapons and 2,000 tons of ammunition in Albania.

Essentially, AEY’s 22-year-old president Efraim Diveroli managed to land several contracts with the U.S. military to supply munitions to Afghanistan’s police and army.  His company was one of 10 firms that submitted bids in time for a September 2006 deadline, which led to a series of weapons contracts.  According to the New York Times, AEY has also provided supplies to the American military in Iraq, including a “$5.7 million contract for rifles for Iraqi forces.”

Aside from the disheartening corruption at the center of AEY’s bogus munitions sales, there’s the issue of circumventing domestic suppliers.  There are U.S. firms that would happily fulfill these procurement needs rather than see U.S. taxpayer dollars sent overseas—and to shady contractors.  Unfortunately, when procurement is awarded to foreign competitors, it helps put U.S. companies out of business.  In late 2007, for example, the renowned 140-year-old Winchester Arms factory in New Haven, Connecticut closed its doors.

There’s a reason that Congress passed the Berry Amendment to ensure that preference for defense procurement is given to domestically manufactured goods.  It simply makes sense to support one’s home factories.

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ITC to China: “Pipe Down.”

Last Friday, the U.S. International Trade Commission (ITC) determined that domestic steel pipe makers are being harmed by competition from China.  ManufactureThis is glad to see that the ITC recognizes what we’ve been saying—namely, that China unfairly subsidizes and dumps products in order to gain a decided advantage over U.S. producers.

  The ITC decision, which came after a 5-0 vote, marks the first time the U.S. will impose duties to compensate for tax breaks and other government subsidies to Chinese competitors.

What’s important to note is that the U.S. has trade laws on the books that are meant to address unfair and illegal trade practices.  Utilizing these laws can help steer countries toward competing fairly, and thus preserving an open, free market.

AAM field coordinator Mickey Bolt, who oversees AAM Action outreach throughout Pennsylvania, is a former employee of Wheatland Tube, a company that had been hard-hit by subsidized competition from China.  Mickey was particularly pleased by the ITC decision and noted that “finished Chinese steel pipe is sold in this country at a lower cost than the raw material costs for the American manufactures.” 

Specifically, Mickey cited large subsidies on the part of the Chinese government that “allow their manufacturers to ship products here and sell them cheaper than an American manufacturer’s raw material cost.”

As Commerce Department data indicates, these subsidies have resulted in a nearly 7,000% increase in steel pipe imports from China since 2002.

As a Wheatland Tube employee, Mickey has seen the ground level results of this import competition and said that he hopes the ITC ruling will mean that “American steel pipe and tube manufacturers like my friends at Wheatland Tube and Sharon Tube will finally be able to compete against Chinese pipe producers and not the entire Chinese government.”

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  As of today, there are only 45 days left till this summer’s Olympic Games in China.  And, if The Atlantic’s Jim Fallows is to be believed, it’s unclear whether the notorious smog of Beijing will dissipate in time for the opening ceremonies.  On his website, Fallows posts a daily snapshot of downtown Beijing, and as of now, the forecast still looks rather gray.

In a post last Friday, Fallows speculated about Beijing’s skies:
“Either there is some unusual output surge underway, making the air for the last few weeks the worst I’ve seen in a year. I have not seen the sun or anything resembling blue in days and days. Or some catastrophic underlying change has occurred, making it all the more challenging to bring the air to acceptable levels in the next 49 days.”

Fallows adds that he was joking when he previously suggested that “maybe the factories are running 30 hours a day, 10 days a week, to meet output targets before the expected mandatory pre-Olympic shutdown next month.”  Now, however, “he’s not so sure it’s a joke.”

The overall smogginess of Beijing is emblematic of the disregard Chinese manufacturers have for environmental standards.  Whatever it takes to make a buck—and a fast one at that—will do.  And if that means belching factory towers, and no scrubbers on CO2 and sulfur dioxide, so be it.

Unfortunately, this full-tilt polluting has consequences—unsafe air in Beijing that actually blows across the Pacific and now accounts for one-fourth of all California air pollution, according to the EPA.

Aside from the air pollution, there’s also a less obvious, but very costly toll: Chinese manufacturers are saving a lot of money by not adhering to any environmental laws.  In fact, the cost benefits for them are sizeable.  AAM has been researching this and, in time for the Olympics, we’ll be releasing a report on how China’s environmental practices help their industries at the expense of American manufacturers.  Stay tuned.

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  This morning, the Wall Street Journal’s Michael Phillips discussed an interesting aspect of world trade flows, namely that $361 billion worth of foreign investment in the U.S. in 2007 came from “emerging-market nations.”  That’s nearly 40% of the $920 billion that foreign investors spent last year on U.S. stocks, bonds, and government securities.

What’s striking about this “emerging market” investment is that it runs counter to long-accepted notions of international trade flows.  As Phillips pointed out, “In economic textbooks, capital is supposed to flow from slow-growing, rich countries that have a lot of it to fast-growing, poor countries that don’t. Certainly that was the case before World War I, when Europeans exploited the natural wealth of their colonies. Now the textbooks are being turned upside down.”

While some of the $920 billion in total foreign investment comes through Britain from oil-rich Persian Gulf states, many billions of dollars also flow from China, Mexico, Brazil, Russia, Singapore, Malaysia, South Korea, and other developing nations.
Essentially, the United States is now attracting investment from Third World countries.  Phillips cites Bank of America strategist Joseph Quinlan, who says of the Unites States, “Not only are we addicted to other people’s money, but the money we’re addicted to is from the poor countries.”

There’s a reason for this, however.  China alone accounts for 21% of foreign investment in the U.S., according to Phillips.  China also accounts for more than one-third of the $700 billion U.S. trade deficit in 2007.  And so, Beijing has used much of its $256 billion trade surplus to buy U.S. assets.

This is one result of current U.S. trade policy—namely that we are importing far more than we are exporting.  As a result, and with no unified vision regarding the importance of domestic manufacturing, dollars are accumulating overseas.  Foreign investors find themselves in the envious position of needing to spend that money.

Phillips worries that the U.S. will find itself “not only dependent on money from the developing world, but in large part dependent on money from governments in the developing world — and undemocratic ones.”  What’s troubling is that “there’s no guarantee that the benevolence will last and, at some point, governments in places like Beijing may decide to exercise the leverage that their riches imply.”

As ManufactureThis is wont to say, a prudent course of action would be to seek more balanced trade.  Because China is brazenly flouting world trade law, step one would be for Congress and the Administration to begin strongly enforcing existing U.S. trade law to see that illegal currency manipulation, dumping, and subsidies don’t result in a continuing, vast outflow of U.S. dollars.

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ManufactureThis attended an interesting event today at the Center for American Progress (CAP).  David Madland, CAP’s Director of the American Worker Project, authored a report entitled “Journalists Give Workers the Business.”    The Center hosted a panel discussion of Madland’s report that included Madland, Philip Dine (St. Louis Post Dispatch), William Greider (The Nation), and Steve Trossman (Service Employees International Union).

The panel discussion focused on how the mainstream media covers the economy.  Madland believes that media coverage of economic issues is biased, with the perspective of workers underreported while business and management see their message represented reported more thoroughly.

All four panelists agreed that a chief reason for media bias in favor of business stems from journalists’ “preference for elite sources, such as government or business representatives, over ordinary citizens.” 

ManufactureThis has noted something similar.  During the recent presidential primary campaign, Sens. Obama and Clinton both criticized NAFTA and unbalanced U.S. trade with China.  Rather than delve into the possibility that NAFTA is flawed in actual practice, or that China is violating world trade law in order to undercut U.S producers, both candidates were accused of “pandering” to disaffected voters.

The irony is that NAFTA has cost the U.S. more than 1 million jobs since its passage in 1994.  And unbalanced trade with China has claimed an even greater toll— more than 1.8 million jobs since 2001.  As William Greider pointed out, “Americans form their views by what happens to them every day.”  And so, when Obama and Clinton suggest that current U.S. trade policy needs revision, they’re not pandering so much as thinking outside the very narrow box of Washington politics.

Madland’s excellent report is posted here.

  Well, some people thought this week’s Strategic Economic Dialogue (SED) with China was a smashing success.  A smiling Treasury Secretary Henry Paulson was quoted in USA Today as saying the talks succeeded in “creating a foundation” for future achievement, while Chinese Vice Premier Wang Qishan deemed the meetings “highly successful.”

But laying the groundwork for some hypothetical future success really just means changing the bucket under a leaking pipe.  It doesn’t necessarily fix the plumbing.  As AAM Director Scott Paul said in the same USA Today article what’s needed is a “more robust approach from Washington”—one that specifically puts China on notice regarding continued violations of world trade law.

Ironically, the shuffling of paper that constituted the bulk of this week’s meeting did little to quiet Congressional discontent.  Sen. Debbie Stabenow (D-MI) had already co-authored a letter to Secretary Paulson signed by 10 other Senators that urged action on China’s undervalued Yuan in order to ensure that its value is “determined by markets, not government interventions.”  The various Senators believe that if China “plays by the same rules, our manufacturers can compete and thrive in the global economy.”

Stabenow and company concluded by noting that U.S. manufacturers cannot “afford further delay in addressing the misaligned [Yuan].”  The distortions caused by this currency manipulation have directly contributed tomoer than 1.8 million U.S. jobs lost since 2001.

In a “China Index” released yesterday, Sen. Sherrod Brown (D-OH) noted more problems from unbalanced trade with China.  Chief among these were the 581,000 manufacturing jobs that the U.S. has lost just since the first SED meeting in December 2006—which means that more than 4% of U.S. factory jobs have evaporated in less than a year and a half.

It’s not just lost jobs that concern Sen. Brown, though.  His index also noted 457 Chinese products recalled in the same brief period, a reminder that China’s unregulated production poses more than job worries for American consumers.

Nero fiddled while Rome burned, and ManufactureThis frets that cheery chit-chat and endless dialogues with China merely extend an unhappy status quo.  As Scott Paul noted in a Bloomberg article this morning, yet another bureaucratic SED meeting simply “squandered another opportunity to make U.S.-China trade more balanced and market-driven.”  It’s action that’s needed, not words.
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As the Bush Administration concludes the fourth round of Strategic Economic Dialogue (SED) talks with China, Sen. Sherrod Brown (D-OH) has released a “China Index.”  Among the facts cited was the $27 billion in energy subsidies for Chinese steel producers first uncovered by AAM earlier this year in a report by Dr. Usha Haley. 

Sen. Brown’s China Index is included below. 

Regarding the outcome of this latest SED, AAM Director Scott Paul noted that the Bush Administration “squandered another opportunity to make U.S.-China trade more balanced and market-driven.  On issues like currency misalignment, energy subsidies, and widespread dumping, another six months have passed without action.  As a result, our monthly trade deficit with China is once again growing, more jobs are disappearing, and China continues to accumulate massive foreign currency reserves.”

CHINA INDEX

4                       Number of Strategic Economic Dialogue sessions
5                       Percent estimated trade deficit as a share of GDP (est.)
12                     Age of workers subject to forced labor under “work and study programs,” according to a State Department report
25                     Percentage estimate of California air pollution that comes from China, according to the EPA
35                     Percent estimated subsidy on Chinese exports to the United States
50                    Percent increase in Chinese steel production since 2006 because of government subsidies
57                     Percent share of Chinese government-owned steel enterprises
79                    Months since China joined the WTO
457                  Number of recalled “Made in China” products by CPSC since the first SED
581,000         Decrease in American manufacturing jobs since December 2006
25 billion        Increase in U.S. trade deficit with China since first SED
27 billion        Amount of energy subsidies the Chinese government has provided the steel industry since 2000, undercutting competition
Relentless      Term used in 2006 report by USTR to describe its efforts “to ensure China’s full implementation of specific WTO commitments…”
Rampant       Term used in 2005 report by USTR to describe China’s counterfeit and piracy problems

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