Well here’s a tricky one—China’s economy is showing real signs of slowing down.  According to a Bloomberg News article, China’s GDP dropped 0.5% in the second quarter of 2008, while consumer prices have simultaneously been rising at more than 7% for the last two months.  The emerging slowdown across the People’s Republic is the most significant since 2005.

China’s currency, the Yuan, also fell this morning, a surprising drop that suggests Beijing is concerned about maintaining its export-led economic orientation.  Because the Yuan is tightly managed by Beijing, it’s quite possible that government officials are trying to provide “breathing room for the export sector,” according to Jing Ulrich, JPMorgan’s chairwoman of China equities.  Bloomberg News quotes her as saying that “the performance of the export sector could influence the government’s approach to pacing the appreciation of the yuan.”

The tightrope that Beijing is now walking stems from their having pegged the Yuan to the dollar.  With the dollar now plummeting in world markets (breaking $1.60 per Euro, for example), China is on the receiving end of the same inflationary pressures as the U.S.  As Ulrich explains it, Beijing now faces “the cost of containing imported inflation from higher commodity prices.”

While an artificially low Yuan has helped China become the world’s fastest growing economy in recent years—and a manufacturing juggernaut—such a meteoric rise has also sewn the proverbial whirlwind.  Economic problems like rising energy costs, constraints on agricultural production, lagging rural incomes, and troubled global financial markets mean that, more than ever, China wants to keep its export engines running full tilt.  But maintaining a low Yuan is starting to bite hard, especially with higher oil prices.

It seems that Beijing is hitting a wall—damned if they do, damned if they don’t.  And so, while Congress frets and fractures over whether to take action on China’s undervalued currency, it’s quite possible that inside Beijing’s ruling regime, the same currency debate is taking place.

In the meantime, U.S. manufacturers continue to take a double beating, both from climbing energy prices and competition from China’s undervalued goods. 

It’s gonna get interesting…

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  David Lynch reports the straight facts today in a USA Today article entitled “Economic pain: ‘Payback’ for debt-fueled growth?”  He quotes Federal Reserve Chairman Ben Bernanke who observes that “The economy continues to face numerous difficulties.” 

Lynch does a good job of itemizing these woes: bank troubles, housing troubles, General Motors troubles…

One point that needs to be made, though, is that the U.S. trade deficit has contributed to much of the country’s mounting domestic debt.  Not only is $2 billion leaving the U.S. each day, but good-paying jobs are being eroded at a steady rate.  The resulting debt creates a drag on GDP.

Simply put: Either the money stays, or it leaves. 

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  Apparently, the U.S. Chamber of Commerce believes we need new words and not new policies to make trade policies work for more Americans.  ManufactureThis discovered a copy of their new hymnal via an interesting article yesterday in The Hill. 

Watch closely as the proponents of some of these free trade agreements begin their (dis)information campaign.  Remember, you can put lipstick on a pig, but it’s still a pig.  The debate on trade policy would be better served by an honest discussion of its merits and flaws. 

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  As ManufactureThis returns from a colorful July 4th weekend, we take note of some recent news regarding the U.S. flag.  Apparently, the U.S. imports roughly $5.3 million worth of American flags each year—with most of them coming from China.

More than one U.S. lawmaker has found the idea of foreign-made flags a bit incongruous.  Not only have a host of Chinese products been found to contain shoddy materials and lead paint, but the notion of a repressive, communist state assembling flags  for the democratic United States seems a bit illogical.

Earlier this year, West Virginia House of Delegates member Jack Yost sponsored House Bill 4150, which would require that any U.S. or West Virginia flags purchased with state funds be made in American.  His bill was signed into law on March 28, 2008.

Last week, Yost was interviewed on CNN’s Lou Dobbs to discuss the bill.  A retired Steelworker and army reserve veteran, Yost said that he was motivated to introduce the bill after seeing foreign-made flags used at a veterans memorial ceremony.  As he explained on CNN, “I lost all of my pension that was promised to me and my health care that was promised to me, as did thousands of other steelworkers. And as a veteran, I feel that it is unpatriotic and disrespectful to put a foreign-made product on a veterans’ memorial.”

Yost and thousands of other Steelworkers lost pensions when their former employers went out of business due to predatory competition from China.  And if $5.3 million in imported flags seems small change, consider that the U.S. racked up a $256 billion trade deficit with China in 2007.  Dumping, subsidies, and illegal currency manipulation have given China an unfair advantage over U.S. producers and so, as long as Beijing continues to cheat at the rules of world trade, it makes little sense to wave flags made in China.
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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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  This morning, the New York Times reported that China is now actively lecturing the United States for its lack of “market regulation” in the mortgage crisis and for its failure to “halt the dollar’s unchecked depreciation” that has caused “soaring oil and food prices.”

This constructive criticism offers a rather fun way to start the fourth round of the Strategic Economic Dialogue (SED), which is taking place today and tomorrow in Annapolis. 

There’s rich irony in the Chinese lecturing the U.S.  As AAM Director Scott Paul pointed out on CNBC yesterday, the Chinese continue to brazenly flout world trade law, no matter how great the resulting distortions of the international market.

  With that said, ManufactureThis thought it might be fun to offer a brief preview of this week’s SED talks.  Specifically, Treasury Secretary Henry Paulson said the meetings would focus on five areas.  Below are those five sections, with a helpful reminder about why these issues actually matter to the world community:

“Managing financial and macroeconomic cycles.”
China utilizes numerous questionable subsidies to artificially boost production, including $27 billion in energy subsidies since 2000 for its steel producers.  If Secretary Paulson and his Chinese counterparts want to equitably manage “macroeconomic cycles,” they would start by ensuring that China does not continue to dump steel on the world market.  

“Developing human capital.”
China’s human rights abuses are notorious, as are the woefully inadequate labor conditions in many factories, including slave labor.  Rather than token efforts, Beijing must stop bashing heads in Tibet and begin to reform the institutionalized child labor (and other unacceptable practices) so rampant throughout its rural provinces.

“The benefits of trade and open markets.”
Despite a minor appreciation of the Yuan since 2005, Beijing continues to undervalue its currency by as much as 40%.  Such massive intervention in world currency markets is clearly one-sided—the exact opposite of a free, open trade.  With the EU and Japan joining U.S. calls for a significant rise in the Yuan, Beijing must commit to lifting its currency peg, or else face sanctions.

“Enhancing investment.”
China has been reluctant to open its market to foreign financial services, and has only approved one foreign securities joint venture—for Credit Suisse.  It’s hard to call this enhanced investment equitable.  Unless U.S. financial firms are given greater access to China’s market, sanctions must again be considered.

“Advancing joint opportunities for cooperation in energy and the environment.”
While the Environmental Protection Agency estimates that 25% of all California air pollution comes from China, the U.S. is considering sweeping measures to cut greenhouse emissions.  If Beijing honestly shares in such concerns it will demonstrate movement to share in such efforts.

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  “The debate about NAFTA has been a red herring,” said the CATO Institute’s Dan Ikenson in a debate this morning with AAM director Scott Paul on Minnesota Public Radio. 

NAFTA has been a significant topic of debate recently among the various presidential candidates and Ikenson disagrees with criticism of it by Senators Obama and Clinton.  As proof of NAFTA’s worthiness, he cites the fact that since the agreement was passed, “U.S. investors have invested about $2 billion a year in Mexican manufacturing.”

An Economic Policy Institute (EPI) study seems to clash with Ikenson’s rosy pronouncements of the trade deal’s legacy, though.  According to their study, NAFTA has claimed a net 1 million U.S. jobs in the past 15 years or so.  Perhaps that’s because the $2 billion in annual Mexican manufacturing investment that Ikenson praises has not been equaled by a concurrent investment in new American manufacturing.

With NAFTA serving as the launching point for a debate on free trade, Paul and Ikenson sparred over competing approaches to U.S. trade policy.  Paul termed NAFTA an “experiment”—“the first major free trade agreement with a country that’s still developing”—and one that, with hindsight, needs “some adjustments,” including “workers rights and environmental protection.”    

Ikenson, however, sees NAFTA as a success and views increased labor and environmental standards as “fig leaves for protectionism.”  He suggested instead that when manufacturing moves to developing countries, it “raises living standards.”

  This poses an interesting contradiction: It’s hard to raise living standards while simultaneously dismissing labor and environmental concerns.  And the projected boost in Third World living standards that Ikenson touts for U.S. trading partners very much includes countries like China, where rampant labor abuse, air pollution, and poisoned lakes vie for worldwide attention with a litany of tainted exports.

Ironically, Ikenson also dismisses the $711 billion U.S. trade deficit, saying: “I don’t think the trade deficit has anything to do with trade policy…it’s a function of different patterns of savings…the way to change that is to encourage better consumption abroad…as the U.S. economy slows down, the trade deficit is growing smaller.”

It’s true that the seemingly endless U.S. trade deficit has declined somewhat during periods of recession—when consumers have less money to spend.  But it belies common sense to think that a vast slowing of the economy in order to balance our accounts is a sound prescription for future prosperity.

Ikenson believes that the U.S. benefits overall from an abundance of ever cheaper consumer imports.  But the real problem is the long-term consequences of this approach.  Day-to-day, it seems great to buy a $5 Chinese t-shirt instead of a $10 American t-shirt.  But when the U.S. textile worker loses his good-paying job at the t-shirt factory, and downshifts to a $7/hour retail job, it’s hard to see how many t-shirts he’ll be able to buy at all. 

  The bottom line is jobs.  A large-scale disenfranchisement of millions of manufacturing workers presents a worrying scenario.  And the resulting consequences are equally troubling: Unemployed or underemployed workers can not pay the taxes to support schools, hospitals, and communities; they can’t pay for healthcare; they can’t adequately provide for their families.

Mr. Ikenson needs to look at the big picture and make serious adjustments for the failings of the current model of trade that he and his colleagues espouse.

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The New York Times reported today on a study commissioned by the Kaiser Family Foundation.  According to their research, a 1% rise in the nation’s unemployment rate could lead to more than 1 million new Americans losing their health insurance.  The possibility of this is very real, given the current, tenuous state of the economy.

  The study also noted that the number of uninsured Americans has continued to grow over the past decade, with 47 million American currently lacking healthcare, a full 16 percent of the population.

One reason for the decline in those with health insurance may be the ongoing erosion of middle class manufacturing jobs that previously supported millions of families.  More than 3.5 million manufacturing workers have lost their jobs since 2000, and unfortunately, few of them have been able to find new factory jobs offering the same pay and benefits as their previous work.  If one multiplies that 3.5 million times three or four family members dependent on a job’s healthcare benefits, we begin to see just one of the many problems that spin off of a wholesale reduction in America’s manufacturing workforce.

It’s often suggested that Americans are moving beyond manufacturing though, migrating to a purely “information services” economy.  While such a concept remains rather abstract in practice, it’s questionable whether these projected information industry jobs could avoid the same outsourcing fate that previously claimed manufacturing’s lunchbox.

Therefore it seems logical not to wantonly risk the livelihoods of millions of hardworking Americans.  A better approach might be the mature view that good-paying manufacturing work offers tangible benefits for the nation as a whole.  Employed factory workers mean families with healthcare.  Thus, the price tag of the “Made in USA” goods these people produce carries with it the self-reinforcing costs of their health insurance.

  But when these people are out of work, they no longer pay into local and state tax rolls.  At the same time, however, city and state agencies must find additional resources to help these uninsured Americans.  Possibly the most troubling consequence of the increasing uninsured is the Kaiser study’s projection that 60% of them will be children.  There’s something poorly conceived in any economic planning that fails to account for the next generation of America’s working taxpayers.

It would be nice if these worrying scenarios were not looming so close on the horizon.  And so, a pragmatic approach would be to try to stem the loss of valuable factory jobs and rebuild our more prosperous manufacturing sector.  To do so, however, requires the vision to revise current U.S. trade policy.  Until we staunch the bleeding and begin to retain these jobs, we’ll see an accelerating pattern of all the ingredients for a bad economic storm: laid-off workers, declining tax rolls, greater demand for social services from cash-strapped civic services. 

If only our elected representatives demonstrated sufficient foresight and adopted en masse a plan to save American manufacturing.

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  In today’s New York Times, David Brooks offers a critique of Sen. Barack Obama’s remarks to AAM’s Pittsburgh candidate forum (”A speech about nothing”) that ignores some basic facts.

Brooks  suggests there “is little evidence that trade has been a major cause of job loss or even wage stagnation” and instead touts “technological change” as the driver of “anxiety” for America’s “struggling working class.” 

In truth, foreign producers have access to the same advanced technology as U.S. producers.  As such, their only competitive advantage is to utilize predatory trade practices in order to produce more cheaply.  What Sens. Obama and Clinton discussed at AAM’s forum is that China is violating the rules of world trade when it artificially manipulates its currency to gain a price advantage.  When U.S. workers fret about foreign cheating that robs them of good paying jobs, they’re right to be concerned.  For Mr. Brooks to suggest otherwise is patronizing, elitist, and simply ignorant.

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All right, it’s time to take John McCain to task again.  He’s gone and done it once more—said some things that just don’t add up.

  In a Town Hall meeting yesterday morning in St. Louis, the good Senator made a very revealing remark: “The moral of the story is…we’re not going back to the old manufacturing base of the economy.”

But what exactly does that mean?

In the past 150 years, the United States amassed the greatest concentration of manufacturing capability in the history of the world.  In 1860, our economy was half that of Great Britain’s.  By 1913, it was more than double. 

In World War II, the United States became the “Arsenal of Democracy,” building more than 300,000 airplanes in five years.  In the years since 1945, the United States has generated much of the world’s wealth and served as protector and benefactor for many struggling countries.

Does anyone believe this would have been possible without a massive industrial base?

Consider some statistics:
-Manufacturing creates wealth: it generates $1.6 trillion for the U.S. economy—12% of GDP. 
-Manufacturing supports millions of good-paying jobs: it employs 14 million directly, with another 6-8 million related jobs throughout the rest of the economy.
-Manufacturing accounts for nearly three quarters of the nation’s industrial research and development. 
-Manufacturing provides the military hardware necessary to maintain our national defense. 

  But if we’ve lost 40,000 factories in the past 10 years, shed 3.5 million middle class manufacturing jobs since 2000, and are “not going back to the old manufacturing base,” just exactly where are we headed?  Is there some greater, even more prosperous route to be found in a nation of burger flippers and cash register attendants?

But it doesn’t end there.  In the same St. Louis speech, McCain also said, “I do not believe in isolationism and protectionism.” 

Fine, if true.  But it contradicts everything Senator McCain has wrought in his elected career.  Inexplicably, he has blocked every U.S. effort to tackle China’s protectionist trade practices, including illegal currency manipulation.

  And so, his comments about “old manufacturing,” like his inconsistency on China, reveal troubling hypocrisy in a would-be president.  They also demonstrate a simplistic disregard for history at a time when the United States is financially and militarily overextended throughout the world. 

To suggest that manufacturing is an antiquated part of the economy defies both common sense and the irresistible laws of commerce.  Like gravity, job losses tend to weigh us down, not build us up.  It’s doubtful, though, that Senator McCain gets the point.
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