Which number is greater?
(a) $2.7 billion
(b) $100.8 billion

  On Wednesday, Commerce Secretary Carlos Gutierrez trumpeted the good news that the U.S. has achieved a $2.7 billion surplus in manufactured goods with our 14 Free Trade Agreement (FTA) partners during the first five months of 2008.  Gutierrez stated, “Our trade balance with FTA partners has swung from a deficit to a surplus proving that open markets are a key ingredient to the competitiveness of U.S. manufacturing and the health of the U.S. economy.”

Opening up markets or, conversely, reducing barriers to U.S. exports, can certainly be helpful for U.S. manufacturing.  Nothing demonstrates the need to reduce foreign barriers more clearly than the $100.8 billion trade deficit in manufactured goods that the U.S. has racked up with China in the same five months of 2008, according to International Trade Commission (ITC) data.  Because China employs illegal currency manipulation as well as subsidies and dumping, there is no happy news—no improvement in the overall trade balance, no increased opportunities for U.S. manufacturers.

Regarding the 14 FTA countries, a better question is whether or not Free Trade Agreements actually helped the U.S. to achieve balanced trade in manufactured goods.  Possibly this recent export success should be attributed more to a significant decline in the dollar’s value relative to virtually all of their currencies.  And, truthfully, countries like Bahrain and Morocco, for example, possess little in the way of a manufacturing base.  It’s not difficult for the much larger United States to outpace them in manufacturing.  

There’s a twist here, too: the U.S. trade balance typically improves during a time of recession.  That’s because, with less money in the average worker’s pocket, consumption of imports tends to fall.  Thus, a dip in imports is yet another fragmented indicator of recession, and so, rather than being a sign of strength, the improvement in our trade balance signals possible, broader economic problems.

The main point is that when you stand a $2.7 billion surplus (spread across 14 countries) next to a mammoth $100.8 billion shortfall, you see a rather big net loss.  Specifically, you see a loss of American manufacturing jobs, a loss of productive capacity, and a potentially diminishing self-sufficiency in national security.

Thus, ManufactureThis, while not wanting to rain on Secretary Gutierrez’s parade, would ask him to focus on the bigger numbers and not nip at the margins.  But that would require getting tough on China’s repeated violations of world trade law, including the aforementioned dumping, subsidies, and illegal currency manipulation—something Gutierrez and the administration have been oh-so-reluctant to do.

Secretary Gutierrez might want to take another look at his interpretation of the facts, or cast a longer glance at China.

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For those of you who are curious about Beijing’s worrisome smog and grey skies, Der Spiegel ran a fascinating set of photos detailing both air quality concerns and algae blooms “caused by pollution and untreated sewage.”

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  If print and TV ads are any indication, it’s going to be China’s season.  The New York Times reports that McDonald’s, Nike, and Pepsi, are among the major brands that are already cheering on the People’s Republic.  Pepsi, for example, offered a limited edition “Go Red for China” promotion earlier this year.

Just why are these companies so eager to adopt the Olympic team of the world’s most populous communist nation? 

The Times notes that China is a “dream for consumer product companies.”  According to Jonathan Chajet, strategic director at Interbrand, “For most international brands…China is the growth market for the next 10 years.”

Curiously, rising nationalism in China may make imported goods a tough sell.  The Times article points out that “China’s growing economic clout and increasing nationalism among its youth — as well as the newfound strength of its homegrown brands — pose challenges for foreign companies trying to woo its growing middle class.”

More significantly, China’s consumers have a higher savings rate than their American counterparts, and tend to purchase mostly the major essentials of daily living.

Perhaps the real reason for promoting China is to better market China’s exports to a hungry world.  Chinese computer maker Lenovo is one of the Games’ “global sponsors,” and it can’t hurt for them to further promote their brand.

The bottom line is that more manufacturing investment in China leads to more imports coming back to the U.S.  And so multinationals that have located their factories in China are undoubtedly going to be rooting for their new favorite home team.

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A New York Times editorial today took the Olympic Committee to task for “complicity” in not having “held China to their word” regarding expected political and journalistic freedoms.  According to the Times, “China has jailed critics, denied visas and threatened news organizations that negative coverage could jeopardize their chance to cover the Games.”

  Such behavior gives new meaning to the phrase “China Cheats.”  In virtually every sphere, from brutality in Darfur and Zimbabwe, to martial law in Tibet, to “police intimidation and bribery” throughout mainland China, the ruling regime in Beijing fails test after test of basic human rights.

And so, this Olympics deserves particular scrutiny because it involves questionable “press freedoms for foreign reporters.” 

While U.S. manufacturers compete against a stacked deck with China, truth in journalism now seems to be doing so as well.

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So, the Consumer Electronics Association (CEA) hit the streets yesterday with a 28-state bus tour aimed at promoting “the importance of trade to creating jobs and driving U.S. economic growth.”  The bus tour, headlined, “America Wins with Trade,” was launched in Manhattan with speeches by New Your City Mayor Michael Bloomberg and Computer World CEO Rachelle Friedman.

  CEA President Gary Shapiro said that launching the tour in New York would be a good start since Manhattan “represents the power of trade and free markets.”

Funny that the CEA is so concerned about free markets.  China, with whom the U.S. racked up its largest ever bilateral trade deficit in 2007 ($256 billion), is notorious for violating free market principles.  The subsidies, dumping, and illegal currency manipulation employed by Beijing distort the open market.  Such practices also cost millions of U.S. manufacturing jobs, so it’s no wonder that Americans are starting to view trade policy with a critical eye, or what the CEA patronizingly refers to as “naysayers.”

If the CEA really wants to make a case for fair and balanced trade, they might try to emulate the national tour that AAM launched back in 2007.  AAM supports trade, which is why we held a series of Town Hall meetings throughout the country to help unravel the doublespeak and misrepresentations that plague many discussions of trade policy. 

For example, the CEA notes that the consumer electronics industry “is projected to generate $1.4 trillion in direct business activity this year and directly employ more than 4.4 million Americans.”  Sounds good, but it fails to acknowledge that while the U.S. exported $146.4 billion worth of consumer goods in 2007, it imported a much greater $474.9 billion worth.  Such large and continuing deficits in various hi-tech sectors mean that, rather than earning higher wages in the manufacture of consumer electronic equipment, more and more American workers are being forced to downshift to hourly retail work selling foreign-made electronic goods at the local mall.

And so the CEA takes to the road with what ManufactureThis politely deems an incomplete message.  It is nice to know, though, that our idea of taking the trade discussion to the people has found imitators.  After all, imitation is the sincerest form of flattery.

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  Apparently, there’s a price tag for cleaner air.  Reuters reported yesterday that China has spent 120 billion Yuan ($17.58 billion) to clean the air around Beijing.  And with government officials racing frantically to scrub the smog from Beijing’s skies, they’ve now institute a number of emergency measures, including new traffic restrictions and factory closures.

Reuters’ Ben Blanchard reports that under new rules “cars are banned on alternate days depending on their license plate number and most official cars have been impounded. Only taxis and Olympic vehicles are exempt.”

Beijing has more than 3.3 million cars, and adds 1,000 new automobiles each day.  Blanchard notes that “most building work has also halted and almost all earth and cement works have been closed, along with a string of factories — including many in other provinces. Some are more than 100 kilometers away.”

ManufactureThis is struck by the crisp effectiveness by which the People’s Republic is currently working to clear its pollution.  These all-out efforts to cleanse Beijing of smog and particulate matter are even being extending to the use of “cold fireworks” (which produce less smoke than ordinary fireworks) during the opening celebrations.

The key point is that Beijing knows the eyes of the world are upon them.  Thus the effort to hide millions of cubic feet of sulphur dioxide and other noxious emissions.  One might wonder, however, if this pollution is so toxic, why the country doesn’t make more of an effort in every day life to keep their skies clear?

The answer is that disregard for environmental standards is yet one more way for China’s factories to undercut their foreign competition.  And so, while U.S. factories must adhere to strict exhaust controls, Beijing happily looks the other way when their factories churn out grey plumes of SO2 and other fun byproducts.

Of course, it’s a different story when the Olympics are in town…

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ManufactureThis has taken a keen interest in the upcoming Beijing Olympics.  It remains to be seen whether Beijing’s smog-ridden skies will be clear in time for the opening ceremonies, 20 days hence.

There does seem to be some progress as the country closes all of its factories west of Beijing in an attempt to clear the air.  Take a look at these views of downtown Beijing courtesy of The Atlantic’s James Fallows:

July 12

July 16 . 

It looks like there’s slightly less smog–or maybe a touch more blue in the sky. 

The bigger point, though, is just how smoggy Beijing typically is every day of the year.  With little adherence to environmental standards, China’s factories continue to belch unrestrained CO2 and sulfur dioxide emissions all year long.  And so, this one-time pause for the Olympics means little in terms of the overall pollution rate that has made China the world’s leader in the production of greenhouse gases and SO2.
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  In this past Sunday’s New York Times, former White House economic advisor Gregory Mankiw published an op-ed entitled ‘What if the Candidates Pandered to Economists?’  Mankiw happens to be the fellow who, in 2004, said that outsourcing is “probably a plus for the economy in the long run”—a comment that did not endear him to U.S. workers.

Well, Mankiw is back on the scene, this time suggesting the repeal of U.S. antidumping laws.  He falsely alleges that such laws “are little more than an excuse for special interests to shield themselves from competition.” 

Curiously, Mankiw never mentions “China” in his piece, a country whose dumping, subsidies, and illegal currency manipulation have drawn criticism from the EU, Japan, and World Trade Organization (WTO), as well as U.S. lawmakers.  One has to question which “special interests” are being shielded from competition when China is allowed to continue breaching the accepted rules of world trade.

ManufactureThis would be happy to discuss this further with Professor Mankiw.
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  A recent article in BusinessWeek posed an interesting question, namely “Can the U.S. Bring Jobs Back from China?”  Reporter Pete Engardio noted that rising oil costs and higher wages in China have cut into that country’s once rock-bottom price.  Engardio wondered if the conditions might be right for U.S. firms to start re-launching domestic production, rather than depend on increasingly expensive transoceanic shipments.

Engardio, by the way, knows his subject matter.  In 2004, he wrote a BusinessWeek cover story that analyzed the ‘China Price.’  Along with low wages, Engardio found that what makes China’s dominance unprecedented is its “humongous scale, a supply infrastructure that enables you to buy every widget and raw material from hundreds of vendors within easy driving distance of your factory, feverish domestic competition, and an entrepreneurial zeal by factories to satisfy a customer’s every desire.”

With regard to a possible revitalization of U.S. manufacturing, Engardio notes that the cost of shipping a 40-foot container from Shanghai to San Diego has climbed 150% in the past eight years and is now $5,500. A Toronto financial-services firm, CIBC World Markets, estimates that if oil climbs to $200 a barrel, that cost could reach $10,000.  Firms would simply find it more affordable to import their goods from Cleveland rather than China.

Unfortunately, it’s not that easy.  American manufacturing has taken a serious beating over the past decade and the bigger struggle would be to ramp back up to full production. 

As the old saying goes, the spirit may be willing, but the flesh is weak.  In the case of U.S. factories, much of the baseline productive capacity and hands-on experience is now gone, a victim of China’s subsidized, artificially-low productions costs.  Engardio quotes James Turk, CFO of the New Mexico-based CEMCO as saying, “American foundries now can compete head-to-head on cost, but there aren’t many foundries, welders, machinists, and quality-control engineers…What we had 10 years ago is gone.” 

At the same time that America’s manufacturing base has been hollowed out, China’s modern foundries are running at full steam, and with modern equipment.  That means that even if U.S. firms want to move their factories back to the U.S., the necessary steps could take years.  In the mean time, they’d still rely on Beijing as the manufacturer of choice.

There’s a serious wake-up call in here.  As ManufactureThis continually asks, what exactly will the United States do when it loses the capacity to produce key hi-tech goods and military equipment?  Any self-aware nation should have a plan to preserve and promote its own manufacturing capability, and indeed almost every industrialized nation has a program for sustaining domestic production.  Sadly, the United States does not, and therein are sown the seeds of a potentially calamitous future.

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Atlantic columnist James Fallows has been keeping the world posted on the view from his balcony in Beijing.  And with the Olympics only 24 days away, Fallows’ most recent snapshot of the Beijing skyline suggests that the city’s murky skies might clear somewhat in time for the big games.

  ManufactureThis was quite alarmed at one of Fallows recent postings—of thick gray smog hanging over Beijing just two weeks ago.  At that point, it seemed the Olympics would be contested in an industrially produced version of the infamous 1988 NFL “Fog Bowl,” so named because the home team Chicago Bears defeated the Philadelphia Eagles in a fog so thick that fans in the stands were unable to view the on-field action.

It’s one thing for winter fog to roll in from Lake Michigan, but it’s another thing for acrid industrial emissions to foul and pollute one of the most populous cities on earth.  With China now leading the world in the production of both CO2 and sulfur dioxide, it’s little wonder that Beijing is suffering a smog epidemic.

Unfortunately, this wanton polluting is hurting more than just China’s citizenry.  More than eight years ago, in an article captioned “When China smokes, you might get a cough,” CBS News reported that China’s unrestrained emissions of sulfur dioxide, as well as “arsenic, lead and zinc,” were already fouling the western skies of the United States.

Those emissions have only increased in the ensuing years, which means that in addition to poisoning its own people, China is now belching toxic gases and particulate matter for all the world to share. And so, rather than simply promote athletic camaraderie during the August games, Beijing is inadvertently helping to foster an accelerated sense of global environmental concern.

ManufactureThis will have more to say on the issue in the next few weeks, when AAM releases an in-depth report on unrestrained pollution from China’s diffuse steel industry.

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