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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  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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  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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  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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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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  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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  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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  Typically in recent years, companies have moved manufacturing operations overseas in an effort to reduce production costs.  Cheap labor, weak environmental standards, and a host of questionable subsidies have all combined to make production in countries like China seem attractive to the bottom line.

According to a piece by the Wall Street Journal’s Tim Aeppel, however, soaring oil prices are threatening to rebalance that equation.  Aeppel cites CIBC analyst Jeff Rubin, who notes that “the cost of shipping a standard, 40-foot container from Asia to the East Coast has already tripled since 2000 and will double again as oil prices head toward $200 a barrel.”  These rising transportation costs “are now the equivalent of a 9% tariff on goods coming into U.S. ports, compared with the equivalent of only 3% when oil was selling for $20 a barrel in 2000.”

Aeppel says that, for many U.S. manufacturers, “oil prices that have hurtled past $130 a barrel have been the tipping point.”  Such heavy shipping costs mean domestic manufacturers are scrambling to source production closer to home.  One example is Emerson, the St. Louis-based maker of electrical equipment, which recently shifted some production from Asia to Mexico and the U.S., all in an effort to “offset rising transportation costs by being closer to customers in North America.”

Though rising oil prices may help to somewhat recalibrate trade flows, it’s not certain that U.S. manufacturing workers will reap the rewards.  With Emerson as but one example, CIBC’s Rubin suggests that Mexico cold be “the biggest winner of all.”  While increased transportation costs may dissuade producers from large-scale Chinese imports, Mexico could take up the slack and become the preferred low-wage, environmentally lenient export platform.

But don’t cry for China just yet.  They’re still running a $20 billion monthly trade surplus with the U.S.
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