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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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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  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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  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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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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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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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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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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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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