The United States’ campaign to blame China for their malfunction 

chinese dragon

China has played many roles in the course of geopolitically and economic history.  In recent decades we have seen the blanket of Maoism come off to present a fertile ground for manufacturing, blossom into a smorgasbord for outsourced production, and most recently develop into a world power whose economy's size is on track to dethrone the U.S.  So how did this happen?

 For the sake of simplicity, let's look at the relationship between the U.S. and China.  First we must ask: why would a U.S. company outsource or relocate operations to China?  The most obvious answer is the cost of employment.  That's wages (cost of living, minimum wage, currency value), taxes, regulations, benefits, etc.  In many industries the U.S. was priced out of the market.  Anyone smart enough to develop a company knows that you wouldn't pay $10 for something that you and your competitors could get for $2.  China also did not fall into this situation serendipitously.

Their economic growth model has been based on government spending on manufacturing and transportation infrastructure, which was made much more convenient by their system of government.  Don't get me wrong, I'm not supporting this idea or overlooking the flaws.  So a good portion of U.S. manufacturing was outsourced to China.  People were not thrilled with the trend but companies and consumers alike got used to paying China prices for finished goods.   Although this movement has persisted for years, now that the U.S. economy is struggling to recover and high unemployment has become heated topic for political (more than economic) debate, U.S. lawmakers are threatening to impose protectionist international trade policies on China.  These would be in the form of countervailing duties to offset what they deem a "fundamental misalignment" with their currency.  Their logic considers the undervaluation of currency as subsidy for exports and therefore tariff increases will level the playing field.  There are problems with this. 

Questionable Diplomacy 

First of all, the U.S. has been one of, if not the strongest proponent of global free trade for over sixty years.  What about the GATT and WTO?  Now I have not read through all of the guidelines for WTO membership but I am confident that the proposed measures are not in compliance with them.  Leverage is one thing, but one sovereign nation (USA) has no right to command another sovereign nation (China) to do anything.  However, a separate organization, like the WTO (or IMF for currency issues), of which China needs to remain a member, exists for exactly that purpose, maintaining the level playing field.  While the Renmimbi may or may not be undervalued, China had nothing to say about the U.S. Federal Reserve's Quantitative Easing schemes as I mentioned in my post on currency manipulation.  China's currency has also appreciated significantly in the last year (7%*), which along with other factors, has made it more expensive to manufacture there and caused some companies to scale back or exit.  

It's unlikely to have any positive outcome  

The U.S. simply cannot produce domestically all that it buys from China at this time.  There is not enough manufacturing infrastructure for the industries that have been gone for decades.  There are not the factories necessary neither to make all of the Nike shoes that U.S. market consumes nor the qualified manufacturing workforce.  To establish the necessary infrastructure to produce all Chinese imports domestically would take years and require an unfathomable investment.  Even if this were possible, any feasible cost structure for fully domestic manufacturing would put prices to end users out of the budgets of many people that rely on Chinese goods.   

Fallout

Most importantly, they will return the favor beginning a trade war, NOT what the U.S. needs right now.  As I mentioned in my previous post, China is the U.S.'s third largest export market** and one that is rapidly expanding.  A trade war with them would, without a doubt, cost U.S. jobs and possibly damage some of their most successful industries.  This bold move could invite a backlash from the rest of the international community, the WTO, and China's economic allies.  This opens up a huge can of worms that has been tightly closed since the 1930 Smoot-Hawley Tariff which is widely considered to be a negative factor, if not a fundamental cause of the Great Depression. 

I'm Puzzled 

In recent weeks my understanding of U.S. foreign trade policy has been turned upside down.  Lawmakers are proposing to impose protectionist measures against China, yet signing Free Trade Agreements with other important outsourced manufacturing destinations?  The most puzzling of these is the TPP (Trans-Pacific Partnership) involving, among others, the U.S., Vietnam and Malaysia.  The latter two have been absorbing spillover business from China due to their rising currency and cost of doing business.  For example, Nike, who previously produced mostly in China, now produces the majority of its products in Vietnam.  We have already seen that a less attractive China pushes manufacturing to other low-cost destinations such as Vietnam and Bangladesh, not back to the U.S.  Obviously, making it more costly to manufacture in China through trade sanctions will not discourage U.S. importing. 

Why on earth is this even on the table? 

Everyone needs a scapegoat, especially the guilty.  Blaming economic downturn and high sustained unemployment on the country's dependence on China is the only thing on which both sides of congress can agree.  According to their law-school-economics, it is easier to demonize an outside entity to take the public's mind off of their inability to devise and agree upon a solution than it is to actually solve the problems on the table.  

Alternative 

The Trans-Pacific Partnership, in my eyes a potentially great opportunity, could alleviate some of the U.S's dependence on China without causing the problems associated with protectionist trade policy.  I agree that relying on China for such a large portion of manufactured goods as the U.S. does is a bad thing.  China's high market share give it too much leveraging power over the U.S. in the same way (opposite actually) that Wal-Mart had too much of Rubbermaid's market share and forced them to sell when Wal-Mart would not accept a necessary price increase.  So the effort should be to diversify, not boycott, and this can be done in a diplomatic way without trade wars or supply shocks.  The TPP would be an excellent start if structured appropriately.  Vietnam and Cambodia's manufacturing capabilities are rapidly expanding and I see the potential for immense opportunities there.   

The proposed protectionist measures against China are an abolition of the idea of free trade and open markets as a means to diplomacy and global prosperity that the U.S. has been promoting for so long.  The U.S. without a doubt has more to gain than to lose from the liberalization of trade barriers which they have been working on and promoting for decades.  If the proposed measures are carried out, they will have taken a giant step backwards. 

*Economist Intelligence Unit
**United Nations Comtrade 
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