Posted on 12/19/2007 8:12:53 PM PST by thankfultobefree
As the trade deficit between the United States and China continues to increase, should Americans be worried? Or should they be cheering China’s trade liberalization and enjoying the bargains?
The Hoover Institution has just released “The U.S.-China Trade Deficit: Reason for Worry?” It’s a good summary of the China-U.S. trading arrangement, and it addresses both benefits and concerns about the relationship as expressed by both Chinese and American parties.
http://www.hoover.org/research/focusonissues/focus/12436706.html
The concern is that we are handing a communist adversary all the manufacturing technology we have developed over decades. It is suicide.
And missile guidance technology. That doesn’t include the nuke secrets they stole.
and the highest electronics manufacturing technologies.
Just wait until the greenies and global-warming idiots get going with their plans for technology transfers under the guise of energy independence.
Trying to follow their circular logic makes my head spin.
That was one of Fred’s babies too, if I recall.
The Greenies want us to give them right to build our stuff and sell it back to us. No intellectual property rights for transferred technology.
I have a beer-money job at Wally World and see Made in U.S.A. goods replaced with Made in China, with no reduction in price.
Next time you're in the stationery section, for instance, see if you can find an item with two different colored packaging labels. Bet one color is U.S. and the other China. I just bought an humidifier. You can't tell me that the U.S. couldn't make one equal to the $30.00 I paid for the China model (with a U.S. name). Oh yeah, the profit margin wouldn't be as great.
I don’t remember where I’ve read it, but I’ve seen it quite a few times. Give our technology (not to the greenies) but to third-world countries so they can work at developing a more global-warming-sensitive industry. I wonder if “give” means that some of these fly-by-night companies set up by the vulture-capitalists will actually be compensated through U.S. Aid funds.
Why Americans are clamoring for wealth distribution is beyond me (except when suggested by the communists, of course).
Back in late 1970’s China had sent a group of engineers to the outfit where I worked as an engineer. They did not buy any
of the products we manufactured, they bought engineering knowhow
for a paltry $1.5 million. So we sold 50 years worth of engineering
development for a quarter of what one of our typical machines cost.
The owner of our company saw it as a quick profit for a few boxes
of paper.
I wonder how many times this story was repeated in the USA.
Considering droves of Chinese are learning in America’s technological education centers...I’d say everyday.
You'd be surprised - I'd wager you couldn't make a humidifier that had an MSRP of $30 here in the US. I used to manufacture in the US, and in Chile, and in the Netherlands, and now in China, and I know the costs...
The issue is governmental regulations, specifically on labor. Having set up, owned, and run factories that did durable goods manufacturing on 4 different continents I quickly found out the difference was labor and regulations. Commodity items - plastics, metals, adhesives, tools, machines - were basically the same price around the world. You pay about the same for a 25 kg bag of ABS pellets in Shenzhen, China as you do in Valparaiso, Chile as you do in Lynnwood, WA.
The difference is the price to turn those pellets into something of value. Take your humidifier. For Wal-Mart to sell at $30, they're paying no more than $18. Indirect taxes will eat $4 of that $12 they make. Shipping, overhead, storage, capitalization, warranties will eat another $6. They're lucky to make $2 on the unit, of which $0.66 goes as corporate income tax. Meaning they'll make $1.33 on the $30 sale - about a 4.4% net profit margin (typical for consumer electronics).
Now, the factory that sold that humidifier for $18 has to make it for less than $18. If it's a standard ultrasonic humdifier (like the Holmes unit at WAL-MART), then you have about $3 in plastics, and probably $5 in electronics. Packaging is another $1.50. So altogether we have around $9.50 in raw materials.
The issue comes when you factor labor into the equation. A deep-draw plastics mold will take a 2 minutes per part. Assembly of the internals - soldering, wiring, securing - will easily add another 10 minutes. Packaging and testing will take another 3. We can have 30 minutes of labor to build that unit.
Here in the People's Republic of Washington, our good State has decreed that minimum wage shall be $8 per hour. And of course, in manufacturing you have another $1.20 in labor and industries insurance. Oh, and 8% ($0.65) for SS and FICA. Add in minimal benefits (state insurance plan) and we're at $12/hour, for a minimum wage job. Competing with McDonald's wages. Want a better worker? Expect to have a burdened cost of at least $16-$18 per hour.
Now, that humidifier that has $10 in raw parts? Now add $6 of labor to it. We're at $16. And we have to sell at $18. So you make $2. Of course, you have B&O taxes (here we pay 1.5% of gross receipts, so that's $0.27), and income taxes ($0.66 of that $2), meaning we're down to around $1 gross profit. Oh and we haven't factored in the overhead like property leases or taxes, power, administration, shipping, etc. Suddenly building here in the US you end up in a negative situation.
Going to Chile or China, the situation is different. Both of those countries have governments that fundamentally understand that wealth comes from companies and individuals, NOT from mandates from the government. And they put very few restrictions on operations of business, letting the market decide most things relating to pricing.
So rather than $6 of labor, I can do it for $1 in Chile, or $0.20 in China. And taxes on process/inventory? Rather than the $3 you'd pay in the US, it would be $1. So suddenly, when I factor in the extra shipping costs for distribution ($1 per unit), and my overhead (another $1 per unit), I can still make $4 profit before taxes. And after corporate taxes, I can still make $3 per unit.
I think President Reagan got it right - the problem is governmental interference here in the US. The US government is driving businesses overseas. Get the government off the backs of business and you'd see more manufacturing here, because it could be done competitively.
Until that happens, though, you'll see businesses relocate manufacturing centers overseas. It's either do that and stay in business or try to slog it out here and watch their business close. I'll take overseas manufacturing and a surviving business any day over the alternative...
Thanks for the detailed reply. Based on your experience, what do you think that humidifier would cost here with a reasonable return?
Well, if my assumptions are correct, and we have a burdened manufacturing cost of $20, then as a manufacturer we’ll need to sell it for $24 to make any sensible profit (about $2, around 8%).
Then Wal-Mart will still need to sell for 40 points to keep their margin of ~4.4%, so that means about $40. So that’s a 33% increase in price.
My experience with manufacturing is pretty consistent with this - when I was building product in the US (right up until March of this year), the product had to carry an MSRP about 30% higher than the SAME product built overseas. And that would often price you out of the market.
My firm belief - based on a few decades of manufacturing and selling world-wide - is that restrictions on trade and added taxation on corporate entities simply slow the growth of value, and forces companies off-shore to regain their growth.
We should welcome the fact that most of the products coming from China roll out of factories that are either partially OR (in my case) wholly owned by US citizens and corporations. Those “funds going to China!” are going to the pockets of US entities, not just to the Chinese. We’re getting a product at a lower price, and the profits are predominantly going back to the US, in the form of profits.
There’s a reason companies that offshore are more profitable - they have the same income, but the profit margin increases. Meaning they can keep the price the same enjoy extra revenue (which flows to the employees and owners and on to the rest of society) OR they can keep revenue constant and decrease the price to gain marketshare (which allows society to acquire those goods with fewer dollars).
Calls for “fair trade, not free trade!” sound all well-and-good but ultimately restrict the growth of economies, and lead to both sides losing. If you can get the product you want at the price you want, then do so. If the Chinese or Germans or French wish to add tariffs to US products, that is ultimately going to hurt their economies much more than ours; the US product will still sell elsewhere, and the foreign country is depriving its own citizens a typically lower-cost option, artificially propping up companies that would most likely fail on their own.
If I had my way, there would be zero tariffs on anything imported into the US. There would be a duty charged only for inspection of products but nothing applied to the value. Regardless of what the “trade partner” did. If they want to export all their low cost durable goods to us, great! It will only continue to INCREASE the ratio of world GDP of the US to their own share.
Speaks for itself.
The rate of Chinese exports to the U.S. are now growing by greater increments each year than the entirety of U.S. "export" to China.
The only "threat" is from those shortsighted mental midgets who justify it...or speak of "enjoying the good deals because they won't last."
A greater quantity of goods is a bad thing?
Well we should be if we are concerned with the amount of money we have to borrow from them to stay afloat, their creation of a military arsenal with the dollars we provide, and their continuing to acquire our factories and export to us tainted toys and food.
Indeed, it is. When it is in the hands of despotic tyrants such as the Chicoms.
Those who pretend otherwise just continue to amaze me at the level of their willful national security ignorance.
You contradict yourself.
If these products were tariffed at 50%, which will indeed happen when MFN is revoked, and the U.S. stopped taxing its own production (which will clearly take a conservative President), I think your whole paradigm for where growth would occur falls on its face. It will be in fact be in the U.S.
I thought conservatives were champions of the free market. Yet you seem to want government interference in the marketplace in order to force companies back to America.
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