Reader feedback on the April 14 column I co-authored with Eamon McKinney, “With China Policy in Tatters, OEMs Best Expect More Shortages,” took us to task on our assertion that the U.S. consuming public is partly responsible for the negative balance of trade this country has with China. I do believe that this is the case and have set up the topic for discussion in a future article.
This column, however, will discuss the federal government’s role in enabling this balance-of-trade disparity. I think we can put politics aside, here, as over the last 30 years both major political parties have controlled Congress and held the White House. So our trade strategy towards China has been bi-partisan. This is one case where I wish there hadn’t been bipartisanship!
In my view, our country has been gamed by the Chinese, with the negative outcome becoming more evident by the month and financial quarter, in spite of the tariffs. This is a result of the Chinese government’s development of a very detailed and goal-driven long-term strategic plan for transforming its economy from one reliant on agriculture to one that is now a major industrial source. And in doing so, set itself up to be the primary competitor to the United States in the realm of world trade.
What has our country’s economic strategy been during China’s ascension to the second largest manufacturing economy in the world? We’ve been their primary enabler. Let me explain.
Historically, colonies have been used to improve the economies of their “parent” countries. This has been accomplished by the parent countries buying raw materials and low-value manufactured goods at bargain prices. And over the long haul, this strategy has helped the colonies themselves by raising their manufacturing capability to the point where they eventually increase the value-add of the goods they manufacture and export. Sound familiar?
In essence, since the early 1990s, the United States operated with China as our unofficial industrial colony. And this could have been a perfectly fine arrangement. Rather than their evolution occurring over the long-haul, however, it was accomplished in a relatively short period of time. And again, this was because China had a well-defined role that the U.S. government failed to recognize.
How did China accomplish this? By convincing U.S. corporations that they would evolve in the traditional way by being an ongoing, long-term source of low-priced materials and goods. And by maintaining this charade, China was able to convince its U.S. customers and partners to share manufacturing savvy and intellectual property.
For instance, any foreign firm wanting to manufacture in China needs to have a Chinese ownership interest. Foreign companies that have opened manufacturing facilities in China also know that a “minder” from the Chinese co-owner follows every step required to get a facility up and running. This provides a tremendous opportunity for the Chinese to jumpstart their expertise in the manufacture of specific products and the types of processing needed in their production. There is example after example of this type of business relationship leading to a solely-owned Chinese company manufacturing a comparable—sometimes identical—product to compete with the joint venture they have ownership in!
I blame the trade policy that allowed this to transpire on the misguided philosophy of free-trade radicals, whom I refer to as Uber-Freemarketeers: in other words, those who preach that world trade competitiveness is based strictly on market forces, with the best thing our government can do being “get out of the way.” And under this framework, when U.S. goods become less competitive price-wise, Uber-Freemarketeers tended to blame this country’s “high cost of labor.” For the most part, this is a red herring. All you need to do is reference Germany—which has higher labor costs than in the U.S., but is still quite competitive in the markets it chooses to participate in.
The reality is that there is no international free market. Why? Because the governments of many other countries facilitate the increased competitiveness of their manufacturers to increase exports. Specifically, exports to the United States. And it’s not just China. For instance, ask yourself the following questions about Korea’s trade record over the last twenty years:
1. Do you really think that the Korean automotive industry could have made the inroads it has in the U.S. over the last 10 to 20 years or so without governmental support? I don’t think so. And with Hyundai-Kia sales now approaching 10% of the U.S. market, South Korea’s emergence has not only hurt the U.S. economy by increasing our country’s imports, but has also taken sales away from American automotive manufacturers.
2. Do you really think that Korean battery manufacturers could have—on-their-own—made the huge capital investment needed to become the first and (for a period of years) sole producer of battery systems for electric cars years before there was significant demand for these systems? Again, I don’t think so. Consequently, when the Chevy Volt was introduced in 2010, General Motors had to purchase and import its battery system from Korea.
But there’s more. At its introduction, the U.S. government offered a $9,000 rebate on every Volt sold. The end result was that a couple of thousands of dollars of this rebate indirectly went to Korea! I wonder whether that tax-based rebate would have been better spent assisting U.S. manufacturers to develop their own electric vehicle battery manufacturing capability.
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Further, most significant government financial support of manufacturing has been to large U.S. corporations, the most recent being the 2017 corporate tax reduction. If this approach was effective, this country wouldn’t be in the negative trade balance that it currently is in.
The United States needs an industrial policy that includes some form of governmental support of the country’s small-and-medium sized manufacturers (SMEs), regardless of the position taken by Uber-Freemarketeers. That policy should be well-thought-out and long-term such that it facilitates an increase in their competitiveness—and yet, at the same time, doesn’t lead to the mentoring of future competitors. For instance, a financially meaningful way to facilitate their investment in new technology—tax credit, financial matching, etc.—which is a major shortfall with SMEs today.
Uber-Freemarketeers use this mantra to justify their position: “The government shouldn’t be involved in picking economic winners and losers.” However the government’s non-involvement has done just that. The winner has been China, and the United States, the loser.
I really don’t think it’s reasonable to expect our SMEs to successfully compete not only against foreign manufacturers but also against foreign governments. We need to open a dialogue on what it will take for us to even out our balance of trade and at the same time keep our manufacturing base strong.
Paul Ericksen’s book is Better Business: Breaking Down the Walls of the Purchasing Silo. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.
