My father recently attended a meeting and rally sponsored by Potomac Supply Corp., a major pallet and treated lumber operation in Kinsale, Va. One of the hot topics driven home at the event was the loss of American manufacturing jobs to overseas markets, especially China.
Senator Charles R. Hawkins of the VA State Senate talked about how the United States actually had a small trade surplus with China in 1985. But that has all changed over the past twenty years as the trade deficient with China has soared to an estimated $200 billion in 2005.
Why doesn’t the government act to reverse the mass exodus of American manufacturing? Well, there do not appear to be any easy answers. Slapping tariffs on China isn’t likely to do much good. Multi-national corporations would just send the factories to other low-cost manufacturing countries. Putting tariffs on too many countries would cause significant reprisals taking us away from the policy of encouraging free markets. Tariffs would hurt American consumers by driving up prices.
The United States has become a victim of its own success and standards. As the U.S. standard of living has increased, so have the costs to produce goods here. The United States has more stringent government regulations than many other places in the world, which causes some companies to move operations offshore.
As the dragon has awakened to join the club of industrialized countries, it has done so at an unprecedented rate. In the process, the economies of China and the U.S. have become co-dependent. Chinese investment in America and America’s consumption of Chinese goods has put these two global economies on a crash course. Can these societies maintain their current courses forever? When will U.S. debt and consumption catch up with us? When will China stop pouring investment income into the U.S. economy?
China holds a significant bargaining position due to the massive amount of U.S. debt it controls. China’s investment in the U.S. has helped lower the cost of money here, which has allowed U.S. shoppers to consume at even faster rates, buy bigger houses and enjoy the good life.
China’s foreign exchange reserves surpassed $460 bil-lion in 2004.
This means that China could simply spend its dollars and cause
the value of the dollar to plummet. But China doesn’t want to do this because its output is tied to U.S. consumption, which would drop if the dollar became seriously depressed in value. China provides billions of dollars in investment to Fannie Mae and Freddie Mac, which own a significant amount of the mortgage debt for U.S. homeowners. The next U.S. recession could be "Made in China" if the Asian banks stop buying U.S. bonds and funding our debt.
While many people are talking about how we are exporting jobs to China, the reality is that most of China’s gains in the U.S. market have come at the expense of other countries, especially those in Asia, not the United States itself. There are some exceptions to this general rule. For example, the U.S. furniture industry has taken a major hit from Chinese imports. China now makes 40% of all furniture sold in the U.S. and that number is expected to rise.
China and the U.S. are on a collision course due to the competition between these two superpowers for raw materials and foreign investment and China’s refusal to recognize and protect intellectual property. China’s incredible expansion has been a major factor in the rise in steel prices around the globe – just ask your pallet nail supplier. And when it comes to intellectual property, China has no problem turning a blind eye to piracy and what amounts to "theft" of proprietary technology.
China used to be known for only its manufacturing muscle, but the country is actively expanding its research and development capabilities. Give it a few years, and China will be an even more formidable competitor in high tech and other emerging fields.
As the dragon awakens, its co-dependent relationship with the U.S. has been both a blessing and a curse. There likely will come a time when the relationship will have to change, and the process could be painful for both countries.
