Tariffs to protect US customers and brands from China?

Tariffs Anyone?

A series of mutual rants by two friends – Dr Jon – a fiscal conservative – supporting basic US and International free market policies and a more conservative friend (known as my “More Conservative Friend” to protect their identity) concerned about our country’s outsourcing and loss of manufacturing. 

Your thoughts?

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More Conservative Friend

Dear Dr Jon

My thoughts haven’t changed in the last 10 years when I started to recognize what we were doing to ourselves in the name of progress and profits.  

You give away or allow your manufacturing jobs and technology to be imported by another nation for instant corporate profits and you, as well as our country,  will inevitably pay the price later on as they out-compete you due to their low labor costs. Soon we will be unable to manufacture anything in this country [the US] if we don’t equalize the scales with tariffs to take away the foreign advantage.  This will allow us to again have a large and vibrant manufacturing sector.  I sound like the union bosses but I agree.  We are forming a nation of burger flippers, health care specialists and other service providers and if we don’t turn it around soon it will become very painful for our future generations either through wars or a low standard of living.

Even though you think China is the future, bottom line is we need to keep our intellectual property and reestablish our manufacturing through the dismemberment of the free trade agenda or else.  The old economic models of guns or butter never considered “or services” as an alternative as you have to produce something of value to sell as a nation or you will sink.

Those are my thoughts, another Conserative rant.

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Dear More Conservative Friend,

Maybe not changing in 10 years is a problem?

I agree that America needs to refocus on our manufacturing capabilities, government subsidies to boost critical strategic materials and manufacturing, and protect our intellectual property.

Tariffs. The problem with that solution is that it may work but only inside the U.S. Tarrifs can’t make any U.S. manufactured product more competitive for export as long as the U.S. pays an average of $35,500 per year to manufacturing workers compared to China which pays less than $12,000 per year on average (up from $5,000 in 2010). And most American’s would not tolerate the quality of life found even in the growing middle class of 400 million people in China. 

And what will be China’s response? Buy less U.S. Treasuries and force Congress and Senate to abandon our debt-financed society? 

Should we stop funding foreign wars and save a few billion now? Or how about ending Social Security (24% of budget as of 2019), Welfare and Medicare (15%), Medicaid (10%)? Cut the Military Budget (16%)? I don’t believe these are pockets to look for funding new programs.

And try to educate or convince Americans who brag that the patio furniture they bought last year for $250 at Costco or Walmart (which were “Made in China”) would be much better “Made in America” and costing $1500.

In earlier years, Japan did the same thing China is now doing… Anyone remember when “Made in Japan” meant poor quality and shoddy products? They began with cheap labor, but moved up the value chain with homegrown and imported technology. Today, they are the major producer of the high technology chips used in most ALL our appliances and military applications. Remember the 1980’s when they bought Rockefeller Center? There was a US outcry! After Japanese worker incomes rose and its population began to age, Japan now can’t afford to manufacture low technology products in Japan and have been opening factories in China, Vietnam, and other low cost manufacturing centers for years. However, Japan didn’t have the local consumer market that the US or China has – and both will have for many decades to come.

Why is it that Japan and Germany can open factories in the U.S. with U.S. labor for the U.S. consumer market and GM and Chrysler have had such a hard time surviving? Maybe it’s the highly paid workers at GM and Chrysler? Note that the VW and Tesla plants are non-union. Not sure if that’s good or bad, but suspect it results in lower overall labor costs and administration.

When we talk with Chinese businessmen, their markets are so big and growing so fast that the U.S. market for their goods is just not as interesting anymore. Global companies (not just the U.S.) will continue to buy cheap labor products wherever they can be found and import to Americans who want things cheaper. (Read my blog on China vs India).

Here are a few areas I think we need more focus:

> Educating our children and requiring adults to get continuing education (tax incentives, Social Security, and Welfare incentives, etc.). 

Just look at the comparison between US engineering graduations and those in China…

• Graduation of US Engineers:
  • The US has a well-established system of higher education, including numerous universities and colleges that offer engineering programs.
  • The number of engineering graduations focus on various engineering disciplines such as electrical, mechanical, civil, and computer engineering.
  • The National Center for Education Statistics (NCES) reported that in the 2018-2019 academic year, 96,000 bachelor’s degrees in engineering, and about 35,000 master’s degrees in engineering [source: NCES].
  • The U.S. has a diverse engineering workforce, with a significant number of international students pursuing engineering degrees in American universities.
• Graduation of Engineers in China:
  • Chinese universities and technical institutes have expanded significantly to meet the demand for engineering education.
  • China has been known to produce a large number of engineering graduates with an emphasis on STEM education (Science, Technology, Engineering, and Mathematics).
  • According to the Chinese Ministry of Education, over 500,000 engineering and technology-related bachelor’s degrees were awarded in 2019 – five times as many as the US – and China has consistently ranked among the top countries for engineering graduates [source: Chinese Ministry of Education].
  • Similar to the progress noted in Japan, China’s emphasis on STEM education is part of its efforts to support economic growth and technological advancement, moving from just a low cost wage manufacturing country to a high value country..

> Put a cap (not a Tariff) on imports by any company. If there is enough U.S. market demand for something, the rest will need to be manufactured here. Prices will shoot up and there will be a loud cry as Americans can’t afford that new patio furniture they want – and we will get used to fixing things and making do with less in the new world. Yes, Presidents will fail to get re-elected, and there will be riots and people getting killed on opening day of store sales as people push and shove to buy that “thing” we all want. Look at Greece’s response to fiscal belt-tightening.

> Realize that we can’t be an island and put more focus on doing in China what Toyota, Honda and VW do here. Did you know that the Buick division in China has been profitable since the day they opened? At least for a while, the power trains are Made in America and shipped to China.  And our profits in China could come back to America in jobs, profit income and corporate taxes if structured properly. I think we need to get into China, export our people and management and take advantage of the opportunity ahead. Then find things we can do uniquely – if anything – here at home to serve those markets.

But China is changing and today Americans and US companies are not as welcome in China.

> Did you see the 60 Minutes special about how our entire defense system and banking system has been breached over and over again by internet hackers? (see details at http://www.cbsnews.com/stories/2009/11/06/60minutes/main5555565.shtml)

We may find a way to protect our Intellectual Property, but I doubt it. Therefore, we need more of it and won’t get it as long as we’re flipping burgers instead of getting educated. Many great inventions and new products are the result of businesses (and defense contractors spending big government money) being in the local market or latest war – not from university labs. 

Interestingly, China has “big government” while many of us still want “small government” in the U.S. The China economic stimulus plan was 1/2 Trillion Dollars (U.S. equivalent) of government money and banks were ordered to start lending – which they’ve done. China banks made $65 Billion in loans in the first 6 months of 2010, but more importantly, that is up 72% for the first half of this year compared to 2009.  I wonder if that matters. Or is it because China can let 650,000 people die every year of respiratory diseases (before the COVID pandemic) and don’t yet have Social Security, Welfare or a Clean Air Act?

A vicious cycle, but hopefully not a zero-sum game.

If I had a reasonable set of arguments or ideas that I thought would really work, I’d become a writer or politician to be heard. But I wonder – why can’t we find high school and college students to dig holes, cut grass or pick strawberries for $10 or even $20 an hour? Something’s gone amuck with our sense of value and entitlement, and we will all pay the price for that as well. But in one of the richest countries in the world, it’s sad we still can’t take care of our poor, indigent, homeless, and uneducated masses.

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More Conservative Friend

Dear Dr Jon

I’ll be glad when I finally get you educated and you find a real job.  Attached are some of my thoughts as I can’t type fast enough to provide all of them.  I reviewed your charts and China photos and see an underdeveloped country moving to catch up with the developed cultures in Europe and the US.  Other than size I see no real difference with the countries in the same position.  I just am not as interested in you at seeing them develop at the expense of most of the citizens of the US. 

Convert an isolationist from what country – the USA or China?  By the way, I am not an isolationist. I just believe in developing, building and selling your products to keep your citizens productively employed not giving away your developments for short term personal or corporate gains while keeping another country’s people employed for personal enrichment from their cheap labor. Doesn’t that make sense to you?

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Dear More Conservative Friend,
 Actually, it does make sense to me. China is doing the same – for example, they have not allowed FedEx or UPS to enter the domestic China market (UPS is big in the shipping docks though) to allow China native industries to develop and evolve in that area. But none of that will bring the $60,000 manufacturing jobs back to the line worker when the world is full of people who will do that job for less – not just in China.

I just don’t believe Tariffs work, but import restrictions and other policies may as these seem more “tolerable” as they are level (that is, ALL countries are treated the same, not just a few). Tariffs create isolationism because it’s strictly for internal markets and to shut out (i.e., raise the price of ) foreign products.

It still doesn’t address the base example of the $1500 patio furniture. Who pays for the higher cost due to Tariffs? The US consumer!

But in a democracy, it’s really hard to get anything DONE…that I believe is one reason India (democratic) is having trouble with their economic rebirth while China (communist) is moving ahead. I’m not a proponent of communism, just making an observation.

The U.S. cannot be a world competitor on the basis of cost of labor. I’ll bet we could put all the lost Oregon workers back to work at $300 per month, but no one would take the jobs!

This is broader than just manufacturing jobs but that is a part of it …our steel and textile industries just could not continue to compete on a world basis and that was their demise. America grew rapidly, creating the world’s greatest consumer market…for a while. Then when you compare the magnitude and timing of China’s growth in the 1990’s and 2000’s and growing middle class (our middle class growth was in the 1960’s) it becomes clear that they are on the same trajectory as the U.S. WAS. 

America is not growing enough to sustain some industries on a worldwide basis and not at the price of steel and textile goods. Any that have survived are like job shops or paper mills – specialty niches of (typically) short-run items with short turnaround times that don’t make sense to export and can’t be imported economically or with such speed.

Now, if the price of oil went to $200 per barrel we’d have a game on our hands as the international supply chain would create higher prices and allow U.S. manufacturing to become competitive again. Maybe we will get “lucky” and they will go up ???

I don’t think any of us are prepared to a) stop buying any product made in China (nearly impossible and just try and convince your friends and neighbors) or b) suggest our children work for $300 per month. So if we can’t hold to our beliefs and vote with our feet, we expect corporations – profit animals by nature – to do it for us? When was the last time EITHER of us “overpaid” for something because it was Made in America?

Technology and know-how can only be protected so long, but the Intel supply chain discussion is interesting (see articles below ) – keeping R&D close to manufacturing. Taiwan does that for both its Toyota plants and TSMC’s high-end silicon chip manufacturing. However, as noted, IP does escape whether we want to stop it to or not.

• Intel’s Intellectual Property Loss – https://www.cpomagazine.com/cyber-security/massive-data-breach-exposes-intels-intellectual-property-for-its-flagship-cpus-and-spacex-sensors/
• Intel’s Supply Chain https://www.thomsonreuters.com/en-us/posts/esg/collaboration-supply-chain-sustainability-intel/ 

See these links below. One discusses how China’s growth MAY bring jobs to the U.S. The other, notes Oregon’s exports (as an example) SHRANK in 2009 EXCEPT for our exports to China which GREW. As one points out, however, Oregon has lost 60,000 jobs in the decade from 2000 to 2010 (some just from sales of Oregon companies to owners in other states) and they probably won’t come back in that form. But look at the list of exports and strategies (e.g., Intel).

http://www.oregonlive.com/business/index.ssf/2010/02/oregon_exports_down_sharply_–.html

http://www.oregonlive.com/business/index.ssf/2009/02/oregon_exports_hit_record_194b.html

http://www.oregonbusiness.com/articles/83-april-2010/3237-exporters-follow-the-money-to-china

http://seekingalpha.com/article/217552-china-s-big-challenge-is-ours-too?source=email

I believe we need corporate, state and national strategies to increase exports and (as noted before), do what VW, Honda and Toyota have done in America. By the way, how much “technology risk” did these companies take in doing that?

The U.S. sees China’s population growth and growing middle class as a burgeoning market, while the Chinese see it as a burden! How do you feed, clothe and give healthcare to 1.4 billion people and how do you continue to placate the growing “wants” of the Middle Class ? Interesting different points of view.
We went through the same issues during our post WWII population growth and found it was good for most of us.

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More Conservative Friend

Dear Dr Jon

Remember to include the other components of a product other than labor in your analysis of pricing that can be just as significant.  Raw materials, production technology /methods, quality, marketing, shipping efficiency and the intangibles such as pride, brand identity and inventiveness. You seem to ignore these which can affect pricing as much as labor and affect demand much more.  We are our own worst enemies as we seek the most short-term return over any long-term cost.  

Interesting when you address Oregon’s unemployment problems. First, to put them back to work you need to end the Government handouts. Again I believe all the government handouts retard people from working at something rather than go hungry. Look at the impact of local and national forest product policies that decimated the use of our most available natural resource in favor of protectionism rather than conservation which was already in force in the industry.  Look at the morons who continue to force the power industry to tilt at windmills while abandoning nuclear, coal and natural gas and continuing to beat up on the water power supply.  As long as the State continues to listen to such unsustainable idealists and elect similar leaders like the current Governor, manufacturing (jobs) will continue to suffer.  So what is left? The service industry and more government employees! This is where an electorate full of freeloaders is bound to fail while a hungry China or others will take over.  I hope and believe these trends are reversible when such governments run out of handouts (like California) and are forced back into a productive mode to survive.  You can only live so long on savings then you must go back to work or sink.

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Dear More Conservative Friend,

We all know Democracy is not efficient (just look at the effectiveness of our Congress and Senate), but we just don’t like the alternatives.

Communism and Socialism are a whole different discussion.

Thanks again for taking the time and giving this discussion some time. I do appreciate it.

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Notes:

1. US Bureau of Labor Statistics https://www.bls.gov/oes/current/oes519199.htm
2. http://www.oregonlive.com/business/index.ssf/2010/02/oregon_exports_down_sharply_–.html
3. http://www.oregonlive.com/business/index.ssf/2009/02/oregon_exports_hit_record_194b.html
4. http://www.oregonbusiness.com/articles/83-april-2010/3237-exporters-follow-the-money-to-china
5. http://seekingalpha.com/article/217552-china-s-big-challenge-is-ours-too?source=email
6. http://www.cbsnews.com/stories/2009/11/06/60minutes/main5555565.shtml
7. Intel’s Intellectual Property Loss – https://www.cpomagazine.com/cyber-security/massive-data-breach-exposes-intels-intellectual-property-for-its-flagship-cpus-and-spacex-sensors/
8. Intel’s Supply Chain https://www.thomsonreuters.com/en-us/posts/esg/collaboration-supply-chain-sustainability-intel/