Posts Tagged ‘Import Tariffs’

Trade Deficits, Currency Manipulation and International Credit Flows Creating Labor Unemployment In Developed Countries.

Wednesday, December 21st, 2011

Wealth (profit) comes from credit applied to production.  With credit, producers of real goods can leverage their ability to produce a final product which can be sold above the total costs of production.

Global international trade where economies are emerging causes credit to flow from developed economies into the emerging economies.  This credit is used to produce real goods in these economies because they offer cheaper labor costs and as they emerge they also offer new customers for those goods.  These offshore factories produce profits for those in developed economies who provide credit and they also benefit those in the developed economies who provide technology and other products of intellectual property.   Unfortunately they do not offer profit for labor in the developed economies because the new labor jobs are in foreign facilities.

It’s more than coincidence that the number of jobs created in foreign countries by American credit and intellectual property matches almost exactly the number of jobs lost in American manufacturing.  This is an entirely predictable result of American credit and intellectual property (IP) flowing offshore.   These are America’s two primary exports:  Credit and IP.

But the beneficiaries of this cycle, those who have credit to provide and those who own IP, are a very small minority of Americans.   Those who did not benefit from this cycle are labor in general and Main Street businesses and professionals who depend upon the incomes of this labor.   This is why Americans are now seeing their middle class disappear as labor unemployment starves a majority of Americans of their income.

The cure(s)?  American credit needs to be re-directed back into domestic production facilities and tariffs need to be imposed so that foreign emerging economies are forced to raise the wages of their labor.   Both developed economies and emerging economies must be weaned away from using cheap labor to gain productive advantages.  In the current situation labor in both types of economies unnecessarily suffer.  Labor incomes in emerging economies do not rise rapidly enough, and labor in developed economies suffer unnecessary income losses–losses which destroy the hard won middle class.   Growing income inequality in both developed and emerging economies is one result of the current cycle imbalances.  High unemployment in developed countries is another.

Fair trade practices, including the prohibition of currency manipulations, are needed.  Beggaring labor incomes should not be a tactic either.  Competition should be, as much as possible, based on quality of product production and distribution.  Measures of ‘efficiency’ that depend upon currency manipulations or labor destruction must be abandoned.



Some Thoughts On Labor Unions.

Thursday, July 21st, 2011

Over at economist’s view there’s an ongoing discussion about the drop in union membership in the private economy and what political groupings might coalesce to replace unions, or supplement their lagging memberships.  An underlying agreement in this discussion theme is that unions, whether you like them or not, played an important and positive role in raising the average American’s standard of living.  The economist’s view highlights an article by Lane Kenworthy over at this blogsite Consider the Evidence.  If you’re interested you should probably start with Kenworthy’s article and read the comments there before going over to economist’s view.

Kenworthy’s article is entitled ‘Is there a viable progressive politics that doesn’t hinge on a strong labor movement?

As with all academic type of discussions in economics or social sciences there evolves a nuanced discussion about what might be in the future–the basic inquiry is what collection of interest groups might step into the role the union movement fulfilled for earlier generations.

What’s missing in these discussions is a basic understanding of where union powers come from.  What are the irreducible characteristics of union power?  Without first agreeing on this discussions of what can replace union influence become un-anchored.

There are only two irreducible union characteristics.  One is force:  The ability to shut down a business or an industry, or even an entire economy.   If you can’t punch the bosses in their collective face, then you have no power.   Of course this irreducible force is made possible by the other irreducible characteristic of unions:  Scale, or the collective power of many union members.   If you have 10 members you have a weak union.  If you have 50,000 members and their strike is backed up with 300,000 other union members who will also strike as a result, you have real power.  The kind of power that gets your union reps a seat at the table of profits as well as a seat at the table of political power.

Two important derivatives of these irreducible characteristics (force and scale) are the power of money raised by membership dues and the ability of union halls to serve as political substations for politicians who support union friendly government regulations.  Any possible grouping of non-union organizations will have to replace force and scale or they won’t be effective.  And that’s what is missing from the discussions over at economist’s view and at Kenworthy’s blogsite.

Of course the rise of unions came about as a result of some basic relationships labor has with the ownership of capital, unions or not.  All organizations of production or services have a common desire for labor, whether they are private in democratic countries, or semi-private in socialist countries, or totally government owned and top down controlled economies like those of Communism:  The unrelenting  need to dehumanize labor in order to make them equivalent to a box of screws.    The optimum outcome is always the same no matter what the economic composition and that is to have labor too weak to fight, and too indebted to flee.  Labor is just another input cost, in other words.

In this scenario labor is paid only what it can take from the owners of capital.  And that’s why unions were formed and often violent strikes were necessary in order to raise wages, benefits and working conditions.   That unions in the private economy here in the US are weakened almost to the point of political irrelevance is a major reason why private labor today cannot make a livable wage.  Today’s weakened unions can no longer force the government to protect their employment, via import tariffs as one example, and they can no longer participate alongside their employers via wage gains commensurate with their productivity improvements.  

Discussing what groups might replace unions is interesting, but in my opinion, likely to be ineffective at finding a suitable replacement.  Far better to restore union power by regaining membership, even if this means using force.

The US Precision Tool Industry Could Use Import Tariffs.

Monday, June 27th, 2011

This article is from 2010, but the lesson is still critical to understand.  When it comes to global trade, a nation has to pay attention to protecting it’s industrial base.  In this case, the government is apparently not protecting a vital industry, it’s actively promoting its destruction with export tariffs on its own domestic precision tool industry.

U.S. producers of some of the most technologically advanced machine tools are in trouble, according to an assessment by the Department of Commerce. Sales of high-precision five-axis machine tools are declining. U.S. share of global exports is in a freefall. Foreign companies in China and Taiwan have caught up with U.S. technical capabilities, rendering stringent U.S. export controls moot. U.S. companies are being purchased by foreign rivals. A lack of training programs has created a shortage of skilled workers able to use the complex machinery. Commercial and U.S. government customers prefer foreign machine tools. Export controls are hampering foreign sales. The entire U.S. machine tool industry spends only $1 million a year on research on five-axis machine tools.

These are some of the findings from a “Critical Technology Assessment” conducted by the Commerce Department’s Bureau of Industry and Security.

U.S. producers of five-axis machine tools had sales of $253 million in 2008, down 11 percent from 2005 sales of $284 million. That was before the U.S. machine tool industry suffered a meltdown in 2009, when domestic consumption tumbled by 60.4 percent, according to the Association of Manufacturing Technology.

Sales of five-axis machines to domestic customers from U.S. producers declined by 19 percent from 2005 to 2008, from $242 million in 2005 to only $195 million in 2008. There are six American companies dedicated to producing five-axis machine tools, and at least 20 in China. Five-axis tools are used for the production of precision components in the aerospace industry, in making gas and diesel engines, automobile parts, and throughout the medical, textile, oil, glass, heavy industrial equipment and tool industries. “Many other industries are discovering the advantages of these machines,” says the Bureau of Industry and Security (BIS).

Yet “only a handful of U.S. producers actually manufacture five-axis machine tools in high volume and most generate less than 10 percent of their annual net finished machine tools sales from five-axis machine tool business lines,” according to the market and technology research report from BIS.

U.S. producers of five-axis machine tools exported only $58 million worth of equipment in 2008. In a tally of global exports of all machine tools, the United States — with exports of $740 million — accounted for only 4.3 percent of global exports in 2007.

In its survey of 61 American end-users that purchased 502 five-axis machine tools worth a combined $900 million, imports accounted for 70 percent of purchases. “Across model types, the number of imported models greatly surpasses the number of domestic models for grinders, mill/turns [and] machining centers,” says BIS. “However, domestic-produced mills slightly outnumbered imported mills.” The average purchase price for a five-axis machine tool was $330,000.

BIS also surveyed 109 U.S. machine tool distributors. It found that 80 percent of the five-axis machine tools they sold in the United States between 2005 and 2008 were imported, with Japanese and German machines making up the majority of models. “Five-axis machine tool distributors, most of which are selling only non-U.S. five-axis machine tool models, have clearly positioned themselves more effectively in the domestic market,” says BIS. “The growth rate of distributor domestic five-axis simultaneous control machine tool sales in 2005-2008 was 3 percent,” says the study. “This compares to a precipitous decline of 20 percent in domestic sales among U.S. producers over the same 2005-2008 period.”

There are not many U.S. producers of five-axis machine tools. Only six of the 109 U.S. machine tool companies surveyed devote 25 percent or more of their current production capacity to these high-end machines. The remaining producers of machine tools have either shifted production to other machine tool lines, or have moved production offshore. Other producers say U.S. export restrictions have forced them out of the business.

Companies making five-axis machine tools in the United States take a lot longer to build them than foreign rivals. BIS gathered information on 477 five-axis models, 96 of which were produced in the United States and 381 of which were imported. “BIS found that U.S. producers take almost twice as long as foreign producers to manufacture custom-built models, on average,” says the study. “However, U.S. producers were able to manufacture standard models 25 percent faster than their foreign competitors.”

Custom-built American models contain 84 percent U.S. content (with eight models reporting 100 percent U.S. content). “In contrast, 87 percent of reported imported machine tool models contained an average level of only 3 percent U.S. content,” says the study.

BIS asked end users to assess U.S. and non-U.S. producers on 21 purchasing factors, including such things as spindle speed, machine durability and precision and repeatability. “The United States has a competitive advantage in only one — service/support,” says BIS. “These findings are consistent with U.S. customers’ high demand for non-U.S. produced five-axis simultaneous control machine tools. A majority of purchasers do not have any domestic produced machine tools of this type in their capital stock. Several end-users claimed that they were not aware of any domestic producers capable of meeting their purchase needs. One commercial end-user responded in the survey that, ‘The overall precision, accuracy, machine tool features and control capability is not available in the United States with reasonable delivery or cost.”

BIS found that half of the commercial five-axis machine tools are purchased for government contracts. The majority of these purchases are used solely for the purpose of government work. “Non-U.S. produced models made up 64 percent of five-axis simultaneous control machine tool models in the inventory of U.S. government contractors,” says BIS.

BIS also assessed foreign producers of five-axis machines. It found that not one of the 45 companies that are indigenous to Brazil, China, India, Russia and Taiwan use U.S. technology, parts, components or materials. China has 20 indigenous five-axis machine tool companies; Taiwan has 22. None of these companies have to deal with the types of export restrictions facing American firms. As a result, these companies are able to produce all the machine tools that are in demand in China and Taiwan, plus they are “able to produce in sufficient quantity to export to other LRCs,” says BIS.

One of China’s five-axis machine tool makers has 24 distinct models. China now has 28 companies capable of building more than 1,000 CNC machine tools. There are 130 Chinese companies with annual capacity of more than 100 machine tools. The country is now supplying most all of its own demand, with only 10 percent of the market being supplied through imports. “In 2005, approximately 59,600 units of CNC machine tools were produced in China,” according to the BIS report. In 2007, the combined amount of CNC metal-cutting and forming tools produced in China was 126,268, more than double the amount produced in 2005. China is now supplying its own demand for five-axis machine tools used throughout its military.

The BIS quotes the Export Compliance Working Group of the American Chamber of Commerce in the People’s Republic of China as saying: “Given the existing domestic and joint venture development and the foreign availability of high-level machine tools, U.S. companies could not make a material contribution to China’s military development. China’s military demands are already satisfied by domestic and foreign supply.”

The United States exported 515 five-axis machine tools between 2005-2007, and only 12 of these went to China. DMTG, China’s largest producer of machine tools, exports products to more than 100 countries.

The Bureau of Industry and Security is in charge of licensing the sale of five-axis machine tools for export. From 2004 to 2007, it issued licenses for the sale of 148 machines, but only 34 of them were sold and delivered. BIS asked the U.S. producers and distributors who applied for the export licenses why so few of the orders were fulfilled. “Many respondents indicated that the customer cancelled the sale after the export license was obtained or bought a competitor’s product,” says BIS. “One Chinese customer cancelled a sale because it took the U.S. company seven months to obtain an export license, and in the end, the license conditions were too extreme in the customer’s view.”

The number of licenses issued for export of five-axis machine tools to China dropped from nine in 2006 to only three in 2007. “As one exporter noted, ‘the costs associated with the uncertainty of obtaining a license [and] the protracted process and impact on customer relations offset the financial rewards of pursuing the [five-axis] business.’ ”

The few remaining U.S. producers all said that export controls are impacting their ability to remain competitive globally. Foreign customers can obtain the comparable systems much faster from European and Japanese companies. European and Japanese governments process export licenses twice as fast as U.S. export control agencies. One U.S. five-axis machine tool producer told the BIS analysts: “Foreign entities with knowledge of the multi-axis simultaneous control machine tool industry view the U.S. export control policies and requirements as an additional burden to consider when dealing with U.S. multi-axis machine tool manufactures.” As a result, they no longer even consider U.S. producers when shopping for five-axis machine tools.

Beezer here.  With this kind of policy, it’s no wonder this critical industry is in decline.  Don’t forget, these are the tools used to make the machines industry needs.  And they make a lot of defense industry machines too.  No wonder we have an ongoing ‘scandal’ regarding defense use of imported products–we gave the industry away.


Great Explanation Of Trade Deficits And Surpluses By Michael Pettis. A Must Read.

Monday, June 27th, 2011

I’m going to start reading this guy regularly and I’m posting a link to China Financial Markets,  his blog, particularly a recent piece explaining national trade and how various policies affect who’s going to have trade surpluses and who’s going to have deficits.  Here’s Pettis’ resume.

Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business.  He is also Chief Strategist at Shenyin Wanguo Securities (HK). 

Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.

I’m particularly interested in having Capt. read this post, entitled How To Become Virtuous And Save More.  So read it Capt!  Here’s a small sample from the piece.

For this week’s blog entry I want to go a little abstract in order to suggest how different countries that participate in the global imbalances are going to adjust.  The debate over the root causes of global imbalances is as fierce and as confused as ever.  The confusion isn’t helped by the vast army of moralizers who like to contrast the hard work and thriftiness of households in high-savings countries with the laziness and binge-buying behavior of households in high-consuming countries.  The world cannot possibly rebalance, they argue, until the later become more like the former…

There are nonetheless some obvious flaws in the argument.  First of all, if the high-consumers become as virtuous as the low-consumers, that just means that global demand will decline, and with it, global unemployment will rise.  In that case global savings won’t go up.  They will go down, since rising unemployment causes income to decline faster than consumption.

Second, lazy spendthrift Americans are actually more productive and work longer hours than people in almost any other rich country, including the harder-working and higher-savings counties in Europe.  Still, the argument does anyway fit in with a lot of cultural stereotypes about Spaniards and Greeks, with their wild lifestyles, long siestas, and dissolute charm, or about Germans and Dutch, whose tasteless food, boring sex lives, and grim movies leave them no choice but to work away at office and factory.

But is this really why people in some countries love to save and people in other countries love to consume?  No, it isn’t.  Aside from the satisfaction it brings, this moralistic argument is almost meaningless.  Individual preferences may cause some of us to save more of our income than others, but we have to be very careful about generalizing.  When entire countries have abnormally high or low savings rates, individual preferences are never the reason.  Abnormally high or low savings rates are almost always caused by trade, industrial or tax policies at home and abroad that distort the relationship between consumption and production.

As with any well written article, particularly one that seems to dismisses cultural tendencies, the article sparked a terrific series of comments, pro and con.  One in particular details a specific German company that the author says exists because of German culture.  My take is that culture does matter, but in most cases not as much as most people assume.  Here’s one of the exceptions.

I really value your blog and read it regularly. But with a caveat: like almost all modern economists you configure the world into monetary relationships and disregard culture, education et al into a black box.
Unfortunately the real world is very different. Spain might devalue its currency as much as it likes; it simply has nothing to the world to sell.
Conversely Germany (or Japan where the Plaza accord of the Eighties had no long term effect on the trade balance) can consistently hike their currencies (as Germany did with the mark appreciation from 4 to the Dollar in 1973 to 1,5 to the Dollar in 1979 and will still run a surplus (in this case with the States).
Case in point is a factory complex making low voltage circuit breakers near Mannheim in South West Germany, which I helped to evaluate for a bank loan. It was formerly called Stotz then became a unit of ABB. (Won´t be more specific for obvious reasons)
The product is not high tech but these 2000 employees churn out a good part of circuit breakers in the world and forced from the market factories in the US and in GB and companies like GE. The workers at ABB are all unionized, get huge salaries, five weeks paid vacations a year and can´t be fired without a very, very good reason.
Now people who are for unions say that is the reason for the success and other people might say it is, because workers are represented in the workers council of the factory. But the real reason why they manage to dominate the market for such a low technology product that could – theoretically – be produced everywhere (they just try in Shanghai up to now in vain) is very simple if you look closer.
It is their production line called Goliath and that was preceded by David. These are in house developments costings upwards of a hundred Million Euro. These are hugely complex machines requiring the harmonisation of workers and engineers skilled in anything from cutting metal to a thousands millimeter to an advanced knowledge of chemistry and take years to build. (Three years in the case of Goliath) These production lines take huge up front investments but once they are in place they deliver a quality product with unbeatable low productions costs. No matter how low the wages anywhere else as wages are anyhow only a small fraction of production costs as soon as something like Goliath is up and running.
And these are not machines like a car that anybody can drive. Only the people who built them can operate them as it just turns out in Shangahi where they shipped David.
First, that something like that is possible has something to do with German business culture. In the US after a take over by private equity they would have never renewed the line but squeezed profits from it until it fell apart. That would have been the end of the factory and it happened in a good many cases which are well know to their German competitors. But that is only one and not even the main point regarding culture.
Goliath and all the other in house developments in German factories are the result of a combination of fabulous in house training of the shop floor people; strong emphasis of tradition (old teaching the young) and the non existence of barriers between engineers and the people implementing their designs.
These are not simply reproducible around the world. ABB is a multinational with branches all over the world and they would love to relocate and get rid of the pesky German wages and workers rights. But they tried and didn´t succed.
In Great Britain you can´t build something like that because there´s no vocational training that´s good enough. Also there´s the problem of the cultural barrier between engineers and workers. (In Mannheim they all talk the same dialect). In the US (as BMW has discovered in its plant in Savannah Georgia) only college graduates have the required reading and mathematics skills to do, what shop floor workers in a German factory are expected to do. But these people are difficult to motivate to get their hands dirty.
In Spain there are similar problems.
These are cultural problems and in China at the moment the greatest problem is, that shop floor workers are afraid to think for themselves. But without it you can´t operate a machine like David.
About China I believe they will learn and eventually become a strong competitor. But only if there is a cultural and probably concurrently also a political shift. Right now the hierarchies are too rigid and there´s no chance for workers to think for themselves. I am confident about China because the Japanese managed this as well. And their culture is ultimately derived from China.
I don´t really see a way out of the crisis along the line that Michael Pettis has sketched. I see no way out in fact. Regarding the situation now in Europe there´s only one solution: for Germany to pay up and shut up. For indeed the advantages of Germany are not due to harder work (they work less hours that Spanish workers) but simply the product of a unique set of historical and cultural circumstances. Best would be for Germany simply to pay the Spanish to buy their products. And the Chinese (which do have the advantage of extremely low wages) to pay the US to buy theirs. Which both did until now in a way. But that will not happen I am afraid so there´s only one solution: default.

How come?

Beezer here.  Pettis writes clearly and I believe very accurately.  That said, the comment reproduced above, clearly shows that culture does matter.  This doesn’t negate Pettis’ arguments but it does show that strong cultural preferences (another comment points out the Japanese and Chinese preference for liquidity) do matter and cannot be dismissed entirely.  Great post and several great comments too. 

What We’ve Done And What We Haven’t Done, But Need To.

Tuesday, May 24th, 2011

Technically we’re out of the Great Recession.  It doesn’t feel all that good because we still have too much unemployment and growth is painstakingly slow, stretching everyone’s patience.

So what have we done so far to fight the malaise?:

  • Cut taxes.  This was done in hopes the additional money in the hands of the private economy would boost lagging demand for products and services.  It looks as though this had some positive effect.  The negative effect was it increased government deficits.
  • Cut interest rates, effectively to zero.  This was done in an effort to force savers out of savings and into productive, riskier investments–and to decrease the costs of new borrowing for productive investment and the cost of government deficit financing.  The negative is that the retired who live on safe bond  portfolios see a reduction in income, and Social Security dependent elderly don’t get cost of living increases. 
  • A series of Federal Reserve moves intended to shore up weakened bank balance sheets.   Other than saving the banking system directly, another hope was that this would boost lending for productive investment.
  • Stimulus spending for infrastructure projects.  Although a minor part of the overall stimulus spending (tax cuts being the largest component), this was the only money spent on directly hiring people.  (Editor’s note: Advisor points out that tax cuts were not the largest portion of the original stimulus bill, spending accounted for about 65% of the bill.  Infrastructure spending was half of that spending.  Since that bill, however, the lame duck Congress following the 2010 elections added more than $700 billion in additional tax cuts over the next two years.)   

Although lacking detail this list covers the choices we’ve made so far.   So what could we do in addition that might trigger economic growth, but not put undue pressure on deficits?

  • Restore progressive tax tables, at minimum to those levels under President Clinton where the top marginal rate was 39.6% on income above $250,000.  This would force large savers to divert some of their inert savings into riskier, potentially more productive assets.    Additionally,  the government could pay more bills and it’s liability to insure huge undifferentiated savings would decrease.
  • Establish an infrastructure bond program aimed at specific, large projects.  We have $2.2 trillion in such projects already identified across the nation, but a national goal setting project on the scale used in the 1950s to build an interstate highway system would qualify as a large enough trigger to spur economic growth.   Think  national urban commuter rail modernization and expansion, for one example.  Or a national energy transmission system modernization, for another example.    This would employ many millions in private companies nationally, a good portion of whom would come from those now unemployed.  It would improve the economy’s efficiency, and thus its global competitiveness, for decades.  Another nice positive is the bonds would help satisfy savers’ needs for income while, at the same time, turning those savings to productive use.  To the degree the projects derive revenues once built, the government’s liability to insure AAA savings would be reduced as well. 
  • Use tariffs and other methods to reduce the nation’s trade deficits.  Cap and trade would raise revenue and reduce fossil fuel use.  Expanding the production and use of natural gas would decrease oil imports–a serious portion of the current trade deficits.  Subsidizing promising sustainable energy companies would create jobs and reduce our dependence on imported oil too.   

The government has cut taxes serially.  Cutting taxes even more will offer, at best, diminished returns.  To the degree they aggravate government deficits, their effect is likely to be net negative.   The Federal Reserve has pretty much run out of tools to use.

What’s not been used are progressive tax tables and direct spending on large, national infrastructure projects that would directly employ millions of workers.   We should be doing both right now.  And we should be aggressive about it.  The fastest way to end recessions and pay off debt is to grow the economy.

How To Make Foreign Competitors Hire Americans. Impose Import Tariffs.

Thursday, February 17th, 2011

‘The world’s top manufacturing country is the United States, as has been the case since before WWII. In 2007, the United States’ manufacturing output was $1.831 trillion US Dollars (USD). This is about 12% of the USA’s entire GDP (Gross Domestic Product), or $12,206 USD for every person in the 150 million-strong labor force. Still, the USA’s output per capita is not the world’s greatest among manufacturing countries — that honor goes to Japan. Important goods manufactured in the United States include, in order of percentage of exports in 2007: production machinery and equipment, 31.4%; industrial supplies, 27.5%; non-auto consumer goods, 12.7%; motor vehicles and parts, 10.5%; aircraft and parts, 7.6%; food, feed and beverages, and 7.3%; and other, 3.0%.’  From the wisegeek blogsite.

While China has a huge population of 1.3 billion people (4 times the population size of the US) and has used an aggressive mercantilist approach to achieve their magnificent growth the past two decades, the US still ranks as number one worldwide.

China manipulates its currency.  But the main carrot it’s used to increase job and wage growth has been to hold out the ‘carrot’ of it’s huge potential as a consumer of products.  The ‘stick’ part of this dynamic has been to reguire that foreign corporations must site manufacturing facilities in China and require that those facilities use local labor and locally sourced inputs wherever possible.  China also makes it very difficult to build in China unless the foreign corporation take on a Chinese partner. 

So why doesn’t the US do the same?  Import tariffs can sanitize foreign labor cost advantages as well as currency manipulation advantages.  Faced with these tariffs what would a foreign company do in order to get a piece of the still massive US pie? 

They build facilities in the US.  They hire locals.  And based upon the tariff and complementary trade restrictions, they can be ‘encouraged’ to buy US inputs for their manufacturing.  The ‘carrot’ is they get to sell into the richest and largest market in the world.  And they get to enjoy the profits too.

From the blogsite Alternet:

‘In at least one other case, action by the USW forced the hand of a Chinese company to move jobs to the U.S. Tianjin Pipe, the world’s largest manufacturer of steel pipe, said it could not export profitably to the United States if tariffs rose above 20 percent. This was after the USW and seven steel manufacturers filed a petition with U.S. trade agencies in April of 2009 accusing China of illegally dumping and subsidizing the type of pipe used in the oil and gas industry. The union won that case this past April, and the U.S. Commerce Department imposed import duties ranging from 30 to 100 percent to give the domestic industry relief from the unfair trade practices. To continue selling in the U.S., Tianjin Pipe had no choice but to build an American pipe mill. Construction is expected to begin in Texas this fall on the $1 billion plant to employ 600 by 2010.’

Beezer here.  China is expected to substantially increase investments in the US.  They need a better return on their trillions of surplus created by their export directed policies.  But why let them just purchase the manufacturing capacity?  Why not do as the Chinese do, make foreign companies invest in new plants that create new jobs?  Tariffs and complementary, national  full employment policies will do just that. 

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