China Trade Bill: We've Met The Enemy And He Is Us

Includes: ESLRQ, FSLR
by: Jonathan Bernstein

The China Trade Bill would impose a tariff on Chinese imports to the US in an effort to get China to revalue the yuan. The purpose of the bill is to reduce the US bilateral trade deficit with China. Its boosters, including Senate Majority Leader Harry Reid, say the bill could create 2 million American jobs it if it becomes law.

The China Trade Bill sailed through the Senate but its prospects in the House are doubtful. Speaker Boehner has said he won’t allow it to come to the floor for a vote – because he knows it would pass easily if it did. (Ironically the House passed the bill in 2010 but the Senate did not.)

While I think it’s a poor solution, the China Trade Bill addresses a real issue. The Sino-American trade imbalance can’t go on forever. At some point – when China is less dependent on the US market – China will be less willing to accept US paper in exchange for Chinese goods. If we let the situation go, eventually China will “fix” it, and do so on China’s terms.

Having said that, the bill highlights a major fallacy in how America approaches the rest of the world. The China Trade Bill would in effect tell China to revalue its currency at America’s pleasure. Not a great idea, because the Chinese can peg its currency wherever they want to, and it doesn't care to be pushed around by other countries. The bill represents a swell idea for Chinese politicians to stoke nationalistic fervor at America’s expense. China has also threatened a “trade war” if the bill passes.

On the one hand, China’s threat of a trade war is less fearsome than it may sound. If trade between the US and China fell to zero, China, which runs a big trade surplus with the US, would lose far more in exports to the US than America would lose in sales to China. America might lose access to some goods it no longer produces, but eventually America could rebuild the manufacturing infrastructure it has lost and would come out stronger after doing that. China might buy less US treasury bonds but then again – there would be no bilateral trade deficit to finance, and the dollar would be the stronger for that as well.

What We Can Do

On the other hand, America could — theoretically at least – do much more for our trade balance, and our economy, without provoking a high profile confrontation with China. In my view, the problem is twofold.

First, we must support the industries that are important to our future, rather than let China pick off its American competitors. We have to care about what industries America will be in, or we won’t be in them anymore. For example, Evergreen Solar (ESLR) set up its manufacturing facility in Devens, MA, aided by a $43 million incentive package it received from Massachusetts in 2008. In 2009 the company started shifting production to China, and shuttered the plant earlier this year. Evergreen CEO Michael El-Hillow stated that Chinese state-owned banks and municipalities had offered unbeatable assistance. Even though labor is far cheaper in China, labor accounts for only a small percentage of total cost, El-Hillow said. The partnerships with banks and municipalities actually outweighed the labor cost differential.

In addition, Evergreen said that while it cut its cost per watt of solar capacity from $3.39/watt in 2009 to $1.90 in the fourth quarter of 2010. Yet the Chinese undercut Evergreen further and were selling panels at $1.60 by then, and could produce them for a cost of $1.35.

Now, some companies – think SolarWorld, (OTCPK:SRWRY), which filed antidumping complaints yesterday, October 19, against China – believe that China gives its solar firms incentives that violate WTO rules. In their view, illegal Chinese subsidies are decisive in helping the Chinese companies cut their cost so much. Maybe they are right, and sometime within the next year US agencies will decide whether countervailing import duties are in order.

My feeling is, who cares? A year is an eon in internet time, and by then the Chinese will have solidified their advantages even more. In any event, Massachusetts could only do so much to hold onto Evergreen, and without Federal help, efforts at the state level were doomed to failure. With the concomitant departure of First Solar (NASDAQ:FSLR) to China, anything the US eventually elects to do will be in the realm of playing catch-up.

I could give lots more examples, but perhaps one of the most egregious is that Pfizer (NYSE:PFE) shut its famed R&D laboratory in Groton, Connecticut, this year, along with its equally distinguished British lab, and will shift much of its R&D to Shanghai. For many years, outsourcing advocates have maintained that America will not suffer much if “low level” assembly and manufacturing work shift abroad, as long as the “knowledge work” stays here. Well, now the knowledge work is leaving too. What has the Obama Administration done about this? Well, not a whole lot.

Closing the Groton lab will do more than harm American competitiveness. According to Medpage, Today, the abrupt lab closure will in effect throw away irreplaceable knowledge and expertise in the area of antibiotics and other treatments to fight infectious disease. While this move might improve Pfizer’s short-term profits, just how wise is it, given the increasingly serious problem posed by drug resistant “superbugs?”

My point is, tariffs can only do so much, if we have not identified and nurtured our key national assets before the fact. Yes, that is protectionism, but then again, protectionism is what nearly all governments do these days. Leaving US firms to compete individually against China in an industry that China wants to dominate, is tantamount to kissing the US firms goodbye.

I don’t know what the solution is to what I see as the second part of our difficulty: US managements, in many instances, simply favor outsourcing rather than producing in the US, even when US production costs are comparable to costs to produce elsewhere. For example in mid-2009, when GE needed wind turbine parts, a company named ATI arranged a deal to set up a plant in Michigan, to make them. When Chinese companies made a counteroffer to GE, ATI was able to match the China price. Yet GE decided to source the parts in China despite this. Similarly, a quick search online will yield plenty of results where consulting firms will tell companies how to get their “globalization policy” up to snuff and where the opportunities are to outsource various corporate functions. As anyone who has spent any time in the corporate world can tell you, consultants dream up solutions that “confirm” the existing biases of their clientele.

Even more importantly, in the early 1980s, key business lobbies such as the Business Roundtable and the US Chamber of Commerce, shifted their opinions from favoring US operations to favoring outsourcing. And after they did so, US policy shifted that way too, resulting in such agreements as NAFTA and the WTO. It was this rewriting of trade rules that made outsourcing workable. If Corporate America hadn’t wanted outsourcing, it simply wouldn’t have happened.

The contrast with Germany and Japan is striking. Both countries remain export powers even though their labor is far more expensive than is labor in China. The difference? Again, I would submit, is that Corporate Germany and Japan, Inc. care about maintaining employment in their home countries, while Corporate America does not.

In other words, if Corporate America wanted to produce here, we still would be, and we wouldn’t need a China Trade Bill. And because Corporate America does not want it, the bill will almost certainly not become law — neither the Republican leadership in the House nor President Obama would dare offend campaign contributors that way. The bill simply gave Reid a chance to grandstand, before going about the business of enacting more job export measures such as the “free trade agreements” with Colombia and South Korea.