The China Conundrum
In the last three years, according to NAM, roughly one in every six manufacturing jobs has been lost, and probably won't return. But, as Vargo pointed out to legislators, the Chinese labor issue, which people often blame for most of those losses, is only a part of the problem we have with China, and with manufacturing in general. In fact, China should be a boon to the American economy.
As Vargo pointed out in his testimony before Congress, labor costs are only one factor in the production process. "In fact," he said, "production worker wages and benefits are only 11% of the cost of U.S. manufactured goods, on average."
One of the bigger culprits is the value of the dollar vs. the value of the Chinese yuan. China has maintained its currency at its 1994 level, despite many factors that would normally cause the currency to appreciate. Economists estimate that the yuan is undervalued by between 15 and 40%.
Besides currency manipulation by the Chinese government, subsidized exports, counterfeiting, ineffective enforcement of intellectual property rights protection and other problems exist.
"We continue to receive reports that Chinese products are being sold in the United States at prices so low that they could not even cover the cost of raw materials and shipping," Vargo said. "These reports suggest the possibility of widespread use of subsidies." One important source of indirect subsidy is the continued lending to money-losing and insolvent Chinese manufacturers.
While Chinese laws on intellectual property rights have improved, product counterfeiting is rampant and on a massive scale, Vargo said. "The violations involve a wide range of products...even entire automobiles."
Beyond China, tariffs are another barrier to U.S. manufacturing. U.S. tariffs on manufactured goods average less than 2%, while in many parts of the world, U.S.-made goods face tariffs 10 to 15 times higher or more, Vargo said.
At home, U.S. industry is burdened by legal and regulatory systems that retard growth. "Unrestrained asbestos liability, for example, could cost industry $250 billion," Vargo said. "Rapidly rising healthcare costs are a constant worry, particularly for small manufacturers. Uncertainty over energy sources has led to price volatility."
Despite the many hurdles U.S. manufacturing faces, Vargo is optimistic. "If we act now, with a refocused and positive trade policy toward China and a concerted strategy on economic growth and manufacturing renewal, we can restore the dynamism and competitiveness of U.S. industry."
The Chinese market also can boost American manufacturing-once the promises made by China's entry into the WTO are realized.
Last year, China was our fastest-growing export market and is poised to become the third-largest importer. "While our overall exports fell 5%, our exports to China were up 15%," Vargo said. "Last year, China was the second-largest market for U.S. commercial jet aircraft. China has the same potential for many products."
Furthermore, there is enormous potential for expansion. Only 8% of China's imports come from the United States, Vargo said. "We believe that very rapid rates of U.S. export growth to China are possible-rates of 25 to 33% annually. This would make a significant contribution towards more balanced and sustainable trade with China and would make a substantial contribution to U.S. economic growth."
A strong manufacturing base is vital to American interests, and exports are vital to manufacturing. Of the $270 billion drop in U.S. manufactured goods shipments since 2000, Vargo said, $80 billion stems from a drop in exports.
The United States is the most productive nation on earth. Surely we can find a way to lower the cost of manufacturing in this country and pressure foreign governments to level the playing field in trade. Then we can start exporting more USA-made products and stop exporting good jobs.
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