"Sanctions on Goods from China - Not a Good Idea"

Sydney M. Williams

Thought of the Day

“Sanctions on Goods from China – Not a Good Idea”

September 27, 2010

Mark Twain once famously said: “Suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.” In an illuminating manifestation of Twain’s principle, two events were reported in Saturday’s press. On Friday the House Ways and Means Committee, headed by Democrat Sander Levin of Michigan, with bipartisan support approved a bill that would give the Commerce Department the power to “impose economic sanctions on China and other countries found to be manipulating their currencies to gain trade advantages.” Also on Saturday, Apple’s new iPhone went on sale in China. Yahoo! News reported: “Some customers waited as long as two days to get their hands on one of the phones.”

The irony is blatant. While it may be true that Apple manufactures phones in China, the technology is American. Despite all that we read about how China’s growth is based on trade, it is worth remembering that our trade numbers are 25% larger than China’s – $4 trillion versus $2.9 trillion. The United States has a long history of hardworking, entrepreneurial innovators and it has a long history, especially in times of economic distress, of encouraging government intervention. In a fascinating and timely article in Saturday’s Wall Street Journal, “Reassessing John Kenneth Galbraith”, James Grant quotes Galbraith as writing, in the mid 1960s: “The day of Adam Smith’s ‘invisible hand’ was over or ending”, pushed aside by corporate and government bureaucrats, collectively the “technostructure”. Grant then added: “The cosseted, self-perpetuating corporate bureaucracy that Galbraith described in The New Industrial State (1967) was in for a rude awakening. Deregulation became a Washington watchword under President Carter, capitalism got back its good name under President Reagan and trade barriers fell under President Clinton…Wal-Mart delivered everyday low, and lower, prices, and MCI knocked ATT off its monopolistic pedestal. The technostructure must have been astounded.”

The action taken by the House Ways and Means Committee suggests that the old technostructure was not killed, but only put to sleep. Have lessons from the past been truly learned? In spite of the financial crisis and a concern that some banks “were too big to fail”, big banks are getting bigger. Government intrusion has become pervasive. The government today is 90% of the new mortgage market. They are making autos in Michigan and deeply involved with banks in New York. They are writing insurance, through AIG, around the world and will be determining pricing for healthcare and health insurance. And now they want the Commerce Department to be able to easily and quickly impose sanctions on China and others. In the interests of protecting outmoded manufacturing and union pensions, they are willing to raise the costs of imported clothing, electronics and other consumer and manufactured goods.

The reason for the protectionist bill is the Yuan and the perception that it is grossly undervalued. Many of the most vociferous critics of the Yuan, and who want free market forces to determine its level, are the same ones who favor keeping interest rates and the dollar low. It is OK for us to intervene, but not for our foreign competitors!

China has, at least, two large advantages over the United States in the race for competitive advantage. First, it has an abundance of labor; and second it has no legacy manufacturing facilities, or technologies. For all intents and purposes China has entered the Twenty-first Century with a clean slate; whereas the United States must transform from the past to the present. Such change has disrupted millions of people and to a large extent accounts for the income disparities that have plagued our nation over the past thirty years. Aside from the practical benefits of community colleges, education and training have failed to keep pace; so, as technological efficiencies in manufacturing reduced the need for manual labor, displaced workers found they did not have the skills needed for the computer age in which we live. A great and unfortunate irony of this recent downturn is that while unemployment and under-employment remain high, thousands of jobs go unfilled because of lack of skills. The Milwaukee Journal Sentinel on September 11 had a column on the subject: “According to Manpower Inc., the global job-placement company, the nation has a gaping disconnect between openings and qualified candidates – a gap contributing to around 3 million unfilled U.S. jobs – which in turn hampers growth.” Training is the answer.

The point I am trying to make is that attempts to defend the past and the old way of doing things condemns the worker who is being “protected” to a life of less. Jobs get shipped offshore for the very valid reason that the functions can be performed less expensively somewhere else, and consumers around the world benefit. The answer is not to raise barriers, for that never works. Affected countries will simply counter by implementing their own tariffs. Neither is the answer to raise taxes on income American companies generate from foreign subsidiaries. The U.S. already has one of the highest corporate tax rates in the world. The answer is to re-train workers for today’s environment; it is to be innovative, developing products and services that are competitive in today’s world. Encouraging investment and unleashing entrepreneurs will do more for domestic employment than erecting barriers.

Around the world an estimated 500 million people, or more, are entering the middle classes. There is much that they will need and more that they can use. They are potential customers for America’s products and services. Trade and the global shifting of jobs is not a one way street. Keep in mind, half the cars built in this country are built by foreign manufacturers who have elected to ship their jobs to this country, and Apple’s Steve Jobs has demonstrated the impact of America’s technology with the iPhone.

One hundred years ago, New England, where I grew up, was the center for mills, converting cotton to cloth. As wages and costs rose, factories moved south and New Englanders were forced to find other occupations. For years those mills remained vacant, reminders of a past that was no more. Today they are filled with small shops, businesses and condos. It is, in a sense, a manifestation of Joseph Schumpeter’s theory of creative destruction. Government may choose to intercede, but its purposes, in this instance, should be to educate and train, not to hold back the tide of progress by defending the indefensible.

Trade wars often start as small skirmishes and the intentions of those who ignite them may be honorable – to protect their constituents, but they and all of us are better served if we prepare for a constantly evolving world. A consequence of America’s proposed sanctions is seen in the threat this morning by China to raise tariffs on imported U.S. chickens – a $752 million business. Sanctions can lead to tariffs and tariffs may lead to trade wars, and trade wars impoverish nations.