Economic Blood Letting | US, China Face to Face in Trade War

About China…China Bashing… Again..

Toronto photographer Ed Burtynsky has photographed industrial landscapes for more than 25 years. From 2003 to 2005, he traveled to China several times to capture images of the country's industrial growth.

By The Freeze|Men With Foil Hats.com

I’ve no love lost on the ersatz-communist (haha) regime in China.  They are autocratic thugs whose hold on power is tenuous at best.  There are crackdowns against peasant revolts that we never hear about.  The few we do hear about are politely ignored by Americans (those currently in power).  The level of absurdity goes past the insane mark when we self report America.  Obama and Hillary ‘admitting’ to the UN that we have human rights violations in America.  Give me a freaking break.  Compared to the rest of the UN we are saints.  The local state issues are just that.  Part and parcel of democracy and the give and take between federal and state power.

During my years of business travel I’ve had many opportunities to observe and learn and understand some of the dynamics which underpin the US / China relationship.

Did you know that there is, right now, an undeclared trade war going on between US and China?  Yep, that’s right.  And I’m stuck right in the middle of it.  Both countries are using existing laws in a warped way to block imports from each others country.  The US I’m sorry to say is being the most underhanded.  But China, which previously allowed copious amounts of smuggling from Hong Kong to China has cracked down on that.  The timing is very suspect.  Because it coincides with a massive US Customs crack down, seizing shipments right and left for any perceived (or not) possible violation of any remotely possible.  A huge swing in policy which happened very suddenly, very recently.  After 20 years importing its quite the surprise.

If you look at the matter from the American perspective, China is stealing jobs, manipulating its currency and putting up trade barriers.

Look at from the Chinese side, they are utterly dependent on America for sales.  We are their largest customer in nearly every category of goods.  Not only that, but goods from China that end up say in Brazil, more often than that go through the US first.  The route is Ching -> Hong Kong -> California -> Florida -> Brazil, Caribbean, Puerto Rico etc.

The same is true for much of Latin America.

In China they whore out their labor at around $2 dollars a day, they pollute their rivers and lakes to such a degree that I have literally seen PINK rivers (on the train from Hong Kong to Guangzhou) among other colors.  For their labor, for the mining, for the pollution, what do they get?  US dollars and treasuries which have nearly lost HALF their value!  Talk about getting double #$#@ed.  If China even let rumors go about selling their US Paper, it will crash the market overnight, making their worth-less, dollar reserves and treasuries worthless.  They are stuck with it whether they like it or not.  If you owe the bank 1 million, they own you.  if you owe the bank 1 billion, you own them.  Same principle, but applied to countries.

Another thing which I find strange is that the Renimbi is tied at a fixed rate to the dollar.  Hong Kong does this, as do many other countries.  It brings economic stability.  It allows us as American businesspeople to do all of our transactions in dollars without having to even deal, ever, with the currency markets.  So it protects the American importers from potential vagaries of currency fluctuations.  In other words it brings a stable environment for businesses which all businesses desire above all else.  A stable and predictable environment.

The reason we are about to (?) go into a double dip recession (this being September of 2010) is that in the United States, right now, businesses have never had so much uncertainty.  We don’t know if we can afford health care for our workers with Obamamaniac’s new rules (many of which are still unknown.)  His insane requirement that we 1099 every transaction over $600 dollars will produce the mother of all paperwork blizzards of all times.  The same goes for taxes, for regulations from all sides.  We just don’t know. As a result everyone circles the wagons, goes on a war footing (in a business type way I mean) and is just waiting to find out what other madness is going to come from Washington DC.  That lack of certainty is killing us right now.  Even under Clinton with high taxes we at least had a predictable environment.

So anyhow back to topic :).  Because China does what many other countries do who desire currency stability, they have a fixed exchange rate pegged to the US dollar.  Americans call that trade protectionism and a mercantilist policy.  But why?  We are not China’s competitor.  China and America for the most part produce entirely different ranges of goods.  China is a producer economy ours is a consumer economy.  Our competitors are European and Japanese.  China’s competitors are Asian.  China doesn’t worry about being competitive vis a vis America, they worry about being competitive against Vietnam, Cambodia, Indonesia, The Philippines and Thailand (among others), who are willing to sell their labor for even less than $2 bucks a day.

America has moved ‘upmarket.’  We are producing higher value goods which require greater intellectual content.  This has given us the incredible growth that we have seen since we lost many industries to Japan in the 1980s.  Yes we are having series economic woes right now, but that is all government and policy driven (i.e. Fannie Mae, Freddie Mac, Unions and unworkable pension schemes and so on).  The real truth of the matter is that we were forced to move upmarket, and while the transition was painful for many, the result is that our economy boomed as never before.  Innovation drove innovation.  Making us the world’s leader in high tech, biotech, medical equipment and so many other areas.  It drove salaries up, and unemployment down.

Take a step back to the 1980s when we were losing industry after industry to Japan.  Well it wasn’t more than a little over a decade later when Japan lost industry after industry to the four Asian tigers (Taiwan, Korea, Singapore and Hong Kong).  Since then, the four Asia tigers have lost industry after industry to China where it has all now consolidated, driven by nearly unlimited supply of workers who stream in from the provinces looking for, and often attaining dream jobs at $2 dollars a day.  Even after their employer deducts $1 dollar a day for their housing in massive dormitories, they net $1 dollar per day free and clear.  To us that sounds horrible.  Until you realize the purchasing power of that $1 dollar.  It can easily feed a family in the provinces for a week.  After a month they can buy a TV – which is often the very first purchase a family will make from the money that is sent home from these lucrative factory jobs.  After a few more months a fridge, a microwave, a washing machine.  Eventually a moped.  Then they start saving for their marriage dowry.  As an educated guess I would say around 95% of the general labor population in the massive factories are female.  The males are needed on the farm back home and females desire indoor jobs so they don’t look like peasants at a young age from dark wrinkly skin that farmers get, and foot diseases from being submerged in dirty water while rice farming.

Seen from China’s perspective as a country they are getting the short end of the stick.  Seen from Chinese workers perspective they are getting a chance to escape the life of a lowly peasant.  After all China is still a 3rd world country, with a few cities that are first world in some aspects.  However there are well over 50+ cities in China larger than New York that you have NEVER HEARD OF!  Think about that for a minute.

So to sum it up, America lost factory jobs to Japan, who lost it to the Asian tigers who in turn lost it to China.  Now, companies headquartered in America, Japan, Taiwan, Hong Kong, Korea and Singapore all manufacture in China, taking the collective exports of MANY countries and pushing it onto the export ledger of one single country.  So even though the parent company might be in America and the vast benefit of the value of those goods are going to American (and Japanese etc) producers, it ends up on China’s foreign trade account.

I say let the free market sort everything out.  Let there be trade imbalances.  We are obviously getting great value for our money as the cheapness of goods from Asia – China – is astounding.  Its helped to keep our core rate of inflation down for decades.  Also, remember the days of 4% unemployment?  At that time wages were going up.  Because employers had to compete with each other for workers.  Free markets tend to do that.

Some interesting facts which you might like to know:

Lets say you are a motherboard manufacturer in Taiwan (somehow they are all headquartered in Taiwan with manufacturing in China).  Like Asus, Foxconn, Biostar, FIC, Soyo, Tyan, eVGA, who among smaller players collectively make well over 80% of all the worlds motherboards – methinks its 100% but whatever.  You source your really expensive parts from American companies – Like Intel for the CPU, the greatest cost item, the chipset also probably from Intel is the next costliest item (NVIDIA, an American company also dominates).

Beyond that you have things like the PCB, and the nearly 1000+ mini parts like capacitors, resistors, transistors, small logic chips like the 74LS series etc.  The list is quite large.  If you were to look at a BOM (Bill of Materials) for a motherboard it would boggle your mind.  Many items are priced in fractions of a penny because they are bought, and used, in such massive quantities.  But here is the interesting part.  China (domestically) now owns the infrastructure to make the penny parts.  They have small scale fabs for wafer manufacturing (4 inch, 8 inch), they make all of the resistors, tantalum capacitors, along with all the other small parts.  The loophole, which serves to boost China’s trade statistics, creating a false presumption of growth, is that all these parts must be exported first to the Taiwanese motherboard manufacturers.  usually that goes to Hong Kong, where all the parts are staged and shipped back to China to contract factories (or self owned factories) to be built into final motherboards.  You would ask, why cant the factory just buy the parts locally?  Well, that’s the law.  Unless you are a locally owned (Chinese owned) factory, which can buy the penny parts from a factory across the street without having to send it on a 2 day journey to Hong Kong and back to comply with these silly laws.  But the net result is a boon to the export import trade and of course trade statistics which are all important to China.  They show 8% annual grown or heads will roll.  Its pushed from the top down.

(not done.. will finish later)