While the decline and virtual death of American manufacturing is an intensely political issue, it is entirely non-partisan, or rather bi-partisan.
When Dick Nixon landed in China on February 21, 1972, I figured at last we’d get some authentic Chinese food. The only thing we haven’t gotten is authentic Chinese food. What we have gotten has made us a lot sicker than the shark fin soup I ate in Zhengzhou some years back, and that made me really sick.
A year or so after Nixon’s trip, I was in the textile weaving business. Over the next 37 years I worked in, ran and, ultimately owned a small textile mill (200 or so employees) and have been party to, victim of and witness to a tragedy of monumental proportions mostly engineered by every part of the U.S. economic/political system, including both political parties, which can’t agree on anything but the destruction of our indigenous manufacturing sectors and a lot of our lower level white collar support jobs. The textile business has been a sacrificial lamb on the altar of free trade from the very start.
Free trade advocates have succeeded in convincing the political class that there is such a thing as a “post industrial” economy. I guess they’re right and we’re living in it now. I bought into the fraud when NAFTA was being considered. I truly believed that there was a high-end market for my products in Mexico, and I’d been selling to Canada for years. NAFTA passed, and all I heard was Ross Perot’s famous “giant sucking sound” of jobs heading south.
The United States has never had a coherent industrial policy. Walter Mondale talked about the need for such a policy in 1984, but it has never happened. American companies now create more manufacturing jobs in China than they do in the United States. We are told that new “green jobs” will be our savior. Does anyone in manufacturing actually buy that line? Manufacturers of “green energy” products will use the advantages of U.S. and WTO rules to shift production offshore as soon as demand reaches a critical mass. In fact, General Electric, the leader in production of wind turbines, is already making more turbines in China than in the U.S.
In my industry, as in many others, China has manipulated its currency to give its manufacturers unfair competitive advantages over domestic manufacturers. Their banking system is subsidized to reduce costs for their companies. They have, but don’t enforce, environmental rules. On one visit to a Chinese yarn dyer, I watched as untreated dye chemicals went straight from the factory into the Yangtze River. It wasn’t even covert. I don’t advocate any weakening of U.S. environmental laws. We are a civilized country. I do advocate using our economic power and influence against international competitors who lack consideration of the negative environmental impact of their behavior by penalizing them, regardless of the WTO.
China and most other countries have Value Added Taxes (VAT) instead of corporate taxes. The VAT was started in France and then other European countries right after World War II in order to facilitate post war rebuilding of nations devastated by the war. When products are exported from VAT countries, the exporter gets a rebate of the VAT it paid creating a tremendous price advantage on top of subsidized lower costs that some bad actors provide to their exporters. Let me give you an example. We priced the raw materials in our most common product if they were sourced in China, added our U.S. labor and overhead costs and then compared the resulting cost to a quote from a Chinese mill. The Chinese quote was lower than just the amount of the raw materials, sourced in China. There is no way that this is possible without a significant subsidy.
In my mill, a technician was paid well over $12 an hour. The Chinese silk mill from which I imported fabric (you can’t get silk here in adequate quantities) paid $12 a week for the same job. When American products reach a VAT country, the importer has to add the VAT to the product thereby raising the prices and making U.S. products non-competitive.
In all my years and all my experience, tax considerations have never been the basis for investment or hiring decisions. Our most prosperous years since World War II have come during times when the marginal tax rates were higher than they are today. Under Eisenhower, that rate was 91%. Under Reagan, who increased taxes a few times, the marginal rate was 51%. Clinton specifically raised marginal taxes on the top 2% to 39%. Jobs and taxes on rich people are not connected. Investment and hiring decisions are based on demand. When you need more stuff, those who make it will invest in the equipment and personnel to provide it. The problem now is that those investments and jobs are being created in China, India etc. not in the United States.
How will we compete? We have to step up and demand that the hemorrhaging stop now. No more trade agreements that offer manufacturing jobs in exchange for our national impoverishment. My industry has been devastated with only a handful of companies surviving. Mine is not one of them, and, if we fail to develop a coordinated approach to rebuilding our manufacturing base, those last few companies won’t last either.
Being the last buggy whip maker is not a long-term solution.
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Comments » 6
Writethinker writes:
Good letter, Mr. Berkley. Many of us are with you out here, but far from enough. But, we build a majority just one person at a time, and I hope your letter convinces at least one person to join us in voicing our message to Washington that we want our jobs back here,and we need policies to accomplish that. A good way to begin would be to get rid of Free Trade Agreements and start over for Fair Trade Agreements. I also think international corporations are too short-sighted, they will find themselves under attack in these countries they have ran to for short term gain, and ceo bonuses. Just because they don't have regulations now, does not mean these countries will not sue the pants off these corporations down the road for lack of care to their environment, worker safety or what have you. And, the time could come that their corporations are nationalized by these governments. Because the leaders of these corps cannot see beyond the end of their nose is no good reason for them to come crying to us for help, when that happens.
bossman1 writes:
Mr. Berkley, Good LTE but it also raises many questions. Can U.S manufacturing match counties like China who have extreme low labor costs coupled with non-existent labor rules and evironment standards?
Your industry ran to South for low wages, free land and no taxes decades ago. Then further South to Mexico and and South America, and now in China and third world countries. This is the natural order of capitalism, embrace it like you did when it helped You.
rlberkley writes:
You ask good questions and none that are easily answered. The China conundrum is complicated. If China is prevented from illegally manipulating its currency and offering illegal subsidies, much of the cost advantage it seems to offer will vanish. Further, the logistics of importing are more expensive than buying locally. This realization is beginning to hit, but it's not enough yet. The final advantage local manufacturing offers is quality. Chinese vendors do only what is necessary to make the sale. American vendors do what is expected in the marketplace.
Shovel writes:
Tom Friedman wrote a book on globization titled "The World is Flat," which explains that our economy is influenced by more than just the Chinese. All the countries have access essentially to the same information and technology, so the primary difference between the econommies of the countries is the knowledge, skill and cost of the labor.
The United States still produces more than the next 3 largest world economies combined, but it is very slowly slipping down rather than advancing. However, that trend may be changing. Companies are starting to move back into United States, for example, CAT has recently announced closing its plants in Japan and moving to the States in order to be closer to their consumers. Companies have located in China for the same reason, that is to be closer to their consumer since the cost of transportation of the goods is becoming a factor.
Writethinker writes:
There will come a time when the lack of regulations, or the lack of enforcement of regulations, regarding the environment will come to haunt these international corporations that found it cheaper to make goods in these countries? When will a city in China file an environmental law suit against one of these corporations for the disease that was caused by the pollution these companies have expended into the atmosphere or into the water. Imagine, entire cities in foreign nations filing law suits for billions of dollars in damages, all for the short-sighted benefit of being able to manufacture without regulations being enforced for a few years. And, what if the political landscape changes, and these foreign nations decide it becomes in their best interest to just nationalize these companies, or simply place controls up these companies that make it unfavorable for them to continue there?
On our side of the pond, we need to end Free Trade Agreements and enact Fair Trade Agreements. We place costly societal safeguard costs on our companies, and to the extent that other nations do not have these same safeguards, and to encourage these nations to adopt these safeguards or at least balance the trading field for our own businesses, we should place tariffs on these nation's products.
I once heard an opinion that we should remove all taxation on our corporations to make them the most competitive with foreign nations, but make up that loss of tax money by taxing the wealthy far more. This would increase investment in business, as a method of escaping taxation and was what helped with higher marginal tax rates all the way up to when we began reducing them again.
Shovel writes:
How about elimination of all individual and corporate taxes, and have only individual consumption tax, including sales over the internet, and capital gains tax?
The wealthy would pay relatively more because they purchase more expensive items. Corporations and individuals, who invest their money, would pay taxes on the proceeds of sale. There would be no taxes on dividends, since that is essentially double taxation.
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