Sunday, January 29, 2017

Death by China?

“We will follow two simple rules – buy American, hire American”, said a defiant Donald Trump to a cheering public & an uncomfortable Washington Establishment, as he was sworn in as the 54th President of the United States of America earlier this month. In his election victory, Trump smashed most expert forecasts, election pundits, opinion polls and the mainstream media narrative that had consistently projected his opponent as the favorite to win.

For those surprised by Trump’s victory, go no further than videos such as this, which might have played a major role in influencing public opinion during the U.S. Presidential elections. Claiming to be one of the most watched documentaries on Netflix for 3 years, the film narrates the story of an “increasingly destructive trade relationship” with China, which has led to the closure of over 50,000 American factories since China entered the WTO in 2001. The film blames China for causing loss of millions of jobs and accumulation of over $ 3 Trillion of U.S. debt to the “world’s largest totalitarian nation”. You can watch the full video here:

Loaded with terms such as “illegally subsidized exports” or “stealing jobs”, the import of the film is clear: Over the past decade and more, America has lost its ‘trade battle’ with China, and this loss is the result of an ‘unfair’ advantage the Chinese businesses get vis-à-vis their American counterparts. The film makes five basic allegations to corroborate its claims:

1. Polluting for Profits: Stringent environmental norms on U.S. manufacturing levy a heavy financial burden on U.S. businesses, but their Chinese competitors follow no such norms, giving them a cost advantage. 

2. Worker Abuse: China exploits its workers, forcing them to work for long hours often in inhuman conditions. This raises productivity per worker.

3. Currency manipulation: China pegs the value of the Yuan to the Dollar much below what it should be, which benefits its exporters.

4. Counterfeiting & Piracy: The Chinese are cheating on Patents, Trademarks and other such intellectual property.

5. Illegal Export Subsidies: The Chinese Government grants illegal export subsidies to its exporters

Due to all this, says the film, "they are cheating monumentally” by producing - sometimes even at 1/10th the price of what it costs to produce in the United States. This has led to the death of American manufacturing. Almost 90% of all products sold at Wal-Mart are made in China. From garments to chopsticks, Christmas decorations to computers, and from printers to shoes – often it is almost impossible to find anything in an American store that is NOT made in China.


The “unfair” Chinese advantage is easy to "see" - and hence to blame, but things become complicated as the film moves on to discuss the role of American Multinational Corporations, who have themselves been at the forefront of outsourcing their manufacturing. From Apple to Caterpillar and IBM to GE and Cisco to Ford, every large American corporate worth its name has shifted it’s manufacturing to China to cut costs and improve profitability. Is it right for a Corporate Entity to cut domestic jobs to maximize profits? The film admits “profits is at the root of America’s offshoring problem”. Sure corporate CEOs are focused on shareholder value, but isn’t this exactly the way it should be?

From time to time, I have seen the “blame China” narrative make its way into public sentiment. But most such narratives tell only one side of the story. Ask someone who bought his first big screen TV or furniture 50% cheaper, cheap imports have given their buyers a standard of living that was not possible earlier. When a foreign government pays you to buy toys or coffee making machines, is there really a cause to complain? As corporate America offshored jobs, profits got a boost, and despite the Wall Street engineered financial crisis of 2008, stock markets today are at an all time high, boosting the 401(k)s and mutual funds of ordinary Americans.

The documentary also erroneously links the $ 3 T U.S. government debt that the Chinese hold with cheap imports. Contrary to what is shown (and even otherwise believed); the large government debt actually represents a huge advantage the United States enjoys over other nations on account of the U.S. Dollar being the currency of international trade. Most exports worldwide are invoiced in U.S. Dollars, and the exporting country has no alternative but to park them in U.S. Government debt. The money thus represents a virtually free source of financing for the U.S. government. And as Jack Ma, founder of Alibaba pointed out recently, what the U.S. did with this money may tell the true story of why the jobs went where they went.

What about human rights? The film also mentions several human rights violations by China, such as the repression of the Falun Gong or Tibet, or its role in human organ trade or nuclear proliferation and aggressive military build-up. These are non-economic arguments that should not be used to color our judgment over cheap imports. 

It is also a contradiction to state that China’s lack of concern for the environment gives them an “unfair advantage”. Indeed, the documentary itself shows China paying the price for its monumental environmental neglect. It is well known that Chinese cities are now considered to be among the most polluted in the world.

Where are the solutions?

The ‘blame China’ rhetoric is a fallacy, and it best stands exposed when its time to offer solutions. While the documentary ends recommending “trade reform with China” and says that China should be held “accountable for human rights abuses”, it fails to come up with specifics. While pitching for ‘a strong manufacturing base for a prosperous future’, the film fails to tell you exactly how it can be achieved.

And this is no surprise.

For, China is just the symptom, the cause lies elsewhere. And this is pointed out in the film itself by Ralph Gomory, President Emeritus, Alfred P. Sloan foundation, when he says, “we are living beyond our means, we have artificially high standards of living”. Fix that, and everything will fall in place.

And that’s what President Donald Trump will need to do, to “Make America Great Again”.

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