To understand the utter imbecile utterances on “bringing jobs back to America from China” by Trump, all you need to do is drive down to your nearest Walmart to see where almost 90-98% of the products are manufactured. Of course, if you stop at any other store on the way – Home Depot? Payless Shoes? Kids Apparel? Women’s Apparel? Shoes and leather products? Think of ANYTHING and it is made in China. The reason almost everything sold is “Made in China” is because they can do so at a much lower price. If you take away those products and replace them by say, “Made in US”, suddenly the overall price of the products will change. And the worst affected would be those who buy from Walmart, Home Depot, Payless, Target etc – which is 90% of America. Your monthly salary will not be enough to pay for your basic necessities!
Ever heard of a society committing mass suicide because it is passionately nationalistic? Look at today’s Americans who back Trump’s “trade policies” whole-heartedly. They aren’t just deplorables. They are imbeciles!
Now, that we have gotten the 10,000 feet test of plain common sense give us a reality check, let us go into details for those who are more analytically oriented.
Subsidies galore and NPAs of Banks
In 2005, China produced 27% of the world’s steel and imported 29 million tons of steel annually. Since then it has become a net steel exporter. Today China accounts for 40% of the world’s steel production. On top of that, it sells its steel for ~ 20% less than the US prices.
And this is despite the fact that as per Harvard Business Review – China coes not rely on Economies of Scale, Supply Chain proximites or Techological efficiencies. And, its labor cost are only 10% of the total cost of producing steel! When looked at – the reason behind the success of Chinese steel industry was – Subsidies by the Chinese Government!
In research conducted with funding from the Alliance for American Manufacturing—work that draws heavily on our decade-long previous study of Chinese industry—we found that total energy subsidies to Chinese steel (from 2000 to midyear 2007) reached $27 billion. (emphasis added)
This chart from the same article explains the whole situation rather well. The chart shows a high correlation between increase in energy subsidies and the growth of Chinese steel production and steel exports.
The burning question here that one needs to intelligently answer is: How did China so quickly grow from a small player to the largest manufacturer and exporter in the world in capital-intense industries without labour-cost or scale advantage from bit player?
And, to understand that is to starting to understand why Trump goes beyond imbecility when he talks of “bringing jobs back to America” from China. Something that some of his decidedly “deplorable” – and imbecile, I may add – followers applaud at, rather stupidly. Quite like some sheep who may smile before being pushed down a ravine!
To further get a better idea, here is an interesting story of a solar panel company and why it moved to China.
Earlier, in January 2011, Evergreen Solar had closed its main U.S. factory and laid off 800 workers. In the previous three years, with the Massachusetts government’s loans and tax credits and its proprietary technology, Evergreen had become the United States’ third-largest solar-panel manufacturer. The company cited plunging solar-panel prices worldwide, coupled with much higher Chinese government subsidies (financial transfers from the government that provided benefits) as reasons for its move. Evergreen’s CEO El-Hillow told The New York Times that the Chinese governments’ and state-owned banks’ considerable subsidies had helped Chinese manufacturers to keep costs very low; the Chinese were now offering him similar massive subsidies that would keep Evergreen competitive. These subsidies, rather than low Chinese labour costs, influenced his move, he elaborated, as labour formed just a tiny part of his manufacturing costs. “Therein lies the hidden advantage of being in China,” El-Hillow said. (emphasis added)
As is easy to see, the subsidies come on the back of the bad loans and debt that the local governments and banks owe now. Per a report in 2014, local governments in China owed almost $3 trillion in outstanding debt! The overdue loans in the end of 2013 for China’s 10 largest lenders was 588 billion yuan ($94 billion).
The worst thing is that even the debts which are termed as “investments” may actually be risky ones with enough ability to hurt and cloaked only by shameless “financial engineering”!
So if you keep the machinations of the “officialese” in China aside, the situation of the banks is pretty bleak!
Chinese banks’ bad loans are at least nine times bigger than official numbers indicate, an “epidemic” that points to potential losses of more than $1 trillion, according to an assessment by brokerage CLSA Ltd.
Nonperforming loans stood at 15 percent to 19 percent of outstanding credit last year, Francis Cheung, the firm’s head of China and Hong Kong strategy, said in Hong Kong on Friday. That compares with the official 1.67 percent.
Potential losses could range from 6.9 trillion yuan ($1.1 trillion) to 9.1 trillion yuan, according to a report by the brokerage. The estimates are based on public data on listed companies’ debt-servicing abilities and make assumptions about potential recovery rates for bad loans.
To compete with China’s low prices and costs, you just don’t need to manage the labor arbitrage. [inlinetweet prefix=”” tweeter=”@drishtikone” suffix=””]You need to compete with China on SUBSIDIES. And on ability to go bankrupt![/inlinetweet]
If you look at the Chinese economy, then it will be clear to anyone that it is a giant Ponzi Scheme! Now, for them, when they were nothing, it was the creative way to get bigger and become the largest economy. But for US, which is already the largest economy, it would be a rather idiotic way to conduct itself! It would mean a whole lot of things.
If we do not break the US economy down with a “Suicidal Spiral of Subsidy Competition”, then we are looking at substantially higher prices for ALL the products. And this is without yet factoring in the labor cost difference. If you bring that in, then not just the product costs rise further, but the competition to become profitable brings the labor salaries down – below the minimum wage!! At a time when we are looking to increase the minimum wage in the US, competing with China will bring the wages down! Here is some basic information on the wages difference.
Presuming a 40-hour work week and 50 weeks per year, that would come to about an average manufacturing wage of $3.50 per hour—roughly half of the U.S. minimum wage of $7.25. However, the average hourly wage in manufacturing in the U.S. is $19.50 per hour—five and a half times that of China.
So where are we now?
Interesting world huh? The Trump Deplorables’ chest thumping on bringing the “jobs back” will not just lead to far higher prices but will bring average wages BELOW today’s minimum wages, thus increasing povert manifold! No wonder Trump talks crazy nonsense on the minimum wage issue!
But hey did you need all these numbers to figure this out? All you need to do is to walk into Walmart (or any of your favorite stores) and look at the items and prices in there. Now, take out your monthly budget and adjust your grocery, apparel, shoes, essential items cost by roughly 6-10 times. Do an average increase of say 80%… and then see what happens to your budget!
And then IF.. if at all Trump wins, try explaining to your kids why they cannot even get proper clothes or food!! That is in case, basic simple common sense has yet not seeped into you at all.