March 18, 2008

What to Do About China?

Justin Katz

Concerned about your business prospects in the domestic market? Well, Providence Journal business-section columnist John Kostrzewa has a suggestion:

With the local and national economies weakening, and perhaps already in recession, small and large businesses are worried about where the growth will come from in 2008.

How about looking overseas, especially to China?

He offers advice, gleaned from a seminar on the topic sponsored by Citizens Bank, the Bank of China and the Greater Providence Chamber of Commerce. "Don't underestimate the language barrier," says one speaker. However, to complement the growing Chinese urban consumer market:

Business owners... can find lower labor, operating and land costs, a surging demand for foreign products and less competition in other parts of the country.

Ah yes. Lower labor costs:

Officially, 2,375 trafficking cases were reported in China last year, a 7.6 percent decrease from 2006, according to the Public Security Ministry.

But the statistics are based on China's narrow definition of trafficking, which covers only the kidnapping, purchase or sale of women and children younger than 14, not older teen-agers and men. Activists say the number is grossly understated and that tens of thousands of people are trafficked each year.

Historically, many victims have been women forced to marry lonely farmers, or male babies illegally adopted by couples who wanted a son. But those types of cases are leveling off, while cases of migrants deceived into sexual exploitation and forced labor are increasing, activists say.

I know, I know. I've got those libertarian, free-market leanings, as well. But I don't think we, as a nation, have come up with an adequate solution for dealing with the potential to globalize our economy without globalizing our principles — in part because we're so divided on what our principles should be. Without some truly visionary innovation on our shores, I'm not confident that either our economy or our moral center will remain strong enough for those invisible hands to crush international iniquity.

Jay Nordlinger puts it inimicably:

Reading a report about China's latest massacre in Tibet, I was struck by one line in particular: "China is gambling that its crackdown will not bring an international outcry over human rights violations that could lead to boycotts of the Olympics."

That is a very, very good gamble. Nobody gives a rat's behind what the Chinese do, to Tibetans or anybody else. It is a curious fact of modern times. If only China's rulers would embrace the Bush administration: Maybe the world would care!

Comments, although monitored, are not necessarily representative of the views Anchor Rising's contributors or approved by them. We reserve the right to delete or modify comments for any reason.

It's not just about the cheap labor. For many companies, not just American, China represents a huge, untapped market. Think about a company that makes motor protectors for motors that go in washer machines and dryers. As China emerges from the dark ages, the prospect of every family in China eventually having a washer and dryer in the home like most Americans do is an enormous opportunity for the companies that make the machines and the components. But what smart companies must also do in order to compete iw reduce transportation costs and lead times by locating manufacturing closer to the customer. This exports most of the supply chain along with the product. The Emerson's who build the motors open a plant in China to be closer to the Whirlpools who make the machines. The Elmwoods or Sensatas open plants to better serve the Emersons. These companies develop local suppliers of the wigets that go into the parts they make so they can meet the quality requirements and so they don't have to deal with a 10,000 mile trip, customs, duties, etc that go along with it. Yes, there's obvious labor savings, but labor ends up being about the smallest reason that companies move their operations overseas. In a high volume operation that uses automated machinery, the difference between a $2/hr machine attendant verses an $18/hr attendant shows up in the third decimal place in some instances. Aside from the logistics costs, where American companies save significantly by operating overseas is in the cost of business regulation, insurance and utilities. The V.P. of operations of my former employer met frequently with the Governors and legislatures of Massachusetts over a period of many years while the company employed over 6,000 locally and close to 10,000 nation wide. He told them it wasn't the cost of labor that would drive them out of the state, but the cost of business regulation, insurance and utilities. That company has grown from about 300 million in revenues, at the time, to over $1.4 billion, but now less than 1,000 jobs remain in Massachusetts.

The cost of labor is often the headline grabbing cry of the left, but when you dig deeper into these stories, the truth is that the market forces that necessitate proximity to the customer and the goverment imposed costs are the more compelling reasons that companies operate in developing markets.

Posted by: George at March 18, 2008 9:44 AM

You make a great point Justin in your concern about coming up with " adequate solution for dealing with the potential to globalize our economy without globalizing our principles."

This may be a classic "which comes first" debate. On a smaller scale, has the cause for freedom in Cuba been advanced because we haven't bought their products, or did that simply retard wealth creation enabling the few in power to retain that power longer?

Global markets are only a threat to the US if we fail to respond to competitive pressure. Capital flows to regions where more profit can be made and kept. The US is a far more stable environment to do business, and we pay a hefty price for that in the form of corporate taxation. But internationally, OECD partners are discounting their own "prices".

How about this reform synopsis:
* a less complicated tax system;
* a broader tax base;
* a lower tax rate; and
* a stronger tax administration.

Ironically, this is a summary of tax reform enacted in China this year:

They dropped corporate income tax rates to 25% (compared to our rate of 35% federal plus > 8% in RI). While the rest of the world tries to out-do each other in creating more favorable business tax climates, we wring our hands dreaming up new "revenue streams".

The low cost labor reasons for moving overseas will diminish in value as economic freedom takes hold. Some argue that the value of the dollar is not declining, but rather that international currencies are strengthening on the heels of tax rate reductions enacted in the last two decades. In fact, a large customer of mine is in the middle of a $100 million reverse line transfer bringing back a major device program back to the states from Mexico as the labor differential has narrowed.

Should the global market trend towards equilibrium as economic freedoms are adopted in the strangest of places, the US will be left behind. We rationalize this with phrases like "service economy" or "knowledge-based economy". In some sense, those are realities, but are they the result of economic "progress" or simply an emigration of capital to regions where the bucks can earn more?

As our economic competitive advantage in the world diminishes, our principles will morph into something in harmony with the global community, as opposed to leading the charge for individual freedoms.

Basically, there is nothing to fear from the international market place that we cannot explicitly deal with on our own soil. The only way China can present a legitimate economic competitor to the US is if they adopt the wholesale freedoms envisioned by our founders. Funny thing is, at that point, they cease to become a threat and instead become opportunity as economic partner.

But we certainly do not help our cause by taxing corporations away. In so doing, we erode our own natural advantage.

Posted by: Roland at March 18, 2008 12:34 PM

If China were run by Christians instead of gun-grabbing, baby killing atheist "progreesives" like Pat Crowley, there would be a total embargo on it like south Africa which had more freedom than the Chinese progressive slaves can even think of having.

Posted by: Mike at March 18, 2008 8:34 PM

"Nobody gives a rat's behind what the Chinese do, to Tibetans or anybody else. It is a curious fact of modern times. If only China's rulers would embrace the Bush administration: Maybe the world would care!"

I like that last line. It's not at all clear that the first line is correct, though.

From the AP this evening:

"The International Olympic Committee has been forced to lobby against boycott calls and the possibility of the games turning into a political demonstration."

Posted by: Monique at March 18, 2008 10:06 PM


"Nobody gives a rat's behind what the Chinese do, to Tibetans or anybody else. It is a curious fact of modern times. If only China's rulers would embrace the Bush administration: Maybe the world would care!
I like that last line. It's not at all clear that the first line is correct, though.
From the AP this evening:
The International Olympic Committee has been forced to lobby against boycott calls and the possibility of the games turning into a political demonstration"

Somebody better give a rat’s behind what the Chinese do! The United States is banking that the China will invest in the US to help defray the looming recession or depression. Chinese are now buying US interests keeping the stock market afloat. Try to spending 24 hours without purchasing a product made or partially made in China.

“Posted on: Tuesday, March 18, 2008

Failure of Bear Stearns signals deeper problems

By John Waggoner and David J. Lynch
USA Today

If the U.S. economy were a car, all of its warning lights would be flashing red.

The breathtaking collapse of investment bank Bear Stearns over the weekend is the latest — and perhaps the most alarming — indicator to flash on the economy's dashboard.

First, the crisis in subprime mortgages — loans to those with poor credit — infected the credit markets. Then home prices started sinking. Then mortgage defaults rose, and the economy began to sputter. Now, the Federal Reserve is desperately trying to stabilize the credit market before a failure of confidence can poison the entire U.S. financial system.

The latest sign that the financial system is close to overheating: Bear Stearns, once the country's fifth-largest investment bank, agreed Sunday to be sold for just $2 a share, down 93 percent from its closing price Friday.

The best-case scenario is that the Fed can get the financial markets humming again, leading to a recovery in the housing market and a resurgent economy. The worst case: an economic breakdown in which the crisis spreads to other banks, and beyond.

Bear Stearns failed because its investors no longer believed it could repay its loans — even its short-term, overnight loans. Even worse, investors concluded the bank no longer could stand behind the complex agreements it had with other financial institutions. And Bear Stearns had a web of intertwined agreements with other banks, investment houses and corporations.

The story of Bear Stearns isn't just a saga of a spectacular Wall Street failure. The company's failure signals far deeper problems with the nation's economy and raises questions about the consequences of Bear Stearns' problems for ordinary Americans:

Q. What is an investment bank, and why should I care what happens to one?

A. Unlike a commercial bank, which offers checking accounts, CDs and loans, an investment bank finances offerings of stocks, bonds and other investments.
Investment banks help companies sell their stock to the public and help cities and towns raise money by issuing municipal bonds. Investment banks also offer advice on corporate mergers and acquisitions. If investment banks can't function, the financial system could grind to a halt. Companies and municipalities would have a hard time raising money. Businesses would be unable to expand and create jobs.

Q. Does the collapse of Bear Stearns mean other investment banks are in danger?

A. It's difficult to say.
Although most investment banks are public companies, it's hard to tell precisely what assets they have on their books and what condition those assets might be in.
When a commercial bank fails, federal authorities have a good idea of its holdings and which of them can be salvaged. That's because commercial banks are regularly required to disclose troubled investments to regulators. Less scrutiny is required of investment banks and hedge funds.

Q. Is that why is everyone so worried?

A. Partly. But there are other reasons, too.
The collapse of an enormous financial institution stirs uncertainty, and uncertainty rattles Wall Street. Lenders are happiest when they are confident they will be repaid. If they think there's a chance that borrowers will default, they don't make loans. Their refusal, in turn, can shut down the economy and the financial system.
But the Fed did nothing Sunday that would alleviate the cause of the financial crisis: an economy that had binged on debt.

Q: How is this going to affect me?

A: Several ways. The yields on money market mutual funds and bank deposits will fall, as the Fed continues to cut interest rates. Stock prices will continue to be extremely volatile. And gold will rise in value, because many investors view gold as the ultimate haven.
The value of the U.S. dollar will continue to sag, thanks to lower interest rates. As interest rates here fall, global investors sell their dollar holdings to find investments with higher returns. That pushes the dollar's value lower — meaning Americans face higher prices.

Q. So it will cost more for everyday goods and for travel to Europe. How else does the falling dollar affect me?

A. The nation needs foreign cash to finance its gaping trade deficits. With private investors vanishing, that's left Uncle Sam increasingly reliant on foreign central bankers. January saw a net inflow of $75.5 billion from foreign governments. Among the biggest buyers: China, Russia and Middle Eastern oil exporters.
Those government investors are becoming more selective about which U.S. assets they buy. They're moving into supersafe U.S. Treasuries and moving out of just about every other type of investment. That shift is escalating the credit crunch, says economist Brad Setser of the Council on Foreign Relations.
For the United States, the danger is that foreign nations whose currencies are linked to the dollar, such as the oil-exporting Persian Gulf countries, will tire of the rising costs they are paying.

Q. So how serious is the financial crisis? Is there any risk of a full-blown depression (a severe downturn that lasts years)?

A. Hard to say. But it's no longer just hard-core gloom-and-doomers who are predicting dire outcomes.

"It's going to go from bad to worse. ... This is certainly the worst financial crisis in the last 50 or 60 years," says Kenneth Rogoff, a former chief economist at the International Monetary Fund and now an economics professor at Harvard.”

Posted by: Ken at March 19, 2008 12:59 AM
Post a comment

Remember personal info?

Important note: The text "http:" cannot appear anywhere in your comment.