September 29, 2003

5% GIANT:

Would a weaker dollar create new US jobs?: American factory workers compete against China, where labor costs are only 5 percent of those in US. (Ron Scherer, 9/30/03, The Christian Science Monitor)

"This administration never said it was for a weak dollar, but they are clearly concerned about the lack of employment growth," says Paul Kasriel, an economist at Northern Trust Company in Chicago. "There is a lot of pressure from the manufacturing sector and labor."

That pressure is particularly strong with the Chinese currency, the yuan, which is pegged to the US dollar.

Many American companies are moving their manufacturing to China where the labor costs are only about 5 percent of the cost of labor in the US. As a result of this stampede, the US trade deficit with China is now running at $130 billion a year - a record for any country. [...]

Another reason the Chinese are reluctant to revalue, says Mr. Kasriel, is that their overall trade surplus with the rest of the world is narrowing. China has now become a major importer of raw materials and parts to assemble for goods shipped to the largest consuming nation - the US.

"This means countries like Chile - which are exporting copper to China - are starting to benefit from the Asian economies," says Kasriel. "And, the Chileans may want to buy something from the US which will help our exports." [...]

In fact, many economists don't see the dollar as having long-term problems. The European economy is in worse shape than the US. And, it's still not clear if the Japanese recovery will last. "Fundamentally, dollar investments are not as good as they used to be, but they are still better than most others" says Wyss. Adds Mr. Vitner, "I think people are too bearish on the US economy."


Three tidbits:

(1) If their labor costs are 5% of ours why is there any reason to believe we'll have any manufacturing jobs in a few years?

(2) They buy raw materials elsewhere, follow plans we think up, and put pieces together. All they are is assemblers and they'll only be that until their own labor force starts pushing wages up. Then the jobs go elsewhere and they're nothing.

(3) [Q:] If you were going to invest your life savings in one economy until you retire, whose is safest?

[A:] Ours.

Posted by Orrin Judd at September 29, 2003 7:42 PM
Comments

My husband's in mfg, and he read something about a firm in our area. The Chicoms bid on the job, but the mfg is done in the US and shipped to the US client.

Besides, Chicom economy isn't really good, you can't trust their numbers.

It's up to US, again, to pull the world along.

I'm really getting tired of it.

Posted by: Sandy P. at September 29, 2003 10:05 PM

"If their labor costs are 5% of ours why is there any reason to believe we'll have any manufacturing jobs in a few years?"

Yeah. Just go buy something made in China and then watch it fall apart.

We'll still have manufacturing jobs, just few and highly paid. A machinist who knows how to operate modern computer-controlled equipment can bring in a pretty penny.

Posted by: ralph phelan at September 29, 2003 11:14 PM

Just go buy something made in China and then watch it fall apart.

Ralph that may have been true once but it's not at all true now. I have just returned from a furniture show and I can assure you the Chinese (well, mostly Taiwanese-owned factories in China) absolutely produce the level of quality demanded by Westerners. What's more, new factories in still other countries--Colombia, Slovakia, Thailand, Poland, Vietnam--have improved their quality and price in response.

Three years ago I saw goods from at least 25 Italian factories (it was Italians who mostly put Americans out of the crib business, not the Chinese, btw) at this show. Now it's 2-3--and they're just not competitve. The Euro has killed them, even though they already run the leanest factories in the world in the sector.

Posted by: Brian (MN) at September 29, 2003 11:36 PM

We'll have manufacturing jobs because in five years, you'll be able to order many more types of things highly customized, and you'll not want to wait for your stuff to be shipped from china. All the parts may be made in china, and assembled right here in the EEUU.

Posted by: some random person at September 29, 2003 11:42 PM

It's obvious that Orrin has never been in a factory, in an industrial laboratory or seen how subcontracting and design works.

There's a value in the network that rightwing economists cannot recognize. It's still there, though.

The U.S. faced a problem of cheap foreign labor before, in the 1920s. The conservatives reacted by passing the highest tariffs in history, wrecking the economy for more than a decade.

Now they want to reverse themselves. They still don't understand.

Posted by: Harry Eagar at September 30, 2003 1:10 AM

The Chinese government pegs the Yuan to 8 per US Dollar (USD). With the chronic trade deficit this has caused the Yuan to become the most undervalued currency in the world.

The head of the US Treasury (I forget his name offhand) recently travelled to Beijing to petition the Chinese government to unhook the currencty peg. He basically was flipped off by the Chinese government.

With the artificial imbalance the Chinese traders quickly reconvert back to dollars while the factory workers inland get paid devalued Yuans. The traders retain a big competitive advantage on the backs of the Chinese workers.

Under classic economics the value of the Yuan would rise, raising the standard of living of the Chinese workers and everything would eventually even out. But because of this artificial peg, the US loses jobs and gets hit economically, the Chinese workers suffer artificially low wages, and everyone is poorer overall -- except for a few apparatchiks and traders in the Chinese government.

Posted by: Gideon at September 30, 2003 1:50 AM

Harry:

The Chinese are the Japanese but work for less. You're the one who maintains car assembly in Japan has a future. Why doesn't it in China?

Posted by: oj at September 30, 2003 7:54 AM

There is no point bending over backwards to
save manufacturing jobs that are already part
of the globalized labor market. What our economy
does need (and lack of these can put a pinch on growth)
are more...

Electricians
Plumbers
More skilled auto-technicians
(A number of other trades)
Literate but moderately skilled technicians in
a number of technology fields.

We are not really producing enough of these people.

We need to get over our infatuation with the
assembly line. There's a lot more dignity
in acquiring a trade that the market will pay
for than standing at some machine all day.

Before the 19th century no Americans worked on
the assembly line. It seems like that cycle
has run its course.


Posted by: J.H. at September 30, 2003 9:41 AM

What is this obsession that manufacturing jobs aren't important, or that none will exist in the US in the near future, and that manufacturing is not important because it's all mindless "assembly" work?

First, even with all international trade, something like 90%+ of GDP is internal market only. If you combine first Canada in a common North American market, that goes up.

Second, there is such a thing as transportation costs. Trucking a domestic made product is considerably less expensive than shipping it in from overseas, and more reliably on time if its a critical item. Things you wouldn't think the US would still make still are made because of transportation costs.

So we will have a manufacturing sector in this country. It may not be like what is now, but it will still exist.

And Harry is right about network effects. Having a strong manufacturing base creates jobs all throughout the area - both other manufacturing and non-manufacturing. And areas of any concentrated business spawn similar businesses because the confluence of skills creates its own dynamics. It's why Silicon Valley is the hub of high tech, Puget Sound has many software firms, and the Great Lakes area used to have all the automotive businesses. And companies follow that same route overseas. Much investment in Mexico goes to the same few locations (like Guadalajara) because that's where all the other businesses are, so the population is skilled.

If you eliminate that skill base, it becomes very hard to attract and keep companies. It's one reason why the tool & die business is critical.

These things build on each other. Taiwan has many world leading companies that initially began as mere "assembly work." But because they were the ones DOING the work, they saw better ways to do it. They told the people who had contracted the work, and then these "assemblers" started designing and making their own parts. Basic parts at first, and then later more complex ones.

Posted by: Chris Durnell at September 30, 2003 12:37 PM

Chris, I never said their will be no manufacturing
jobs at some point in time.

The market can balance the differential between
transport and production costs.

This is why many car parts can be made overseas
but more commonly they are assembled here.

This is also why we don't get our bricks and
concrete from china.

Is your real concern with transfer of manufacturing overseas that we will forget how to make things and thus be vulnerable in a world war type scenario?

The one caveat that I make is that we must maintain military superiority (design and production) and therefore will not allow any
country to blackmail us over any product or commodity.

And Harry, the left has always loved industrial
workers because they are not accustomed to thinking and they are the easiest to mold into
a proletarian political machine. Otherwise there
is no intrinsic value to our nation to have
factory jobs.

This nation was founded by self-employed traders,
artisans and tradesman, not clock-punchers.

Posted by: J.H. at September 30, 2003 12:58 PM

JH -

Yes. One hopes that increased prosperity will pull more people into these skilled blue collar trades as there's more demand for the services.

Now, I'm not arguing for the viability of an economy based 100% on installing each other's Korean-made central air conditioners and repairing each other's Japanese cars and building custom cabinetry with Chinese woodworking tools. But if we only had solid high schools there are a lot of these trades where you can really make quite decent money, and which are well-suited to be small businesses in a way that manufacturing isn't. That sort of business strikes me as healthier in a lot of ways than giant industrial corporations.

Posted by: Mike Earl at September 30, 2003 3:17 PM

Who is going to hire those skilled craftsmen? Unemployed ex-factory workers?

You would think that the Right, having almost destroyed the US economy in the '20s by leading it into an underconsumption trap and then administering the coup de grace by subsidizing production, might think about things, instead of merely chanting free trade mantras.

Ridiculous statements about industrial workers being unable to think, like J.H.'s, merely demonstrate that rightwing elites have never spent any time in factories.

Among the reasons you want a strong manufacturing sector is that ideas for improvement come from below as well as from above. If there is no below, the above part will soon be outclassed by economic setups where things work both ways.

Economic historians know lots of examples. The artificial dye industry is probably the most famous. Invented in England, all profits made in Germany.

Posted by: Harry Eagar at September 30, 2003 3:46 PM

Harry:

Agreed. The only way to preserve such jobs is protectionism. But that doesn't seem to work out to well in the long run either.

Posted by: oj at September 30, 2003 5:25 PM

To Brian in Minn.

Taiwan = capitalist

China = communist

They may all be Chinese, but the 2 groups produce goods and services very differently - in quality and quantity.

Posted by: John J. Coupal at September 30, 2003 5:47 PM

Chris:

It may be important, but we can't keep them. They pay too much.

Posted by: oj at September 30, 2003 6:02 PM

"The left has always loved industrial
workers because they are not accustomed to thinking and they are the easiest to mold into
a proletarian political machine."

?????

You mean like Solidarity in Poland?

Stop with the insults, JH. And while you may not have claimed that there would not be any manufacturing jobs, Orrin did in the original post when he wondered if there would be any manufacturing jobs left.

Posted by: Chris Durnell at September 30, 2003 8:21 PM

I agree, Orrin, that there is possibly no way to preserve most low-skill manufacturing jobs.

But it wasn't low-skill jobs that the Reaganites exported by the millions in the '80s. It was the skilled jobs, the multiplier jobs that we ditched in the name of taming wage rates.

Fair enough, I suppose, if everybody tames his income in the name of international competitiveness. So, OK, name me one executive who's doing his bit.

I stated my position a while back -- if you don't offer me a taste on the way up, don't ask me to cover your tab on the way down.

Posted by: Harry Eagar at September 30, 2003 9:21 PM

I detect a whiff of the "lump of labor" fallacy.

The more the Chinese make, the more money they are going to have, and the more buying they are going to do. Instead of dividing a constant size pie in smaller slices, the pie will get bigger.

And then there is this whole pegging thing. Doing so makes imports artificially expensive, which will create inflationary pressures in the domestic economy, which will lead, eventually, to a corresponding wage spiral.

There's no such thing as a free lunch.

Posted by: Jeff Guinn at September 30, 2003 9:40 PM

Harry:

If they were skilled jobs the unskilled peasantry couldn't do them. Technology made the skills obsolete.

Posted by: oj at September 30, 2003 10:52 PM

Orrin, you are in an area you obviously do not understand.

Why cannot the Chinese build good cars?

I'm sure they could, if they were to approach the job in a rational fashion, as the Japanese did, starting with motorbikes and graduating through 3-wheel trucks to lousy cars to good cars to the best cars in the world.

It is unlikely that China, with its top-down economic planning, will choose that route. In fact, the Chinese have been building Jeeps in a joint venture since the '80s, but you don't any $10K imported Jeeps yet, do you?

I know you are a smart guy, Orrin, but you have to study complex subjects to understand them, and you have not studied industrial management.

Here's a short course: in the '80s, US plutocrats shipped, eg, a large industrial lathe to Taiwan. The Taiwanese learned to operate it.

The official line out of such idiots as Paul Craig Roberts was that when US labor came to heel, the lathe would be returned.

Maybe it was, maybe it wasn't. Meanwhile, a Taiwanese businessman had learned he could gross a million dollars a month with a lathe, and he bought his own.

You seem to think that the only jobs we experted were in the needle trades. You're wrong.

Posted by: Harry Eagar at October 1, 2003 11:06 PM

The Taiwanese are Chinese are they not? Of course they can operate stuff that we design. Any idiot can, that's the point. What they can't do is generate ideas themselves.

Posted by: oj at October 1, 2003 11:31 PM

Orrin, you don't know what you are talking about.

I suggest you contact Liebherr and ask about dockside cranes in Singapore.

Posted by: Harry Eagar at October 2, 2003 8:43 PM
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