U.S. Can Start Regaining Ground We Lost to China
By Michael C. Colozzi
Special to The Pilot
The Chinese government recently announced that it would allow the yuan (the Chinese currency) to appreciate somewhat against the U.S. dollar, to which the yuan has been -traditionally pegged. Although this was mentioned in the news, it met with very little fanfare.
As someone who lived and worked in China for more than a decade (1997-2008) as president of the Asia-Pacific division of an American company and ran a successful manufacturing operation that made and sold goods to other countries in the Pacific Rim, I was not surprised that this gesture by Beijing barely got a mention.
Nor was I surprised that no news agency reported that Beijing has allowed the yuan to appreciate a total of 19 percent against the U.S. dollar in recent years. We seem to not like the Chinese much and frequently accuse them of playing unfairly. In many instances, our accusations are justified. But in other instances they are not.
I was equally surprised with the People's Bank of China's gesture to begin appreciating the yuan once again. Why? Because our treasury secretaries and trade delegations in the Clinton, Bush and Obama administrations have put constant and relentless pressure on China to appreciate the yuan.
When pressured, China's response was always, "Show us what you are doing to help yourselves, and we will consider aiding you, including the appreciation of the yuan."
When the global financial crisis struck, America responded with a "stimulus package" that approached $800 billion. Almost simultaneously, the Chinese implemented a $700 billion package.
The difference between the two packages, other than a mere $100 billion? A total of 94 percent of China's package went into national infrastructure enhancements. Money was released immediately, jobs were created, and within six months employment and domestic consumer spending were back to normal levels. The bulk of our stimulus money is still sitting in a bureaucratic quagmire, or it was earmarked for entitlements.
Were jobs created? Yes! But only a few, and they are of the nonproductive government paper-pushing variety, something we need less of, not more. I share China's view that we could be doing a better job at helping our own cause.
Learning From Our Adversary
So what can we do to help ourselves? Let's face it. We can only help ourselves by initially creating jobs in the -manufacturing sector and by creating exports to reduce our ever-growing trade deficit. We are kidding ourselves that a service-driven economy will bail us out. We need to take a few pages out of our adversary's playbook, as any good coach or military commander would do, and level our own playing field.
The only way to do that is to reduce the cost of goods made in America. There are several ways this can be achieved without great sacrifices but with some small changes.
Start with labor costs and manufacturing efficiencies. China allows, indeed encourages, 12-hour shifts in their manufacturing sector. Workers work three 12-hour days one week and four the next. Overtime is paid based upon total hours worked in any four-week period. In other words, each month these workers work 14 days instead of 20 and log a total of 168 hours, of which eight are overtime.
By contrast, a 12-hour shift in America brings four hours of overtime. You get the point.
Most industrial engineers will tell you that in most manufacturing environments one shift change per 24 hours versus two is far more efficient. Worker momentum and production per man hour is actually heightened. Three- and four-day breaks revitalize production line personnel. Commuting costs incurred by workers are reduced 30 percent.
This savings can serve to increase discretionary spending or encourage saving. For manufacturers in China who operate on seven-day schedules, Saturday and Sunday are just another day. No premiums are paid, nor are premiums paid for the night shift. In sum, lowering labor costs and increasing manufacturing efficiencies can reduce the cost of goods made in America.
More Tax Incentives
Next, let's give manufacturers who create exports some tax incentives.
Again, in China, any manufacturer who exports 30 percent or more of their product is totally tax exempt for three to five years, depending on the region in which they are located and the product they manufacture. In some cases and for some products, the tax holidays are even longer. In addition, manufacturers enjoy an 80 percent tax rebate on taxes paid on raw materials purchases that are used to produce goods that are exported.
Some might argue that the enhanced profits from such tax incentives would only be used to increase executive salaries and perks in America. They are probably right, given our past excesses. That being the case, mandate that the tax savings be reinvested in manufacturing infrastructure and the addition of jobs that result from increased sales due to lower overall cost of goods.
After all, to a very large degree, it was America's shortage of investment in manufacturing infrastructure and the cost of labor and the lack of tax incentives that drove jobs overseas in the first place.
Another argument that might arise from the -granting of tax incentives involves the potential downturn of corporate taxes paid to federal and local governments. This is not likely to happen, as the downturn in corporate taxes paid would be offset by tax revenues generated from personal income taxes with the addition of jobs.
Health care costs are another huge financial burden on both companies and government. Imagine any company's health insurance costs being reduced by, say, 20 percent. Imagine a significant reduction in sick days. These can be reduced quickly by forcing all Americans to take responsibility for their own health in two key areas.
Depending on which survey one reads, the costs associated with obesity and smoking account for 28-40 percent of total health care costs in our country. We as individuals control these.
One solution, although it might sound Draconian, is simple. If a doctor tells you to lose weight or quit smoking it should be documented and the insurance carrier is advised. If you do not comply in a finite period of time, you lose your benefits. Is it really too much to ask that people take better care of themselves? Or, heaven forbid, allow companies to force them to do so?
In China, raw material costs for products made with wood, plastic resin, steel, textiles and virtually all chemicals are every bit as expensive as they are in America. In many cases raw materials are even more expensive in China than they are here. In addition, the cost of goods made in China are burdened with significant trans-Pacific shipping costs and U.S. Customs clearance fees.
Therefore, by reducing overall labor costs, taxes and health benefit costs and improving overall manufacturing efficiencies, American goods can absolutely become more competitive and, as a result, more jobs can and will be created. Side benefits include the increase in domestic consumption because there are more people working. Trade deficits are reduced.
If one were to talk to practically any corporate purchasing manager (retail buyers might be the exception), they will tell you to a man or woman that they will buy American if the cost deviation for American goods is not greater than 10 percent compared with goods delivered from China.
Lead times on goods from China average 90-120 days, freight and customs must be managed at considerable expense and effort, and there is always a quality-of-goods risk. Buyers would much rather deal with another American who can be reached by phone and communicate in English.
Getting within 10 percent of the landed and delivered costs of goods made in China is very achievable.
Let's begin helping ourselves, shall we? In areas like textiles, furniture, electronics, automotive and other key areas, we may be able to recover at least some of the manufacturing legacy we have given away over the past five decades.
Michael C. Colozzi lives in Pinehurst.
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