Historic Sinophobia

Wednesday, October 9, 2024

Historic Sinophobia

Count me as a free trader. Open and free markets make sense, maybe to the point of being a truism. But the case of China is different—or so it often seems. If it is a different case, is it because of something uniquely menacing about China, or is it about some unique failings of our own?

The end of the Cold War was a period of optimism, driven by a sense that things generally would work out just fine. If we helped our erstwhile rivals enter the global marketplace, the taste for freedom and democracy would lead them down a path to the inevitable overthrow of authoritarianism.

But in the case of China, the potential for industrial production looked like it was on a scale far beyond anything we would be able to withstand. China could get richer, and maybe move toward freedom and democracy, but the process would cost us our economy. It has been a cause of worry dating back to the turn of this century.

A news story 20 years ago reported on the early indicators and where they pointed. Unfortunately, this is where things get a little tricky for this blog: the article “The China Price”, written by Pete Engardio, Dexter Roberts, and Brian Bremner and published in Businessweek on December 5, 2004, is behind a paywall. I signed up for a trial three-month subscription to Bloomberg for access at an introductory price of $1.99 per month to read it. The article is a thumb-sucker—mainly in a good way.

The story is about several American manufacturers quickly learning that Chinese producers can undercut their prices so drastically that the Chinese goods cost less than the prices of the raw materials. There were whole local American communities that had specialized in specific goods, such as home furniture, auto tires, circuit boards, or ceramic tiles. Suppliers to those industries, along with their specialized service providers like shippers, bankers, and insurers, had grown up around them tending to their peculiar needs. But Chinese manufacturers undercut their prices by 30 to 50 percent. Even the ones that tried to innovate quickly by upgrading their machine tools for greater efficiency were discovering they still couldn’t survive.

This was only three years after the People’s Republic of China entered the World Trade Organization with help from the United States. China was opening up to American products and producers, too. Western multinationals were finding Chinese factories to produce for them, driving down costs. As the reporters wrote, no one in the world could match the advantages of producing in China.

While salaries for top Chinese designers are rising fast, they are still a fifth to a tenth of those in Silicon Valley. If China's wages rise 8% annually for the next five years, says a Boston Consulting Group study, the average factory hand will still earn just $1.30 an hour by then.

Fifty-nine furniture plants employing 15,000 American workers had shut down between 2001 and late 2004 when product prices were driven down by 30 percent in a mere three years. Domestic competition among producers in China was another factor, as the promise of growth led to the construction of massive, state-of-the-art new factories churning out volumes of merchandise beyond what American industries were capable of.

Small and medium-size American companies were losing out as the competition laid waste to local communities around the country. Multinational conglomerates like Proctor&Gamble, GM, BASF (chemicals), Panasonic, General Electric, or Honda were finding eager reliable suppliers in China to invest in—even switching whole production lines to the mainland to capture cost savings.

The promise offered to Americans was that in helping China join the global free trade system on the path to freedom and democracy, Americans would move up the value-added chain from doing the hard, dirty work of manufacturing and into the brainy white-collar of engineering, design, and management. Except that, as it turned out, four or more Chinese engineers and designers were available at the price of one in the U.S. Chinese competitors could move up the value-added chain, too.

Politically, this was before Xi Jinping became the Chinese leader who is in office today. Hu Jintao had only recently taken over from Jiang Zemin under the stable government succession system promoted under Deng Xiaoping. Xi’s return to the Maoist system—and the ambition to challenge America on all fronts globally—was still eight years away. The arrival of Xi has made the progression since seem like it was intentional all along, as a part of a long-running sinister plot. While that can’t be ruled out entirely, it hardly seems likely that the only challenge facing the United States was that the Chinese leadership’s plot was implemented so flawlessly.

Meanwhile, the hollowed out American manufacturing communities are not much more than nostalgic memories. Local workers have moved away or otherwise moved on. Was Businessweek right in its warnings? It would be hard to argue that it wasn’t.

But what has been the response to Chinese competition offered by American politics and government? It hasn’t been to ease rules and regulations that contribute to making American manufacturing more costly and less competitive—quite the contrary. American leaders seem intent on raising the costs of extracting and refining raw materials and of producing energy. That behavior would appear to favor Chinese manufacturing. Meanwhile, the current public political debate is about raising import taxes to make Chinese production more expensive artificially by government fiat.

The idea seems to be that we can’t compete with Chinese business around the world, so at least we can protect American producers by making the American consumers into their captives. That’s hardly a solution that smacks of confidence or optimism. It sounds more like fear and advance capitulation: a can’t-do attitude.

I have a lot of misgivings about Chinese products from the tech sector having too much spyware built into it: the national security worries. Not to mention a lot of concerns involving the long-standing approach of Chinese producers sanctioned and encouraged by the state to steal intellectual property. But I don’t see how protectionist rules and tariffs fix any of that, either. Not if a lot of the problem is caused by us using bad, self-restricting policy to hamstring ourselves. Maybe we should start by attempting to find better solutions through reforms at home first and foremost.