Charles Cottle —
In the world of international trade, China cheats. Much was made of this claim in the 2012 election season and now again in 2016. China’s cheating, it is claimed, creates an uneven “playing field” on which the United States is the loser. For those who have not followed these issues, China is said to cheat in three basic ways. First, it subsidizes its export market in violation of World Trade Organization rules. Second, it actively violates and refuses to protect intellectual property rights. And third, it manipulates the value of its currency.
The third charge, is interesting because while charges one and two seem to be clear violations of trade agreements, the benefits of China’s currency manipulation go well beyond the borders of China. To explain, China’s “cheating” here refers to China’s practice of artificially devaluing its currency rather than allowing it to float upward in currency markets. Weakening their currency, the renminbi, helps the Chinese export sector by making Chinese imports cheaper worldwide than they otherwise would be. At the same time a weakened Chinese currency vis-a-vis the U.S. dollar works to the detriment of the U.S. export sector as U.S. products in China become more expensive. It seems obvious, therefore, that we should pressure the Chinese to peg their currency to market prices, rather than artificially keep it at a lower value.
The Chinese artificially devalued their currency from February to May in 2012, in the midst of the U.S. presidential campaign season. That policy eased in the subsequent years and the renminbi gradually floated upward. However, in the early months of 2015 they again weakened their currency by small amounts in the face of lagging international trade and a stalled internal economy.
Who benefits from devalued Chinese currency? Clearly, Chinese labor benefits. But also, any company (and its stockholders) that manufactures and exports goods from China and any vendor of Chinese exports benefit because these goods are comparatively cheaper than comparable goods made at home. Verification of just how cheaply Chinese textiles are priced as compared to those made in the United States can be easily seen. Indeed, it is increasingly difficult to find clothing made in the United States.
Several years ago I was able to tour the Tianjin Economic-Technological Development Area (TEDA) Tianjin, China. TEDA is one of the largest economic development areas in China. It hosts manufacturing sites for a large number of companies in China’s export sector. Among these companies are a number that U. S. readers will recognize, including Motorola, Toyota, IBM, Schneider Electric, LG, Honeywell, Volkswagen, Fujitsu, Coca Cola, Pepsico, Kyocera, Sanyo, Samsung, Canon, Exxon Mobil, Haliburton, Emerson Electric, Chevron, and AT&T. All of these companies, and their stockholders, benefit from competitively lower prices as they sell their products to the U.S. market and around the world.
Additional corporations taking advantage of cheap labor and China’s currency manipulation can be found throughout China. A major example is provided by the Hon Hai Precision Industry Co. Ltd. Known as Foxconn, the Hon Hai Precision Industry Company is reportedly the largest electronics manufacturer in the world. It is a Taiwanese company with assembly plants located around the world. Many of its products are made at the assembly and manufacturing complex in Shenzhen, China, located just north of Hong Kong. According to Wikipedia, Foxconn’s major clients are Acer, Amazon.com, Apple Inc., Cisco, Dell, Hewlett-Packard, Intel, Microsoft, Motorala Mobility, Nintendo, Nokia, Samsung, Sony, Toshiba, and Vizio.
Here at home, Wal-Mart and other big box retailers also benefit as they sell cheaper commodities to the American consumer. Indeed, it is difficult to find any American made products in Wal-Mart, K-Mart, or Target. Wal-mart has its Chinese headquarters in Shenzhen and, according to PBS, sources 80% of its retail inventory with some 5,000 manufacturers, all located in China. Wal-mart, and vendors like it claim that we, the consumers, are the beneficiaries of lower prices. Lower prices, it is claimed, put money in our pockets. If that is true, then American consumers are yet another sector that benefits from China’s “cheating.”
It is clear, however, that the U.S. worker does not benefit as manufacturing moves to China. Wal-mart and the big-box retailers may claim that U.S. consumers are the beneficiaries of lower prices, but if those consumers lose their jobs as a consequence, then how will they continue to consume? According to the U.S. Bureau of Labor Statistics, manufacturing jobs were about 28% of total U.S. jobs in 1970. In 2014 they were just at 8.1%. In the short term consumers may benefit from lower-priced Chinese imports, but long term prospects depend on inventing new well-paying jobs for American consumers. So far, that isn’t happening.
So, who benefits when China cheats?
- Wal-Mart, Target, K-Mart and all big box retailers benefit;
- American Corporations such as Apple, Dell, Hewlett-Packard, Intel, Coca Cola, Pepsico, Motorola, Microsoft, and perhaps hundreds more – and their stock holders benefit;
- Foreign corporations that have become brand names such as Sony, Samsung, Nintendo, and Toshiba benefit; and
- If slave wages count, then Chinese workers in the Chinese export sector benefit.
Who does not benefit?
- The American worker does not benefit; and,
- American manufacturers do not benefit.
An earlier version of this essay was published in October, 2012.