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China Critics Ratchet Up the Rhetoric in U.S.

By Stan

Looking at the foreign press headlines today, I sense a disturbance in The Force — I mean, some bad juju in the bilateral relationship between the US and China. Several reasons for this, including a new espionage accusation, continued allegations of cyber warfare, and a ramp up in the currency manipulation/trade protectionism/job loss stories out there.

A couple of examples. The recent bailout of General Motors by the US government received a lot of attention in the first press go around, mostly with respect to the debate over the wisdom of bailing out private companies.

Now that that’s all over, and the new shareholding structure has been put into place that includes the United Auto Workers union, some of the current business activities of GM are being scrutinized. As I wrote about a few weeks ago, GM’s activities in China are going to be looked at, particularly if plans to close US plants move forward and if some of the cars built over here will be exported to the US.

Case in point is an AP article I read this morning on GM outsourcing to China and how the UAW is not at all pleased.

As thousands of General Motors workers await word on more U.S. plant closures, reports that the company plans to import Chinese-made vehicles to the U.S. have created a political problem for the automaker and the White House.

The reports, which GM will neither confirm nor deny, could mean trouble because GM is supported by $15.4 billion in U.S. government loans, largely due to the Obama administration’s desire to preserve the company’s 90,000 U.S. jobs.

The United Auto Workers charged last week that the Detroit automaker intends to almost double over the next five years the number of vehicles it imports to the U.S. from Mexico, South Korea, China and Japan.

“GM should not be taking taxpayers’ money simply to finance the outsourcing of jobs to other countries,” Alan Reuther, the union’s Washington lobbyist, wrote in a letter to U.S. lawmakers.

As pro union as I am, I gotta say that this UAW shareholding structure doesn’t seem like such a good idea at the moment. I don’t know too much about the auto industry and the stark realities facing GM management (what’s left of it). However, I would guess that there are some good reasons behind GM’s outsourcing plan and the savings this will bring to the company. Unfortunately, the financial well-being of GM and the agenda of the UAW does not necessarily mesh as it relates to US jobs.

This also illustrates some of the problems inherent in a government bailout of a private company like GM. If company business strategy includes outsourcing, or anything related that is perceived as primarily benefiting individuals or entities in another country, the bailout will be held up as a sufficient reason for additional intervention by the new shareholders.

When these new shareholders include the government, and also in this case a union, their motivation and goals may run counter to that of a corporation’s primary mission: profitability. I really have no problem with shareholders making business decisions, even when that shareholder is the government. That’s only fair — they put up the money and should be treated the same as any other shareholder. But when they fail to act as an ordinary shareholder, and have conflicts of interest with other owners, then things tend to get messy.

I’m not sure where this is all headed, but it doesn’t look all that good to me. Consider this rather stark pronouncement at the end of a blog post commenting on the GM outsourcing story:

There are two choices to be made. You can stand with management which wants to import foreign products or you can stand with labor.

I believe in Fair Trade not free trade, I am not a so called globalist.

I will never side with Made in China.

The next example is also on outsourcing to China by US companies and comes in the form of an LA Times article profiling an LA-based consultant/logistics firm that specializes in hooking up small and medium-sized businesses in the US to factories in China via a Taiwan intermediary. Nothing new here of course, but the tone of the scrutiny as evidenced in the article is interesting.

The firm?s CEO, Steve Rochman, is put in the position of having to defend his actions. He does this rather poorly, in my opinion:

“Bringing the cost down is not a bad thing,” Rochman told me as we sat in his office on the 27th floor of a downtown high-rise. “You go to Wal-Mart and buy three pairs of socks for $7 instead of $30. That’s not a bad thing.”

Unfortunately, U.S. sock makers get driven out of business by cheap Chinese imports.

“Yes,” Rochman agreed. “But now Wal-Mart is selling more socks. They’ll need people to sell them.”

To succeed as an outsourcer, you need to be good at rationalizing things.

Here?s a second ?rationalization?:

“I’m not the devil,” Rochman countered. “If it weren’t for me, small businesses wouldn’t have a chance to compete.”

Most big companies already outsource their manufacturing abroad, he said.

“That’s the devil,” Rochman insisted. “The devil is already out there. I just help people compete with the devil.”

This guy needs a PR consultant in a hurry. Look, telling people that they can go and buy a cheap pair of socks at Wal-Mart, and therefore they should shut up about the loss of their job, is not a very strong argument. It is important to point out consumer welfare gains, which are significant when it comes to China trade, but if that’s all you have on your side of the argument, it’s going to be a tough sell.

One reality that is not reflected very often in the press when it comes to trade and outsourcing is that the United States is an open economy and is a signatory to various and sundry international laws (many of which it pushed in the first place and has supported in principle since immediately after World War II) that require it to maintain a liberal trading regime. With that in place, manufacturing is going to be outsourced, if not to China, then elsewhere.

We’ve already seen what happens when trade restrictions are put in place; low cost manufacturing shifts away from the restricted jurisdiction to another low-cost venue that may still export to the US freely. Take a look at textiles as an example.

In other words, unless you wish to abrogate treaty obligations and turn your back on trade liberalization completely, it makes no sense to tilt against the windmill that is outsourcing to China. Unless, of course, you don’t like the fact that products purchased in the US have been made in China as opposed to a third jurisdiction. Yes, some critics are not protectionist, they could alternatively be simple China bashers.

It would have been nice if the outsourcing firm profiled in the Times article was able to defend itself better, explaining that it was helping US companies stay in business and compete globally. Instead, the CEO relied upon the insipid argument that a manufacturing job is somehow equivalent to your average sales position at Wal-Mart — ouch.

Until the free trade side gets some better, and more eloquent, defenders out in the public arena, we will continue to lose this argument in the mainstream press.

Tags: U.S.-China Relations

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Full post as published by China Hearsay on May 15, 2009 (boomark / email).