America Must Force Her Politicians to Acknowledge that American Factories are Better than Free Trade

China now commands a majority of all the hegemonic commodity relationships of the Earth, processing the following within her shores:
… 53% of the world’s cement
… 48% of the world’s iron ore
… 47% of the world’s coal
… And the majority of just about every major commodity.

In 2010, China produced 11 times more steel than the United States and set a new world record by manufacturing and selling over 18 million vehicles in 2010. These are not the statistics of a country on the heels of the United States, or even more naively, on the wane. They are the statistics of the greatest industrial strength of the world.

To prepare for this phenomenal level of production, China installed supporting infrastructure, taking on debt. Some experts have suggested that China’s governmental debt obligation now exceeds 150 percent of her GDP, much higher than the United States’ total governmental debt ratio at 122 percent and slightly higher than Greece’s 140 percent debt ratio. Since Greece is the whipping boy of the world right now, causing its government to incite riots as it attempts to curtail its governmental spending, why is it that the world’s credit rating agencies are not downgrading China’s credit rating when her debt ratio is worse?

Why is it that a week before S&P came out to disparage America’s credit rating, she was egged on by Dagong, China’s premier rating agency? A week before S&P gave Fonda like cover for China’s government to chastise America for our government’s debt, Dagong bypassed her own government’s sizable debt issue and downgraded the United States’ credit rating for having a debt that is 30 percent lower as a percentage of GDP than Dagong’s own country’s debt. The question is, did S&P get it right?

The answer may be better understood by looking at the reason for each country’s debt. During a business upswing, the debt a country takes on may be indicative of their future financial strength and not their financial straits. In the case of China, that has been experiencing three decades of meteoric rise in productive capacity, her government has been increasing debt to place infrastructure ahead of production. While China has played the edge of keeping her business cycle from turning down while greatly investing in infrastructure investment that at times significantly precedes production, China’s ability to eventually pay her debt is much greater than the United States, whose productive capacity has not been keeping up with our government’s spending for decades.

China’s surge of infrastructure and productive capacity has preceded government revenues, but will ultimately be covered by her rising private economy, even if inefficiently. However, in America’s stagnant economy that is not rising as fast as its government’s debt obligations, our rising government debt will ultimately choke off private business growth and cause an even greater debt ratio to occur.

China’s debt has been used for infrastructure to support productivity increases. However, the United States’ federal debt has been overwhelmed by military and entitlement payments, which ultimately takes from productive business growth. Our consumer debt is worse. Instead of investing in domestic long term efficient assets, our excessive consumer debt has left us with huge piles of plastic landfill rubbish and large tracks of unused, foreclosed, and obsolescing housing. However, some consumer debt, including home equity debt, was used to funnel money into the stock market, much of which found its way to China as equity for Chinese foreign direct investments.

China’s private economy is strapped with high debt that is susceptible to economic downturn. Variability of cash flow during the peaks and troughs of business cycles have historically set the amount of equity needed to sustain businesses in different industries. However, at the zenith of financial bubbles like we experienced, historical debt/equity ratios are thrown out in favor of getting the deal done. Many China deals were highly leveraged, 100 percent debt, non-recourse loans.

At the coming trough of this exaggerated business cycle, China may have factories that cannot pay their debt payments, tens of thousands that cannot be lifted off their foundations and returned to the equity investors. If this cycle, trends hugely negative, lenders will be forced to restructure loans causing Western equity investors not to receive the returns they had hoped and evaporating trillions of equity from the New York Stock Exchange, equity that was provided from the West.

Unlike equity in normal business cycles, this equity came from millions of Westerners hawking their home equity collateral for loans that were then reinvested as equity in China deals. If the business cycle makes an excessive swing, the debt acquired by Americans and other westerners to provide the equity for China’s deals will go into default and creditors will foreclose on the collateral of those assets to cover losses. In this world economic monetary retraction, all suffer but China has the best of the bad outcomes.

While China positioned herself to transition through this potentially worst upcoming economic retraction in history in much better condition than the West, this does not mean that the United States should sit idly by and waste whatever pre-trough time we have left. It is critical for America’s national security that we bring a few jobs back to America’s shores. America has the largest military power ever assembled. Yet China has the ability to re-supply her military at an alarmingly faster rate than we can re-supply ours. This made the difference in WWII as in most large wars of attrition, and America has left her manufacturing flank grossly unprotected.

So a critical factor for our national security and economy is to help businesses that employ the American workforce to improve competiveness. Ultimately, the differential cost of operating in America versus overseas, weighted for risks, has to be driven to zero to assist those companies that wish to remain in America to stay competitive and to survive. Yet businesses are continuing to leave America for China and other emerging countries, suggesting that in some cases the cost burden asked of our businesses is too high.

For the 40,000 factories that have left America for China, they have been driven by financial choices: (1) the cost of supplying America is less in China even including transportation back to the U.S. (2) the cost of supplying both the U.S. and China is reduced by building larger capacity in China to supply both countries or (3) the cost of not building in China is too great, because China will not give access to her market unless factories to supply it are built in China.

To stave off further loss of businesses to overseas locations and to entice others back to America, for the choices above (1) costs of factories to supply our domestic markets must be driven down to match leading edge international costs. For (2) if the market is greater in China (a huge advantage for her) the cost of building capacity in America large enough to also supply China, with the corresponding scale efficiencies, must overcome the much greater transportation costs of moving many more goods to China than the fewer goods consumed in America. For (3) the costs of building in the U.S. must now also overcome lost opportunity costs of losing China’s market.

Certainly (1) driving down costs to match international costs is fraught with political traps such as minimum wages that must be managed to succeed. (1) However, building capacity to fulfill local demand is much easier than (3) overcoming opportunity costs of being closed out of China’s markets. Yet, if we accept premise (3), we are accepting an unlevel playing field imposed by China.

Corporations understand China’s imposition and do not react as if it as unlevel. MNCs do not have loyalty to build in any one country and therefore do not see building in China to gain access to Chinese market as a detriment per se. MNCs see the opportunity to build mega factories to supply both China and the U.S. as an economic boon. However, that is because China’s building impositions have thus far not caused other countries to respond negatively with tariffs and other retributions. (Why?)

No, the detriment is to the government of the United States and to our working class. Our government’s politicians, who have not yet taken actions in favor of America’s working class, must finally be forced to acknowledge that America’s middle class and the American government that is supported by their taxes has different motives than the multinational corporations that fly our flag. We should do everything in our power to see that our government’s and corporations’ interests align but when they do not, we can no longer feign ignorance.

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Filed under American Governance, China, Free Trade, Multinational Corporations

One response to “America Must Force Her Politicians to Acknowledge that American Factories are Better than Free Trade

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