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Regaining a Level Playing Field

Dean M. Peters, Consulting Editor
email:
demipe@aol.com

To an American manufacturer that does business globally, the concept of a “level playing field” upon which to compete is not a foreign one. What is becoming increasingly foreign to manufacturers, however, is the country of origin of their major competitors. U.S. manufacturers of products ranging from textiles to electronic components to machine tools are feeling the pinch of emerging foreign competitors. Many of these competitors, who once were considered emerging Third World economies and of little threat, now are rivaling the U.S. in manufacturing expertise and competitiveness.

The reasons for this trend are many, varied, and complex. No simple answers present themselves on how to fix the problem, which, incidentally, is haunting the service sector as well. Since our entry into the 21st Century, America has lost about 3 million manufacturing jobs. Although many foreign enterprises have developed expertise and efficiencies in their own right as they have matured as global competitors, there are still many foreign competitors who rely on artificially erected trade barriers to gain a significant advantage into a foreign market or to protect a domestic one.

Common Trade Barriers

The U.S. Government, though cognizant that obstacles to free trade take many forms, has identified the most frequently encountered barriers or unfair practices, as listed below:

  • Intellectual property infringement.
  • Customs procedures that are not uniformly applied.
  • Lack of competitive bidding procedures for contracts.
  • Application of direct or indirect subsidies by a foreign government in support of domestic suppliers.
  • Burdensome certification and testing requirements not required of all manufacturers.
  • Influence peddling in which another company or country interferes with fair trade at your expense.
  • Bribery, corruption or requests for payoffs that diminish a company’s competitive position.

Each of these practices is a serious matter, but let’s look at the most damaging one – intellectual property infringement. In some emergent Asian economies, the culture is such that copying and pirating intellectual property is a form of flattery. As a result, many dollars have been illegally siphoned from legitimate copyright or patent holders, who are feeling anything but flattered.

It has been estimated by one industry group that 92 percent of all software on Chinese computers is either unlicensed or pirated, representing a loss to U.S. exporters of nearly $4 billion annually. The number gets much higher if you add losses related to books, CDs, DVDs, and video games.

The preceding list outlines common practices in restraint of free trade, but some countries implement other, more systemic trade barriers as part of their economic policy. The rapidly expanding Chinese economy is a case in point.

The Chinese Problem

In 2003, China surpassed the United States as the world’s largest recipient of foreign direct investment. Concurrently, Chinese export growth has been booming. The confluence of these events means demand for Chinese currency (the yuan) has increased enormously. The principles of free market economics state that as demand for a commodity (the yuan, in this case) increases, its price goes up. If the price of Chinese currency increased, however, Chinese products would become more costly and not be as price-competitive in global markets. Demand for those products would fall, as would demand for the yuan, and prices would also follow suit. The cycle would then begin anew and the dictates of supply and demand economics would prevail.

But in this cycle is a wrinkle that makes doing business with China a less-than-fair proposition. The wrinkle is that the Chinese government pegs the value of its currency to the American dollar and doesn’t let it fluctuate. The Chinese strictly regulate imports and the allocation of foreign currencies to, in effect, falsely valuate its currency to its economic advantage. Even if we set aside the obvious Chinese advantages of their bounteous labor supply and its low cost, their playing field has been skewed for years. Their currency policy alone has cost American manufacturing six-figure job losses and billions in lost revenue.

The success of China’s economy is not all based on unfair trade practices. In fact, some trade barriers fell as part of the agreement to allow China into the World Trade Organization (WTO). But, discussion of trade barriers aside, the business culture of that country is based on a strong work ethic, a virtually endless supply of labor, and a strong dedication to success and innovation. As a result, the Chinese manufacturing sector has evolved from one skilled at producing simple, low end products, to a juggernaut that is taking on world class manufacturers at their own game, no matter how complex the product or the technology behind it.

Environmental and Occupational Trade Barriers

U.S. manufacturers have also been hurt by trade barriers that were inflicted on them by their own government. About 40 years ago, the U.S. Government created the Environmental Protection Agency (EPA) and the Occupational Health and Safety Administration (OSHA). These agencies, in their zeal to save the environment and make workplaces and occupations safe, saddled American manufacturers with a host of costly environmental and occupational laws and regulations, for which was yielded not a single additional unit of product to ship.

The extremely contentious relationship between these agencies and business that characterized the early days has moderated considerably in recent years. American manufacturers accept that there is nothing wrong with socially and environmentally responsible manufacturing. But, in many instances domestic manufacturers were burdened with costs unilaterally, while foreign competition could produce product without heed to similar reciprocal regulations.

A U.S. producer of cast metal manhole covers, for example, had to worry about (and pay for) minimizing noxious emissions from the process of melting metal and processing sand molds, disposing of process waste products, the safety and health of its workers, just to name a few basic items. That manufacturer’s Asian competitor, in contrast, had little in the way of environmental or safety measures with which they had to comply. The cost advantage in such an imbalance is enormous, and that’s even before considering the vast differential in the cost of labor.

What Can We Do?

It should be obvious to the most casual observer that the playing field upon which American manufacturers compete against foreign counterparts has become less and less level. Nonetheless, the U.S. still has the largest economy and the most productive labor force in the world. These are two significant advantages that can serve as the foundation upon which to reverse the economic trends of the past two decades and to nucleate a newly emergent economy based on ingenuity, efficiency, and economic growth.

There are no quick fixes or easy answers to reverse what has occurred during decades of economic evolution (some may argue for the word devolution). What follow are some ideas about what can be done to change the pendulum’s swing. They range from individual actions to changes in public policy:

  • Americans need to exercise more fiscal responsibility. Individuals and businesses need to save more of their incomes and the federal government needs to get serious about curtailing deficit spending. America is already selling its way of life to foreign debtors to the tune of about $1.7 billion per day. This is not something that can continue indefinitely. We can bite the bullet now, or swallow a cannon ball at some future time.
  • Educate a workforce to lead into the 21st Century. America has lost its edge in attracting and educating students in engineering and technical disciplines. Future breakthrough products come from research and development efforts carried out by technical graduates, but foreign countries are grooming technical graduates in higher numbers at much higher rates per capita. This needs to change for American business to remain competitive in the long run.
  • Increase political pressure on China or other countries whose currency values are artificially established. China’s refusal to let the yuan float is costing America jobs and diminishing the competitiveness of its global businesses. The WTO’s rules prohibit nations from manipulating their currencies for trade advantage. China has offered the fragility of its banking system as an excuse to keep this practice going, but this is no longer an appropriate response from the world’s fastest growing economy.
  • Keep investing in productivity growth. Among the things that have kept American enterprises competitive globally are their improvements in productivity. Investments that improve the productivity of capital and labor are keys to future success in global markets—both in the near- and long-terms.
  • Enforce trade laws more strictly and promptly. Currently, if a company feels it is victimized by the dumping of foreign products, its only remedy is the filing of an expensive and lengthy anti-dumping suit. By the time the suit is decided and paid for, smaller companies receive little benefit, even if they win the decision. The U.S. Department of Commerce can act on behalf of an entire strategic industry when it sees a threat. This program should be expanded and DOC should act as advocate for more industries victimized by unfair trade.

    Vigorously defend intellectual property rights. Legitimate owners of patents, copyrights, trademarks, and other legal protections do not seek the flattery of emerging Asian (or any other) economies. They seek free and equitable access to their markets. Governments that look the other way while their citizens openly pirate and re-sell stolen property need to be held to account.

American industry became great by seeking and seizing market opportunities when and where they occurred. But even the most productive economy in the world can’t compete with unfair trade practices. If your company has encountered or been victimized by any unfair practices, consider visiting  http://www.export.gov/tradebarriers.html for help in reporting the experience and responding to it.

 
 
 
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