China vs. America

What’s more important to you: American factory jobs or cheap stuff? As America’s factory-based industries move production lines to China, American workers lose tens of thousands of jobs but the rest of us gain the ability to buy some of our favorite items at all-time low prices.

The switch that really brought the whole issue to the forefront for me was when my beloved (and the all-American best-selling shoe in world history) Chuck Taylor Converse All-Stars production line was closed in Pennsylvania and moved to Asia. The shoe quality didn’t go down so much as it simply changed. American Chuck Taylor’s would wear out where the toe area connected to the laces part of the shoe –forgive my lack of correct technical shoe jargon? and also in the back. But the new Chinese Chucks were wearing out a little more quickly, but from the sides. One day my entire right foot slipped out of the left side of my shoe.

But let’s step back. Where did this new manufacturing trend come from? Why is China so popular for manufacturing the world’s goods? In 1972 President Richard Nixon was the first U.S. president to visit the People’s Republic of China and lay the foundation for trade relations. Since then, the United States has been continually working with China to increase free trade. Bill Clinton was instrumental in getting China into the World Trade Organization. In 2005, spurred on by the U.S. Congress, China tacked the worth of their Chinese yuan to the worth of the U.S. dollar. By doing this, China made free trade between the two superpowers much simpler. As the worth of the dollar goes down, so does the yuan, and this provides the opportunity for cheaper goods for American consumers. As we buy more, China produces more and prospers.

This seems pretty good, right? American-owned companies, in order to save money and work in the interest of their shareholders, move production to China. In China, their production costs are fractions of what they previously were in the United States, and profits grow. In turn, Wal-Mart, among others, can offer you the same products at lower prices all the time.

But here is where it begins to get a bit more interesting. Some American companies don’t want to move their production lines to Asia. They’re loyal to their American workers and don’t want to compromise American jobs for bigger profits. But large corporate chain retailers, specifically Wal-Mart, have contracts with their product suppliers. These contracts are quite lucrative for the companies that land them, and competition for these contracts is stiff among producers because they guarantee high sales worldwide. In these contracts, Wal-Mart is allowed to set the price they are willing to pay for each item, like television sets, for instance.

Let’s say an American-based dealer has a contract with Wal-Mart to sell them each television for $55. Wal-Mart is able to turn to that company and tell them they won’t pay more than $40 per unit and if this company can’t meet their requirements, they’ll turn to one of their competitors. The television company, which cannot make a profit by producing their televisions in the United States and selling them for $40, is faced with losing their contract with Wal-Mart and in turn a large portion of their market share, or lowering production costs. In order to keep their contract the company will move their production plant to China in order to produce their product at the demanded price.

It is things like this that increase America’s trade deficit and in turn lower the worth of the U.S. dollar, sending the United States into a downward spiral. The U.S. trade deficit, which began in the 1970s, is the difference between what goods the United States produces and the domestic demand or the worth of our exports versus our imports. Historically, the U.S. currency was backed by a gold standard, which allowed us, in the case of a trade imbalance, to send gold to make up for the imbalance. But since the U.S. abandoned the gold standard in 1933 and is able to print as much money as it would like, the reversal of the trade deficit is more difficult.

In August 2006, based upon the rapid growth of the twin debts (U.S. trade deficit and national debt), Italy decided to sell a large portion of its U.S. dollar holdings and purchase, instead, British pound sterling, causing the worth of the U.S. dollar to drop. Shortly after Italy’s move, many other countries followed suit.

The national debt, which is money owed by the government to creditors, i.e., foreign governments, began early in our country’s history during the Revolutionary War when we borrowed money from countries to help fight the English. The debt has existed and has fluctuated greatly in our country’s 231 years of existence. It was at its highest, as compared to the gross domestic product (GDP), during the 1940s due to our involvement in World War II. The GDP is essentially the market value of every final product or service the country produces. Currently, China holds $339 billion in U.S. Treasury securities.

Here’s something else to keep in mind: Chinese cities continue to grow at astonishing rates. In 1952 there were approximately 72 million Chinese people living in cities and urban areas; by 2004 that had jumped to 540 million people. It is estimated that, with a 1 percent increase per year, by 2020 900 million Chinese will live in cities. Bringing former rural and farm populations into the urban and industrial centers enlarges the need for energy production. With every new factory or housing complex constructed the increase of energy needed for heating, electricity, et cetera rises exponentially. The United States is currently the world’s single largest consumer of energy and China is quickly catching up. Soon there will be a huge struggle between the two superpowers for oil and other abundant sources of energy, which, no pun intended, drive our country forward. If you think energy costs are up now, wait until we have to fight China to get our hands on resources.

In the end, companies like Wal-Mart constantly require lower prices from their dealers. In order to remain competitive, American companies are forced to move their plants to China. This grows the U.S. trade deficit along with our ever-growing national debt and lowers our dollar’s worth. In the end, China and companies like Wal-Mart make out like bandits while America slowly begins to sink under the weight of our own consumerism. But, hey, we can get cheap flat-screen TVs. That’s something.