Stan AbramsBy Stan Abrams
This is a sentiment that has been bandied about in the press with abandon this year, particularly since the U.S. presidential election has heated up. There are a lot of economic, political and cultural factors at play here that have led to all the China criticism. Let's take a look at some of these in the broader context of trade and manufacturing jobs.

First and foremost, the U.S. economy has been in trouble for a couple of years. Depending on your employment situation or your political affiliation, the economy could be described as the worst since the Great Depression or merely sluggish. If you worked in Silicon Valley, you might even throw in a few expletives to describe the economy.

Millions of people in the U.S. are unemployed, underemployed or employed but nervous. As is the case with any human society, when a large problem becomes evident, the natural reaction is to explain what is happening and why. In years past, blame was laid at the feet of an individual, an ethnic group or a foreign country. A suitable execution, pogrom or war took care of that nicely and made everyone feel that their government was looking out for their interests. Nice sentiment unless your house is being burned down by the Cossacks. But I digress.

The U.S. does not formulate economic policy in this manner. Foreign and national security policy maybe, but not economic policy. No wars will be fought over the loss of outsourcing of tech jobs. That is not to say, however, that a suitable scapegoat will not be found. In this particular economic cycle, China seems to be a convenient target.

Second, political factors have contributed to the choice of China as whipping boy. Sino-U.S. relations have been uneven, but generally positive, for quite a few years. The majority of politicians, backed by American multinationals and other enterprises, have done what they can to keep things upbeat and move cooperation forward, spy planes and Embassy bombings notwithstanding. At the same time, China has faced constant, and sometimes bitter, criticism from the Right and the Left, conservatives and liberals. The objections of the Right often center on China's official Communist status, although much of the literature of the Right strays over into conspiracy theories about the "Red menace" taking over the Panama Canal, stealing nuclear technology, colonizing Mars, etc. The folks on the Left generally point to human rights issues as their major area of concern, although environmental and labor topics are starting to come up more often.

So China already has a big target on its back, so to speak, and we have an economy with a lot of unemployed people and a lot of scared people. Third, and this one is more of a gut feeling than anything else, I believe that cultural and racial issues have had an effect on the debate. Assume if you will the exact same facts above, but substitute a country such as Sweden for China. You can see the headlines: "Swedes take U.S. jobs!", "My company moved to Stockholm and now I'm penniless!" But would we see the same outrage? Something tells me no.

I believe that the image of the teeming Chinese sweatshop where workers are literally chained to their tables is a picture that readily leaps to mind for most Americans. The press is eager to spoon this sort of problem own our throats of course and send their intrepid reporting staff to Guangdong or Fujian in search of bad practices. The recent series in the New York Times that is indeed entitled "The World's Sweatshop" is merely one example of the generalizing that is going on. The poor labor practices occur in some places, of course, but the press in reporting on these places is doing nothing more than reinforcing a negative stereotype. Not helpful. When was the last time you read an expose of a sweatshop full of illegal immigrants in Houston or Los Angeles or Miami? Point made, I think.

OK, preliminaries finished. China is a convenient target. This helps to explain WHY Americans might be angry at China, but does not suggest if they SHOULD be angry. Next slide, please.

At the outset, let me stipulate that yes, many American companies have closed down offices or operations in the U.S. and set up others in China. This is my business, so I can state this with some degree of confidence. Why do they do this? For several reasons, one being that wage rates here are much lower than those in the U.S. and another being that they desperately want access to the China market.

So U.S. companies are over here making stuff, setting up R&D centers and so on, and hiring Chinese folks to perform the work. How does this hurt U.S. workers? One way to look at this is to count up every employee of every U.S. company over here and use that figure as what we have somehow lost. What would that give you? It gives you a meaningless figure that misses the complexity of the Sino-U.S. relationship.

Writing in Foreign Affairs last summer, Morgan Stanley's Joseph Quinlan explained that U.S.-China trade is inadequately explained by simple import/export figures. Two major issues here. One, U.S. companies that engage in Foreign Direct Investment (FDI) by setting up entities in China and then sell products/provide services in China – this would not be counted as an export from the U.S. to China, but profits derived from the sales are, at least partially, repatriated to U.S. shareholders as dividends or increased stock value. Second, and this is the main event, these same

companies are also using China as export platforms, sending goods back to the U.S. These sales are counted as Chinese exports even though the profits are made by U.S. corporations. Some have estimated that as much as 40% of Chinese exports to the U.S. are actually goods produced by foreign-invested enterprises.

When we talk about the trade deficit, therefore, and related job losses, it is important to remember all those lovely corporate dividends washing onto the shores of the U.S. from China manufacturing, unless of course the money sits in a safe investment fund offshore somewhere until needed (apologies to Parmalat). It is also important to note the other benefits of trade, including the direct-to-market sales of U.S. foreign-invested enterprises in China and the great low-priced items made in China and enjoyed by U.S. consumers.

All of that being said, we still have a nagging problem: plants are being closed down in the U.S. and opened in China. It is difficult to tell that line worker from the widget plant that just closed down in Saginaw, Michigan that he should be optimistic. His company will cut costs and make more profits, the economy as a whole will benefit from cheaper widgets, and more jobs will ultimately be created in the U.S., providing a suitable place for our line worker. The biggest problem is what job and when will it be available.

In a roundabout way, we have arrived at a conclusion. Discontinuing certain jobs in the U.S. and moving them to China is a good thing in the aggregate and in the long run, but there are also some problems. Do I need to rollout that old chestnut? OK, here goes, from John Maynard Keynes of course, "In the long run, we are all dead." That line worker may not see his particular job come back quickly.

But we all want to place blame, and we are definitely angry if we become unemployed, "outsourced" out of a job. Should we be mad at the Chinese? No, our companies are benefiting immensely by producing cheaply and selling to the expanding China market. Should we be angry at the companies for making the decision to move? No, the fiduciary duty of every executive and director is to ensure that the company maximizes profits; to not move may be

irresponsible. Certainly we cannot blame the worker for demanding such high wages.

Therefore, and in conclusion, I would like to submit a substitute in the blame game: the U.S. government. Ah, there's a bit of a surprise. We have a good economic pattern stimulated by what our economist friends would call the Chinese comparative advantage of cheap labor. Dislocations occur between the time jobs are lost in the U.S. and when those jobs are replaced, and there is also the issue of retraining. A collective solution makes sense to me, and job training, unemployment insurance and other measures are not at present adequately funded. U.S. House Majority Whip Tom DeLay said recently that there is simply no reason to extend unemployment insurance benefits to long-term unemployed individuals. The guy in Saginaw has no job and is getting worked up by the press about China stealing his job. Now do you understand why U.S. politicians are more than happy to blame China instead of actually helping their constituents?

About the author:
Stan Abrams has been an attorney with the Chinese law firm Lehman, Lee & Xu since 1999.  He specializes in foreign direct investment and protection of intellectual property.  Please send questions or comments to [email protected].


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