Wednesday, September 2, 2020

All Our Eggs...

We got greedy, and now its going to bite us on the ass.

I recounted before about how my father went to China in the early 1970s to try to set up a truck clutch remanufacturing facility. This was shortly after Richard Nixon went to China and reopened relations with that country.  I am not sure anything came of my Father's trip - it was too early to really set up manufacturing there - the country was still in a primitive state.

However, American manufacturers salivated at the chance to tap into such a low-cost labor force. We could export jobs overseas to places where there were no environmental laws, no labor laws, no unions, no nothing. We could have products made for pennies that in the United States would cost dollars.

And labor costs - despite what Union lackeys tell you, were and are high here.  I worked on a project for Carrier, and our target price for the A/C unit was about $450.  The materials alone were over $400, and the labor cost was $78.  As you can see, it was a money-losing proposition.  Today, that plant is closed and the products made in Mexico or in the non-union South.   And no, we couldn't just "charge more money" for the product - the customers would buy from our competitors - or not buy at all.

Initially, exporting jobs was a fiasco. Someone even wrote a book about it, entitled "Beijing Jeep" – actually, there is more than one book of that title.  Chrysler tried to set up a factory in China to make Jeeps and the result was almost hilarious, as they struggled to make manufactured goods with primitive tools and backward thinking. But no one's laughing today. General Motors makes more profits in China and they do in the United States. And every manufacturer is clamoring to get plants into that country - or one of many neighboring countries in Southeast Asia, Korea, or India.  No word on Africa, just yet.

Or at least that was the trend. The intended effect of opening up relations with China has occurred. A new Chinese middle-class has emerged as economic conditions for Chinese people have increased dramatically in the last few decades.  But almost everything sold in the United States today is either made in China or has a number of components made in China. And in some instances, the only source for certain components is China or some other third world country.

We've put all our eggs in one basket. The problem with this approach is it now we can't afford to piss off the Chinese too much, as they make almost everything we consume. If China were to cut off shipment of products the United States, we would have to scramble to develop alternative sources for almost everything we need, except food.

Of course, we each have guns pointed at the other's head.  If China were to try to embargo all of its manufactured products, such as the Arabs did with oil back in 1973, they would also be cutting off their own source of income. And unlike oil, which is a commodity available only in certain parts of the world, manufactured goods can be moved almost anywhere, as evidenced by the fact that we did move them to China in the first place.

I recounted before how in the late 1970s I worked in a ball bearing factory run by General Motors. In the forge plant, we were pulling the machines out of the ground and putting them on the flatbed rail cars to be shipped to India. While the UAW laborers discussed whether or not to go out on strike next week, they seem to be oblivious to the fact that there was an alternative to their product - their labor - at less than one-tenth of the cost. As each machine left the factory, fewer and fewer people were employed. Today, the factory is not a warehouse for Chinese-made goods.

The problem is, of course, that we are all used to the low price of Chinese-made goods. None of us wants to pay $2,500 for a $500 television, but that's about what it would cost in real terms if we paid 1975 prices for a color TV today. We are hooked on the high grade heroin of low-cost Chinese made or third-world made goods. And speaking of heroin, guess where most of these opiates are coming from as well?

The second part of the problem is that exporting these jobs to China, in addition to losing employment in America, merely shifted our labor problems, our environmental problems, and our regulatory problems overseas. China is one of, if not the largest polluter in the world, yet we give them a pass on the Paris Accords claiming they are a third world country still in need of development. In reality, they are a global superpower second only to the United States.

We like to talk a lot about solving the problems of pollution and global warming, and here in the United States we are doing just that. Emissions controls for automobiles were instituted first in the US and we've always been on the vanguard of this, worldwide. The Germans, on the other hand, only figured out ways to cheat on the test.

Why liberals still drive Volkswagens is beyond me, but every third car you see in New York or Vermont is a VW.  What have I said about getting into a business relationship predicated on a lie?  It can only go downhill from there.  And it is the height of hypocrisy to be "politically correct" and drive a polluting, cheating VW.  Yes, even if they "fixed" the problem, they cheated, intentionally, on environmental laws.  Why would you give them a second bite at the apple?   Would you ever buy a Subaru if they were caught dumping toxic waste in third world countries?  Same deal.

Unsafe polluting Nazi deathtraps, that were the darling of the liberal left - that's what they started out as, and haven't changed much.  But I digress.

But meanwhile, the six hundred pound gorilla in the room is the coal being burned by China to keep their industrial machine going. They have cities there where the air is unsafe to breathe through most of the year.

The question is, of course, how do we break ourselves of this nasty little habit? And the problem is, of course, that there is some other third world country who would gladly accept massive Western investment if it means more jobs and industrialization for their country.  And we are working our way through southeast Asia and the subcontinent in this regard. American companies as well as Europeans, are more than willing to invest in places where labor laws are lax and pollution laws are nonexistent.

Of course, in theory, eventually things equal out.  And in a way we are already seeing this. Labor costs are increasing in China to the point where many companies are thinking about relocating to other parts of the world including even the United States.   BMW's largest manufacturing facility is in America, not China or Europe. But this only reflects where their largest and most profitable market is located.

While our labor costs may be higher, our energy costs - thanks to fracking and cheap natural gas - are far lower.  And our transportation infrastructure is far better than in China.  There is also the matter ot the stability of our government - well, there was, anyway.   The fear of investing in China or any third-world country is that a regime change would result in your investment being nationalized, which is one reason companies try to wring obscene profits from such investments, while they can.  Sadly, the instability of the Trump administration and the talk of nationalizing TikTok and other companies makes us look more and more third-world every day.

In the long-term, this era of cheap manufactured goods may be short-lived. In the future, as people in China and India and other so-called third world countries move into the middle class, they will demand higher wages and consume more of the products they are manufacturing. As a result, they'll be little or no advantage to moving manufacturing overseas, if products are made just as expensively in the United States.

And perhaps to some extent this will be a good thing. Perhaps the era of disposable consumer goods will come to an end. People will think long and hard before they invest in a new television or computer, wanting something that will last for a decade or more, rather than just two or three years before they throw it away and move on to the next thing.

But the bottom line is, the cost of consumer goods could skyrocket, with this "made in America" movement and worldwide tariffs.  This in turn could cause inflation to take off and destroy the savings of most middle-class Americans.

Welcome to 1975.  Welcome to stagflation.