Two Manufacturers

I was biking along part of the Luce Line Trail in Golden Valley, MN on a this past Sunday. The route was mainly suburban, but consisted of varied land use types including industrial development. As I biked through the industrial area, I came across an industrial user that is headquartered in the city in which I worked as city planner for over three decades. As a city planner, I dealt with a variety of land use types, from open space to high density housing to industrial. I wish I had written down my experiences, because some are relevant today in this era of tariffs and trade. That Golden Valley industry reminded me of a story of two different manufacturers I worked with in Fitchburg. The two were located near other, back yards kitty corner to each other. separated by a road one direction and a former rail line, now bike trail the other direction. This post has a specific interest to China after all the US now has tariffs of 145% on Chinese products, excepting some electronics. Two different manufacturers had different approaches to trade overseas.

In the world of trade there are winners and losers, and when it comes to the United States, our capitalist economy tends to work against national interest, as a consumer culture desires products at the lowest possible cost. I recall when HyVee was wanting to come into Fitchburg. A locally owned business , Steve's Liquor, was next to the proposed location and was concerned about Hy-Vees predatory practices. In my mind, they had a right to be. Hy-Vee had said there intent was to put a local Verona grocery store out of business. The then Mayor Shawn Pfaff referred to the possibility of such locally owned businesses going out of business as collateral damage. Essentially, he dismissed their concerns. For years, to obtain cheaper goods, the US has allowed national corporations to move overseas, with effects in creating what we now refer to as the nations Rust Belt. We also have allowed cheap goods to come into the US. 

China Trade to US is on Left of vertical date scale
US trade with China is to right. Colors represent different industries
Source: Axios

This has had other consequences for social order and cohesion. The Rust Belt became collateral damage to those companies moving overseas, and the predominance of cheap goods from overseas. To that end, China has become the world manufacturer. They lack the environmental regulations that the US has, and often are considered exempt from world rules or standards due to it being a "developing country." However, as one venture capitalist, who has interests in China, has said, they lie, cheat and steal. They demand intellectual property from many foreign firms, their court system favors the government. Trump seems to have a love hate relationship with China, continually giving the Congressionally passed ban on Tik Tok, an extension, even beyond the one allowed by the law. 

Axios reports that the US trade deficit with China has been over $200 billion dollars since 2005, and was $418 billion in the second year of Trump's first term. He placed some tariffs on China then, and those were continued with the Biden Administration. As to what we import from China, in 2022, according to Axios the main items were "electronics, machinery and appliances, toys and games, textiles and chemical products, per the Council on Foreign Relations." These imports likely contain forever chemicals. For example, nine out of 15 smart watch bands tested by the University of Notre Dame contained PFAS, a series of forever chemical, that cause various cancers. They get into the home, then the water and into the wastewater stream. PFAS are no longer manufactured in the US, but apparently can enter through trade. It is the ease, and low cost labor that has made China attractive to US manufacturers who apparently are willing to accept the risk. This leads us to this story of two manufacturers.

Manufacturer one constructed bike racks, spinning bikes (I called them stationary exercise bikes) and some other bike accessories. The then owner and CEO chose not to source parts from China, arguing, if you have a problem they are half a world away, and it becomes costly to solve, due to a variety of issues. He needed electronic parts for the high tech spinning bikes. When I was still working, we did a great deal of work with them for manufacturing and office expansion. It took a great deal of effort on his part to find mainly US manufacturers or North American manufacturers to supply some of his parts. After COVID, the company fell on hard times, due to falling sales as the high COVID sales could not be retained. They were sold to a venture capitalist.

The second firm, the one I saw with a plant in Golden Valley, at one time was planning a large expansion in Fitchburg, and even had most all necessary approvals, when they decided to change course. This was back in the late1990's or early half of the 2000's, and when I inquired what happened with their expansion, they stated "Everybody is in China, so we have to get a presence there." Hence, the jobs, investment and building expansion planned for Fitchburg was uprooted to China. They were following the leader. If one thing I realized from working with businesses is that many of them do not plan far ahead, and change plans abruptly. Foxconn is another perfect example, they manufacture for Apple, and was supposed to be the 8th wonder of the world in southeast Wisconsin, as promised in Trump's first term. It never materialized to its great promise. Maybe Apple now wishes they had proceeded with that plant. 

The funny thing is a couple years ago, I was talking to a financial guy and we got talking about trade with China. I mentioned these two businesses to him and their difference of opinion. He stated that the second business mentioned above had actually left China, due to the difficulties of doing business there. Apparently, China's actions and demands became just too much. He may have learned the lesson the first business did not wish to take. 

As I write this, as with most things in the current Administration, there is a great deal of change of mind. Some electronics may now, at least for a while, be excluded from tariffs. I phones and many other electronics will cost more. It is said, that Apple brought over a few plane loads of inventory in February in anticipation of the tariffs, and while they have some manufacturing in India, China is still by far the main producer of their laptops, I phones and I pads. The US has, since the 1980's prioritized globalization over resiliency and strength in its manufacturing base, according to The Hill. As it reports, China saw that the US was not prioritizing its electronics industry and was happy to fill the void. So, are the tariffs Trump is now imposing too late? History is replete with people who wish to back to the good old days, when those days are long past. Bringing manufacturing back to the US will require time. Perhaps, three or more years from when a decision is made. Will more businesses do what the second company in my example did and move back? 

There is something to be said for how a desire for less expensive goods externalizes costs. Mining is a good example, we argue against mines in the US, meanwhile cobalt, and other important minerals are mined in Africa with few or no environmental considerations and at times using child labor. All to fill our move to batteries for electric vehicles. Further, lack of appropriate production in the US leads to national security concerns over manufacturing of chips and other high end electronics. We saw this during COVID when cars made here could not get chips, but Japanese manufacturers had no such qualms as they apparently received the chips first from the foreign manufacturing base. Supply chain issues, it was said, led to the delay for the US big three automakers. Five years beyond COVID, I still hear of supply chain issues. While the US is a leader in chip engineering and design, it only manufactures 10% of total world chips. Many of our chips are processed in Taiwan. Time will only tell when China takes the heavy hand to claim Taiwan as part of China.

Writing in America Magazine online, a Jesuit economist argues that there are more tools than tariffs, such as exchange rates. He further notes, the problem is the low US savings rate. I am not sure how that works for trade, other than meaning we buy too much. This economist also points out that there have been too many economic crises over the past few decades, and makes an analogy to the Smoot-Hawley tariffs of the 1930's. Of course, China, like Hy-Vee is predatory and India has similar issues, although much smaller trade deficit, due to China dumping products. 

Tariffs will disrupt trade and cause a price increase, now whether or not it provokes a recession is yet to be seen. The US has become comfortable low cost items, even as such moves overseas led to damage on the home front--unemployment, distressed areas, reduced investment, social chaos, increase in drug use and other deviant behaviors for people not able to get a suitable job. The socio-economic fabric of industrial based communities was ripped to shreds. If these external costs had been attributed to the trade, our current trade deficits would be even greater. Yet, we are likely long-past getting much manufacturing back in the US. Except that, at some point China overplays its hands as it did for manufacturer two in my scenario and ends up driving them away.