U.S. manufacturers are closing up shop and taking their businesses to Asia

The 33-year-old Sarasota manufacturer, which made computer printer parts for such big names as Canon, Epson and Hewlett-Packard, had just hit $20 million in revenues and was planning to move into a new 120,000-square-foot plant off Fruitville Road.

The collapse came after Hewlett-Packard canceled VICO's contract and gave the work to a Chinese manufacturer that promised to make printer parts at a lower cost -- a dramatic example of the growing threat of competition from China.

That competition is coming not only from Chinese manufacturers, but also from U.S. companies that have moved to China to take advantage of that country's seemingly endless supply of low-cost labor.

In the late 1990s, an increasing number of U.S. companies began building plants in China or contracting work out to Chinese manufacturers to gain an advantage over competitors. As their low-cost products began flooding the domestic market, other U.S. companies felt pressured to set up factories in China as well.

The trend only accelerated during the economic downturn, which created even more pressure for U.S. manufacturers to slash costs.

Exports from China to the United States consequently surged from $38.8 billion in 1994 to $101.3 billion in 2001. U.S. exports to China have not kept pace, with the U.S. annual trade deficit widening from $29.5 billion to $83.1 billion during the same period.

That's reason enough for concern. But the movement of U.S. factories to China also has contributed to the loss of 2 million U.S. manufacturing jobs since 2001, reducing employment in the sector to 16.5 million, the lowest level in 40 years.

Manufacturers in Southwest Florida and the nation have begun petitioning state and federal governments for relief.

"What we want is a level playing field," said Peter Straw, executive director of the Sarasota Manatee Manufacturing Association, or SAMA.

That would include getting the state government to lower taxes that Florida manufacturers must pay and persuading the federal government to get China to stop subsidizing its exports by holding down the value of its currency, Straw said.

Losing jobs to countries with lower labor costs is nothing new to the United States.

The domestic textile industry was decimated in the 1980s when the United States reduced tariffs with Caribbean and Central American trading partners through the Caribbean Basin Initiative.

In 1994, a wave of U.S. manufacturers moved to Mexico after the North American Free Trade Agreement removed trade barriers between North American trading partners. Mexican exports to the United States consequently surpassed U.S. exports to Mexico, shifting the balance of trade from a $1.3 billion surplus in 1994 to a $29 billion deficit in 2001.

China is proving to be an even greater lure. Even Mexican manufacturers are heading to the East.

During the 18 months from October 2000 to March 2002, Mexico's maquiladora industry, which assembles products and exports them duty-free to the United States, lost 300,000 jobs to China, according to the National Maquiladora Export Industry Council. That exodus -- 21 percent of maquiladora employment -- has caused a public outcry in Mexico.

The main reason for the movement of manufacturers to China is its lower cost of labor.

Chinese manufacturing workers make 50 cents to $1 per hour. Mexican factories pay $2 an hour. Hourly salaries in the United States are $6 or more.

But China also benefits from a growing supply of skilled workers and engineers, and the Chinese government makes it easy for manufacturers to set up shop.

"If you want to set up a factory in China, a government official will help you get that factory up in three months," said SAMA's Straw. "That official's sole mission is to make it happen. He will clear the way rather than set up obstacles."

China protects manufacturers within its borders by artificially depressing the value of its currency. That lowers the price of China's exports, while raising the price of its imports. As a result, China is able to flood world markets with inexpensive products.

Harry Bakker, chief executive of Trailmate Inc., a Manatee County company that makes adult tricycles and lawn mowers, said advantages offered to Chinese manufacturers already have caused most of his parts suppliers to relocate there.

"We don't know what we will do -- whether we will join the flood or hang in there," Bakker said. "There are so many things a small manufacturer has to adhere to in the United States. Sometimes it seems it would be better to make the stuff elsewhere."

Peterson Manufacturing, which makes tubular metal parts for the auto and appliance industries at its plant in Sarasota, recently lost a $350,000 chunk of a $600,000 contract to a Chinese manufacturer.

"We still sell $250,000 worth of our parts to our customer. But we don't know how long that will last," said Jerry Yates, Peterson's general manager. "Eventually they will find a supplier in China for that piece of business, too."

In response to the competitive threat, the Florida Manufacturers Association has commissioned a study to show the importance of the manufacturing sector to the state's economy.

"For every manufacturing job that's created in Florida, two or three jobs are created in retail and services," said Kevin Connelly, the association's vice president. "Manufacturing brings new money to a region."

Connelly expects the FMA study to be completed and presented to state legislators by mid-March to convince them of the need to reduce taxes on manufacturers and ease environmental and safety regulations that make it difficult for Florida manufacturers to compete.

FMA officials also intend to work with counterparts at the national level to try to stop China from dumping cheap products in the United States.

"There should be trade parity between the U.S. and China. If we buy $5 billion of their goods, they should buy $5 billion of ours," Connelly said.

Peter Morici, a business professor at the University of Maryland, said the best way to achieve parity would be to persuade China to let its currency trade freely. He said that would cause the price of Chinese exports to rise and the price of U.S. exports to fall, thereby helping to relieve the trade imbalance.

Morici said the United States could threaten trade sanctions if China doesn't comply.

"But the best approach would be to talk to the Chinese and let them know how their policies are impacting U.S. manufacturers and convince them of the need to change," Morici said.

The problem with getting the Bush administration to confront the Chinese government, however, is the undoubted resistance from U.S. companies in China. Those companies, who include giants like General Electric, Motorola and Procter & Gamble, would be hurt by any policy that benefits domestic manufacturers.

In the meantime, manufacturers in Southwest Florida are using a variety of strategies to compete with China and other countries where labor costs are lower.

Sarasota-based Sun Hydraulics Corp., for example, is concentrating on producing high-quality, high-performance products.

The company's hydraulic valves, used for a range of products from powering machines that lift baggage into airplanes to keeping Ferris wheels spinning at amusement parks, cannot be duplicated easily in China and Mexico, Sun executives say.

"If anyone can make a product, then the low-cost manufacturer will always win," said Dick Dobbyn, Sun's chief financial officer. "We invest heavily in engineering to make better products than lower-cost producers."

Sun Hydraulics set up a manufacturing and distribution operation in China in 1998. However, it uses the operation not to tap into low-cost labor, but to sell its products to Chinese manufacturers.

Last year, Sun Hydraulics sold $500,000 worth of valves made in Sarasota and Manatee counties to Chinese customers. It imported nothing in return.

Churning out small quantities of special-order products is another way to compete with China.

Bradenton-based West Coast Castings Inc., which molds molten aluminum into parts for auto manufacturers, power plants and furniture companies, focuses on producing about 50 to 200 parts for each of its customers. Such production runs are simply too small for many overseas manufacturers to bother with.

A third way local manufacturers are meeting competitive threats is by automating production.

Hi-Stat Manufacturing, which makes heat and speed sensors for automakers, has spent $8 million since July 2000 installing robots at its Manatee County plant.

"To be successful here in Florida, you've got to control labor costs," said Ray Laurent, the general manager of the Manatee plant. "When labor becomes a minimal factor in the overall cost of production, it doesn't really matter where you produce."

However, increased automation means Hi-Stat requires a smaller work force. The company now operates with 200 fewer workers than it had three years ago.

In spite of efforts by manufacturers to continue producing on U.S. soil, the forces of competition are causing more and more of them to give up and either shut down or move their operations overseas.

The Florida Manufacturers Association estimates that the state lost 500 manufacturing companies in 2001.

"Some of those companies went out of business. Some left the state and others left the country," said Connelly of the FMA.

Since Willie seems to be on a rant again, I thought that this would be a good time to demonstrate to the more sensible readers of this thread, just how US businesses are at a disadvantage. The following is an excerpt from an article that I wrote for the Action America web site in 1998 (after several updates, it was removed a few months ago, pending a complete rewrite). In the example, I deal with a US citizen vs. a foreign national, though similar tax penalties exist for US companies who have to compete with foreign companies.

The Citizenship Penalty

US citizens are at a decided disadvantage when competing with foreign nationals in a similar business. Non-citizens (foreign nationals) can run their profits through an IBC (International Business Corporation) in a country that does not tax investment income, get a Green Card and live in the USA if they choose and only report and pay tax on US earnings, while US citizens must also report and pay taxes on almost all types of offshore earnings, as well. This is yet another reason why many wealthy Americans are leaving the USA and renouncing their citizenship. The following simple model is used by thousands of foreign nationals to undercut US businessmen and still make a healthy profit.

A Case Study

Let's look at two people running the same type of business. The first person is a US citizen. We shall call him Joe. The second person is a foreign national with a Green Card. We shall call him Jose. Both people buy and sell products in the USA. In our case study, both people buy 1000 widgets from Apex Widget Corp. in the USA, at a cost of $500,000. Both people sell their widgets to Ajax Thingamajig Company in the USA for $1,000,000. Both people recognize a $500,000 gross profit before taxes. Let's assume a reasonable 25% of sales price ($250,000) for marketing costs and another 5% ($50,000) for overhead, creating a total cost of $300,000. That brings the total net profit before taxes to $200,000. No matter how he structures his company, Joe must pay taxes on $200,000. Yet the foreign national, Jose, legally only pays taxes on $5,000. Lets look at how this can happen.

As stated above, Jose's citizenship is from another country. Remember that the USA is one of only two countries arrogant enough to tax the offshore income of its citizens. Jose forms an offshore company, Jose International, in a country that does not tax businesses income. He also forms a US company, Jose USA.

Jose Int'l. (Jose's offshore company) buys widgets from Apex for $500,000 and sells them to Jose USA (his US company) for $695,000, recognizing a $195,000 offshore profit. Jose USA, then sells the widgets to Ajax for $1,000,000, recognizing a $305,000 gross profit, which after marketing and overhead, calculates to a $5,000 net US profit before income tax. Now, this is important. Although Jose has recognized the same total $200,000 pre-tax profit as Joe, as a foreign national, Jose does not have to report or pay tax on the $195,000 offshore income from Jose Int'l. Joe, on the other hand, being a US Citizen, must pay tax on the full $200,000 profit, even if he sets his companies up in the same way as Jose. So you see, since Joe is a US citizen, he must pay what amounts to a Citizenship Penalty, in the form of taxes on his offshore income. Now these numbers can be tweaked with expenses, different tax rates and such, but the effect remains the same.

The following table demonstrates where the profits go and how the foreign nationals have a decided tax benefit. In this example, Joe USA (light blue background) is the US owned company. The two Jose companies (pink background) are as described in the previous paragraph.

	Apex Expense	Sale to Jose Int'l.	Sale to Ajax	Less Expense	Taxable Income	US Taxes (~ 38%)	Net After Tax Profit
Joe USA	-$500K	(NA)	+$1,000K	-$300K	$200K	$76,000	$124,000
Jose Int'l.	-$500K	+$695K	(NA)	$0	$0	$0	$195,000
Jose USA	(NA)	-$695K	+$1,000K	-$300K	$5K	$1,900	$3,100
Citizenship Penalty on $200K Profit					>>>>>	$74,100	<<<<<

On a deal that netted both Joe and Jose $200,000, before taxes, the US citizen, Joe, effectively had to pay a $74,100 US Citizenship Penalty (assuming that both Joe and Jose are taxed at 38%, a number that varies year to year). This reduces Joe's net after tax profit to only $124,000 while Jose recognized a net after tax profit of $198,100. With such an advantage, the foreign national, Jose, can reduce his selling price the next year, either taking away Joe's customers or forcing Joe to cut prices so low that he cannot afford to stay in business. Of course, after Joe closes down operations, Jose will raise his prices again. Also, since Jose's US income is very small he will likely pay an even lower tax rate, thus increasing the effective US Citizenship Penalty to Joe.

This is not just something that I dreamed up or read about. Since I am in the Import/Export business, you could say that I am Joe and that I personally know several Joses. According to the foreign nationals that I know who are structuring their business like this, there are a few hoops to jump through in order to stay legal in every country. But, there are so many people doing this, that offshore attorneys can structure such a package in just a few minutes.

But, here is the kicker. There are thousands of foreign nationals using this type or similar types of strategies to great advantage and the numbers that we are talking about are not $200,000 or $1,000,000 as in the example above. The amounts are in the TENS of MILLIONS of DOLLARS for each case. Do the math. That translates to BILLIONS of DOLLARS being legally sent offshore by foreign nationals every year. What's worse, we are seeing more and more, that many of the foreign nationals engaged in this type of business are (you guessed it) US EXPATRIATES... Big surprise!

Our tax system is the real culprit here. Since we cannot tax foreign nationals on their foreign income, it would seem that the obvious answer to the Citizenship Penalty is to allow US citizens to exclude offshore income from taxation, as almost every other nation does. But, even this fix would only eliminate the Citizenship Penalty and would NOT solve the real problem of wealthy citizens leaving and taking ALL of their wealth out of the USA. The only thing that will stop that exodus is an equitable tax that gets the government out of our personal business, rewards US investment and does not attempt to punish the wealthy for their wealth.

At this time, the only such tax system even being discussed, is the National Retail Sales Tax (NRST). In fact, surveys have shown that the NRST would not only stop this exodus, but would actually reverse it.

As I mentioned above, the same kind of penalties demonstrated here, incur to US owned companies, who must compete with foreign owned companies that sell within the US.

It's the PENALTY that you pay for being a US citizen or a US corporation.

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