Posted on 02/24/2003 1:38:02 PM PST by Willie Green
For education and discussion only. Not for commercial use.
VICO Technologies was going strong at the start of 2000.
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.
A year later the company was out of business, and 260 people were out of a job.
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.
Many industries suffering
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."
The multiplier effect
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.
Trying to compete
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.
Everyone knows Joe doesn't pay taxes, Joe's company only collects, then remits the taxes. < /sarcasm >
Sarcasm aside, Joe's company, being a distributor (middleman), does not even collect taxes.
Using the nst logic, If you eliminate Joe's taxes...
You can't eliminate Joe's taxes. You only shift them to Joe's consumption side. But, what you do accomplish is to tax Jose at the same rate as Joe, thus eliminating the Citizenship Penalty.
and IF he lowers his prices accordingly his net income/profit would be the same as now.
True. But, you miss the point. Since Joe could reduce his prices under the NRST, he could compete with Jose, who would no longer have that huge income tax advantage. In fact, Jose would be paying additional taxes, under the NRST, since he would pay that tax every time he makes a retail purchase (just like Joe).
I used the example of a sole proprietorship distributor to make it easier for everyone to understand. But, I see that even that simple example was over the head of some folks.
under your NST ... the labor intensive service industries would have to (if they could) RAISE their prices 30% if they wanted to offset the new tax...
DUH!
Since a large part of a service industry's costs are employment taxes, the elimination of employment tax under the NRST, would enable them to reduce their prices even more than non-labor intensive businesses. Now I understand why you failed to grasp the very elementary example that I presented earlier.
"Citizenship Penalty"
Have I your permission to use this phrase in my presentations? I really like the image it conjures up.
Certainly. In fact, it is a term that we should all be using. All that I would ask is that when you use that term, you attribute the source.
I am currently completely reworking the original article, "Infernal Revenue", that contained the section that I quoted. I updated it several times, but so much has changed since I wrote the original article in 1998, that updates were just not enough, so I pulled it and I am reexamining every part of it for accuracy. I will repost it on Action America as soon as I can, though that may be a while, since my business endeavors are currently taking much of my time.
Incidentally, when I first wrote "Infernal Revenue" and the most popular article on Action America, "Tick-Tick-Tick - The Economy Bomb", I was firmly entrenched in the middle class. Even so, I have often talked about the threat represented by attacking the top 1% and top 5% of income earners. That's because, being involved with several international ventures over the years, I have had occasion to encounter more than a few very wealthy US expats and have found that their stories are all the same. They didn't flee the tax burden, they fled the RISK that the IRS represents, for even squeaky clean, law abiding citizens. That same RISK is why many companies have already left and many others are positioning themselves with overseas operations, to be prepared to leave. Fortunately, I have moved up the income ladder significantly since I first wrote those articles, but their truths are just as valid today, as they were then. In fact, though I am still not among the ultra-wealthy, I am in a much better position today, to validate the facts in those articles. The wealthy are leaving and they have good reason.
Of course they do and it's NO accident that they are being forced out by this COMMUNIST INSPIRED income tax system Americans labor under!
As usual, the article is SPOT ON!
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