Manufacturing and Trade Learnings from COVID-19

Blue Collar Dollar Institute
August 18, 2021

COVID-19 Proves Why We Must Manufacture our Own Health Products

As Americans fight to overcome this novel virus, I can’t help but focus on the irony in the US governments bailout plan.  Would you, as a taxpayer, prefer a good paying job in the manufacturing sector over low paying service jobs that require stimulus of this size?  Mind you, China’s average wages have grown 11% each year since they joined the WTO in 2001 – while US wage growth remains stagnant.  Additionally, our ballooning trade deficit with China has, in total, cost us 23 million jobs at an average of $80,000/job.  This truly has brought to light a critical lesson about our domestic economic dependence on China and many others for crucial manufactured products. Now seems to be the right time to begin not only social distancing, but economic distancing, from the PRC.  With a crisis of this scale, it is hard to defer judgement of fault.  According to Axios, if China had acted just three weeks earlier to contain the virus, the number of Coronavirus cases could have been reduced by 95% and its geographical spread limited.  Liability aside, this historic shutdown of global economies proves what many have been saying for years – free trade simply does not exist.  Just weeks ago, the major buzz surrounded US-China trade talks and the tariffs placed on various Chinese exports; today, lawmakers are debating tariff removals, arguing that it would be a simple way to help business’ and consumers during this trying time.  If this virus has taught us anything, it has proven that we must be harder on China and other foreign competitors than we were just weeks ago.  We can also learn a lot from the Chinese, who place an incredible amount of trust in their government to take care of them, provide livable wages, and carry them through crisis’ such as this.

One of the most telling areas of dependence is seen the U.S. Pharmaceutical Industry.  Most Americans, especially prior to this pandemic, had no idea that 97% of antibiotics distributed in the United States are imported from China. The Defense Department indicated that although the U.S. does not important finished goods, 80% of the finished good is imported to the U.S. for final production and distribution. Last year alone, China accounted for 95% of U.S. ibuprofen imports, 91% of hydrocortisone, 70% of acetaminophen, 45% of penicillin, and 40% of heparin. The Chinese government has threatened to cut off America’s access to vital drugs in the midst of this pandemic, pushing lawmakers to introduce legislation to curb our “drug dependence” with China.  97% of the US imports of plastic disposable gloves come from China.  As the pandemic continues to threaten the US, the most recent delivery of medical-grade N95 masks arrived from China about a month ago, on Feb. 19. And as few as 13 shipments of non-medical N95 masks have arrived in the past month — half as many as arrived the same month last year.  This very situation brings me back to a trying time for our nation, when we decided to stop selling oil to Japan, which brought about WWII.  Senator Tom Cotton and Congressman Mike Gallagher introduced a bill called, “Protecting our Pharmaceutical Supply Chain from China Act,” which would ultimately end U.S. dependence on China’s pharmaceutical manufacturing sector.  Our government must offer incentives to domestic pharmaceutical manufacturers in order to bring production back home, and in turn, create more high paying jobs domestically. More importantly, we must learn that proactivity is crucial to the welfare of our country, and waiting around to fix our broken trade agreements should no longer be an option.  Bringing back critical manufacturing, at the very least, would offer skilled labors, and those without a college education, the opportunity to live in the middle class with wages 3x higher than that of the retail industry.  Not only would this move allow us to be dynamic in the midst of a crisis, but it would also allow us to rebuild the rust-belt and revitalize the inner-city communities through higher paying, predictable income streams.

It is in times like these that we must focus on products the United States imports from China that are crucial to our national security, welfare, and economic prosperity.  In a study done by the United States Geological Survey found that the US produced no rare earth minerals in 2017, while China accounted for 81% of global mine production.  Rare earth minerals are crucial to our nation defense and economic prosperity, seeing that they are necessary components of magnet’s, radar systems, and various consumer electronics.  In 1950, the Defense Production Act became law, allowing the president to incentivize domestic producers of critical materials through purchase commitments and other guarantees. This very law begs an important question; does the law itself indirectly admit that we knowingly allow the outsourcing of production in critical materials, and by default, put our country at a dangerous disadvantage come times like these?

Other types of manufacturing, such and shoes and textiles, have long been dominated by the Chinese.  Former Macy’s CEO, Terry Lundgren told CNBC that 90% of all footwear under $100 at retail are coming out of China.  Data like this shows our need to diversify our cost savings strategies, and implement programs to incentivize American Manufacturers in the production of goods.  The United States imports 98-99% of all footwear sold domestically each year.  In 2018, the US imported $186.5B worth of computers and electronics from China, $50B in electrical equipment, $39B in Machinery, and so on.  At the same time, the US exported only $18B in computers and electronics to China and $11B in Machinery.  In 1999, China produced under 500,000 cars while the USA produced nearly 6M.  Fast forward to 2009, China produced 10.5 million cars, while the USA produced only 2.1 million.  The automobile industry provides some of the highest paying jobs in the manufacturing industry, and we once were the leader.  I think it is fair to say that Henry Ford would be very disappointed in the direction the USA is headed.

In order to bring back manufacturing to the United States, we need to take a hard look at the way China and other foreign competitors manipulate their currency.  Japan, followed by China, are the largest holders of US government debt, north of $1T, which they use to support a higher US dollar.  Because China pegs their currency to that of the US dollar, it is in their best interest to see a highly valued dollar.  The years 2000 to 2010 saw China accumulating currency account surpluses of $1.8 trillion, while the United States accumulated global trade deficits of $7.6 trillion. During the same period, nearly 6 million American factory workers lost their jobs, a loss larger than what was seen during the great depression.  Since 2000, manufacturing output has expanded at a rate of 12% of that of the private sectors growth.  Without computers, manufacturing real output has only grown .2%/year since 2000, even though we are led to believe that manufacturing is still growing robustly. A 2017 study done by Douglas Campbell showed that the US dollar saw a sharp appreciation in 2000 relative to our low wage trading partner, China.  The ensuing increase in foreign imports and weakening demand for US exports resulted in a loss of around 1.5M manufacturing jobs between 1995 and 2008.   The Peterson Institute indicated that the devaluation of Chinese currency has resulted in an increase of the U.S. trade deficit by, on average, $200-$500 billion each year.  A lower valued currency would allow the US to be more competitive as exports are priced in dollars, immediately increasing the cost of exportation for our foreign competition.

Furthermore, it is imperative that the US government offers incentives for US manufactures, much like our foreign competitors do, in an effort to retain domestic production of goods.  This could include, but is not limited to, tax incentives such as 200+% depreciation for plants, property, and equipment as well as direct government funding and subsidy of certain critical manufactured goods that otherwise would be produced overseas. We must take note of the actions taken by countries like China to preserve and grow their domestic dominance in manufacturing.

We must explore our options to stop currency manipulation, which could include the taxation of interest and principal of foreign debt holders, or reciprocal currency intervention, something currently impossible as China implements capital controls to prevent foreign buyers of their currency. Yet another method of getting WTO jurisdiction exists. The United States would have to persuade a judge that currency manipulation presents an unfair ‘de facto’ trade subsidy, as it props up its own manufacturing interests. A country could thus employ the WTO’s dispute resolution system by looking to the General Agreement on Tariffs and Trade’s language on subsidies.

Investors much like myself have been waiting for an opportunity to again invest in manufacturing.  In the current climate, between unfair currency values and foreign subsidies, it is impossible for domestic investors to put their dollars to work.  As everyone knows, investment in manufacturing brings thousands of high paying jobs to workers of all backgrounds, especially those without a college degree.  As of 2014, for every $1 of mfg GDP, $1.33 of economic activity is generated; compared to $.66 of economic activity generated from $1 of retail GDP.  It is time to incentivize US manufacturing with plans such as 200% depreciation on capital expenditures for new manufacturing facilities.