Notes on Ethos Debate Interview on Stoa Trade Topic

So Chinese companies pay a duty on the furniture they produce, ship, and sell to American consumers. That duty (hundreds of millions of dollars) is paid out to American furniture companies (the article above is about a legal dispute over which U.S. companies are to receive the payoffs).

An NPR segment from last summer tells the story of Factory Man, on:

the collapse of the American furniture industry and its human cost in her new book, Factory Man: How One Furniture Maker Battled Offshoring, Stayed Local, and Helped Save an American Town. 

She profiles John Bassett III, a determined owner who fought back against the foreign onslaught — both by filing anti-dumping charges with the U.S. International Trade Commission against Chinese firms and by making his own company more competitive.

A Slate article tell this story in “How Asian Companies Took Over the U.S. Furniture Market—Before One Virginia Man Fought Back“

They make it sound like a war story of “battling offshoring” and fighting back “against the foreign onslaught.” But who is missing from this picture? For one, U.S. consumers who appreciate the opportunity to purchase lower-cost furniture.

The article notes that in response to competition from Chinese furniture imports:

One of the things that Bassett did was they re-engineered their furniture so that they could make it cheaper. Actually, they cut their costs by a third to keep up with the deflation that was going on in the industry. 

So international competition led to a one-third cost reduction in U.S.-produced furniture, at least from the Bassett company. That’s one benefit from international trade in furniture.

Still furniture from China captured more market share, and U.S. factories closed, laying off workers: “An estimated 300,000 workers lost their jobs in furniture and related industries.”

Swedish company Ikea has been another source of competition, offering low-cost furniture (with some assembly required), as explained in “How Ikea Became America’s Furniture-Selling Powerhouse.”

Millions of American consumers benefit when the cost of new furniture falls. They enjoy more furniture, and/or have money left over to purchase other goods and services, when they are able to pay less for the furniture they desire. But consumers’ gains are disbursed while producers hurt by imports are concentrated and willing to lobby congressmen for import restrictions, and file complaints with the Commerce Dept.

Back the Ethos Debate interview, where I discuss “the blob,” the deeply interconnected economies of China, Japan, South Korea, Taiwan, and the U.S. Apple computer provides one example. Nearly everything about the consumer experience for Apple products in the U.S. is positive (except perhaps the price).

News stories about the actual production of Apple products are not so positive. The design stories are upbeat, with Apple’s Jony Ives explaining how each new product features innovative manufacturing processes and cutting-edge materials.

Actual manufacturing of iPhones are managed by Foxconn, a Taiwanese company employing 1.4 million in its Chinese assembly plants. This April 15, 2014 Re/Code article “Where Apple Products Are Born: A Rare Glimpse Inside Foxconn’s Factory Gates” provides a look into one Foxconn factory that assembles iPads and Macs.

The 1.4 mile-square Longhua complex, with its 140,000 employees, speaks to Shenzhen’s identity as a global manufacturing hub. The city, once a fishing village in the Pearl River Delta region, was designated as a special economic zone in 1980. Its population swelled from 30,000 to more than 10 million as rural workers migrated to the fast-growing city in search of opportunity.

News stories emphasize Foxconn employees work long hours for low pay and the sophisticated Apple products they assemble enjoy high profit margins. These stories seem to emphasize the unfairness of the whole arrangement. Why not just pay workers higher prices, or reduce their hours, or both?

Foxconn has raised wages over the years, as worker and factory productivity has increased, but paying higher wages without productivity gains, translates to charging Apple more for assembly, and Apple charging higher prices to consumers. Apple prices already seem high to most, and each increase reduces quantity demanded, which reduces orders from the Foxconn factories, which will reduce employment.

You could ask Apple to reduce its profit margins, allowing some combination of higher wages at Foxconn and lower prices to consumers. But that leaves Apple with less margin to invest in research and development, lower pay for its employees, or less return to Apple stockholders.

The other question to ask is why workers in China are willing to work for such low wages, and live in drab dormitories. The answer to that is poverty. China is still a mostly undeveloped country with hundreds of millions living in or near impoverished rural villages. The path out of poverty continues to be working long hours in factories producing goods for the world, and increasingly for China’s emerging middle-income consumers.

Here is an interesting “infographic” with notes and numbers on Apple iPhone production. The biggest factor blocking assembly in the U.S. seems to be the high federal tax rate.

For negatives responding to affirmative plans claiming to boost U.S. manufacturing jobs, the difference between a 2% tax on overseas profits and a U.S. corporate tax rate of 35% looks pretty significant.

Plus, even with much manufacturing and assembly overseas, these jobs help keep costs down which in-turn helps support some 600,000 jobs in the U.S.

As China’s economy grows and average income in developed provinces increases, that is good news for American companies.

This April, 2015 Bloomberg Business story about Apple, “Apple IPhones Sales in China Outsell the U.S. for First Time” explains:

“The progress we’ve made in China has been remarkable and we continue to make incredible investments in China,” Maestri said. “The growth rate in China is significantly higher than most parts of the world. In the short-term, we don’t expect China to become bigger than the U.S. but over the long arc of time, you could certainly draw that conclusion.” 

The success of the iPhone in China along with last week’s rollout of the Apple Watch underscore the importance of Chinese consumers for Chief Executive Officer Tim Cook’s efforts to keep up sales momentum. Revenue rose 27 percent to $58 billion in the fiscal second quarter, topping analysts’ average projection for $56 billion, according to estimates compiled by Bloomberg. 

Cook said Apple is on track have about 40 stores in greater China by the middle of 2016, up from the current 21. He has also said China is poised to overtake the U.S. as Apple’s biggest market at some point.

This April 2015 study by George Mason University economist Don Boudreaux looks at the arguments of trade critics: “The Benefits of Free Trade: Addressing Key Myths.” The summary begins:

The most recent debate over providing the US president fast-track trade-negotiating authority raises the perennial catalog of questions and concerns about free trade. This is understandable: the benefits of free international trade are often diffuse and hard to see, while the benefits of shielding specific groups from foreign competition are often immediate and visible. This illusion fuels the common perception that free trade is detrimental to the American economy. It also tips the scales in favor of special interests seeking protection from foreign competition. As a result, the federal government currently imposes thousands of tariffs, quotas, and other barriers to trade.

In this three-minute LearnLiberty.org video, Don Boudreax explains free trade arguments, and uses Hong Kong as an example of the success of free trade policy: