American Manufacturing can not be Competitive

Headlines in newspapers continue to report on the expanding dispute between the USA and China over China's relatively low valuation (peg) of the Renminbi to the dollar.

American economists and politicians see China able to offer cheaper products to a large extent because the Renminbi is pegged to low to the dollar.

Economist Paul Krugman in a New York Times opinion article is advocating taking strong action:

“But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 per cent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 per cent.”

Paul Krugman is no ordinary economist – he is a 2008 Nobel Prize recipient for his work on international trade.

Part of the problem is the straight jacket the dollar must operate. At one point in time, having the American dollar being the world's reserve currency must have been a good idea – but in 2010 it prevents the dollar from finding its natural level, or for the USA central bank (Federal Reserve) to manipulate the dollar's value because its effect on the whole international trading system which is based on the dollar.

But even if the dollar / Renminbi exchange rate could somehow be reset at a different level, American manufactured product exports will not substantially increase.

Economists are not skilled in industrial production. They have read a few books, and a few like Paul Krugman have won a Nobel Peace Prize in economics. It does not make them experts on manufacturing.

The real problem causing the trade imbalance has been caused by American laws. Consider the effect that USA laws have placed on American business trying to compete internationally:

1. The cost of labour in America can be double the amount paid to the worker due to employment laws. As an example, the new health care legislation in the USA greatly increases the cost to employers of having an employee. There are many tax laws in the USA were the employer is required by law to pay costs on behalf of their employees.

2. An American company does not get the tax money back they paid to the government for a product they export. Most other major exporting companies reimburse taxes collected for exported products.

3. American law allows workers to shut down business and industry regardless of its impact to the health of the country, or agreements with its clients. Laws restrict worker replacement during a strike.

4. Even though workers will work for less money, the government has set a very high minimum wage. This places an artificially high wage for workers, and makes production of products requiring low skilled workers much more competitive outside of the USA.

5. If a company has assets (like a manufacturing plant) inside of America, and a consumer has been hurt by that product – they can go to court and force the company to pay them money (in many cases a lot of money). If a company has no presence in America and somebody gets hurt – the consumer has no way to get money from the company.

To protect themselves, American manufacturers must purchase expensive insurance which depending on the risk represents a sizable percentage of sales. Imports therefore have an advantage as they do not need to pay for product insurance.

6. If a consumer outside of the USA is hurt by an American product, they can get damages in an American court. This adds to the cost of American companies in exporting products – or in their operations outside of the USA. Other countries do not allow litigation for events which occur outside of their own country.

7. American laws have forced export of even basic research. Environmental laws are very strict and cause special handling / costs in handling research materials and their disposal. Religious based laws prevent study in several areas of bio research. Use of animals in research are restricted – and public activism further restrains even legal research. If research is not done inside of the USA, it is unlikely production will occur in the USA either.

8. Americans are criminally and civilly liable for acts which are against USA law even if the act occurred outside of the USA. American companies are held to a higher standard which makes them less competitive then their foreign rivals.

The bottom line is American business has been handicapped by the American government. The politicians have made American manufacturing non-competitive – not the Chinese pegging their exchange rates.

American's are lucky that their country is resource rich, and have some of the most fertile conditions for food production. Their productivity continues to grow at rate which mitigates some of the constraints of the government's laws.

If America wants to compete internationally, they must first make laws which create advantages for American business.

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