In Part I, we discussed the events that led up to America’s fall from manufacturing grace, but I believe that there are two underlying causes of those events that precipitated that fall: our tunnel vision regarding the dangers of too much off-shoring and our devotion to the notion of free trade.
For many free marketers and inveterate capitalists, free trade is more than a mantra; it is an economic way of corporate life that unshackles (some would say encourages) American companies to escape the laws of regulatory gravity and move about the world seeking the highest possible profit and the best deals.
At this point, it’s important to draw a distinction between free traders and fair traders. Free traders believe in a commercial world with few or no boundaries or encumbrances like tariffs and quotas. They believe in the free and unfettered movement of goods, services, capital and workers across international boundaries with minimal or no intervention from local, regional, national or international institutions. If free traders wore t-shirts, they would probably say, “Free traders do it anywhere, anytime, with anybody.”
Free traders are also aware of the historical baggage they carry from the days when oil and mineral cartels reigned supreme. They are used to hearing themselves called monopolists and capitalist pigs, but they cling steadfastly to their contention that world commerce could simply not function in a tightly regulated trading regimen. Despite that fact, they’ve allowed themselves to be controlled by international trade agreements and institutions like the GATT and the WTO.
Fair traders, on the other hand, subscribe to a different theory of world commerce, one that is constantly looking for a level playing field where no one country gains economic advantage or hegemony over the other. The problem with this philosophy is that “fair” is a subjective term that is more often defined by politics than economics. That’s why fair traders are always frustrated and spend an inordinate amount of time trying to rearrange and re-position the regulatory framework to equalize the opportunities.
Both free and fair traders have their share of proponents and detractors, and their ideological purity is constantly under attack by market forces, well-heeled companies, lobbyists and legislators not to mention special interest groups.
Trade pragmatists make up the third group. These are the realists, companies that understand the rules of global commercial engagement and live within them while they work to change them to their advantage. Trade pragmatists are not patriotic. Their loyalties are to their shareholders, not their country of origin, and that’s why much of their time is spent in trying to cut their manufacturing costs and shelter their profits.
Their raison d’être is survival, preferably survival at a higher level. It is precisely these companies that comprised the vanguard of the off-shorers, joined later by the free and fair traders that formed the perfect storm that led to vast unemployment and decimated opportunities for millions of American workers today.
Are they the only ones to blame?
The cartoon character Pogo said, “We have met the enemy and he is us.” Pogo was right; Americans are also to blame. That goes for organized labor, white-collar workers and consumers. Had we voted with our feet and insisted on purchasing more goods made in the United States, we might not be in the situation we’re in. I believe that most Americans are reasonable people, and when confronted with a purchasing decision that would save an American worker’s job or let it migrate overseas, they would choose to save one here.
The problem is that the choice has not been ours to make. Companies don’t survey their customers on where they would like their products manufactured, nor do they offer us a choice of the same products made in two different locations (one in the United States and one made overseas). It is basically a take-it-or-leave-it situation, and without an alternative, we are forced to take it.
I have a friend (we’ll call him Leonard) who is an experienced industrial designer and manufacturer of a line of outdoor barbecue items. Leonard has been manufacturing his assortment of products (Leonard’s Line) in China for the better part of a decade.
Like many other companies, he didn’t start out that way. Leonard’s Line used to be designed, manufactured and marketed by U.S. workers working for U.S. companies until, one day, he got a call from a major manufacturer that was private-labeling his line and selling it to a nationally-recognized discount retailer. The manufacturer started to pressure Leonard on price and on delivery times. He called his usual contract manufacturers and asked if they could make some product modifications that would cut some product costs and bring the products into the price range of the manufacturer and meet the stringent delivery times. He was told, “no,” they couldn’t.
Leonard got nervous. If he botched this order it could be his last with the nationally-recognized manufacturer and even harm his reputation with the major retailer (whom he was courting with other products under his own label). He could lose immediate sales and long-term ones as well.
Leonard did what hundreds of other American manufacturers would have done in a similar situation… he started looking abroad for a contract manufacturer. China was at the top of his list, and he made some inquiries and soon found himself on a plane headed for an industrial park there. A deal was worked out and Leonard’s Line became Leonard’s International Line.
After solving some thorny quality control and other manufacturing problems over a period of several years, Leonard’s Line has now become a 100 percent outsourced assortment of products with average yearly gross sales in the millions of dollars reaped from sales to major manufacturers and major retailers.
Where’s the value added?
Aside from the product design (which Leonard still does, himself), all other value is added in China. This includes product prototyping, manufacturing, packaging design and fabrication, point of sales displays, brochure design and printing, inventorying and shipping. All but a tiny percentage of the total costs associated with producing Leonard’s Line are added overseas, leaving no value for American workers to add until the products land in U.S. container ports, where they are off-loaded to American trucks or rail and begin their journey to the retailers’ shelves.
When discussing the situation, Leonard feels no guilt about off-shoring his line. He explained that, “If I hadn’t done so (gone offshore), I would have found myself out in the cold – just another rejected company by one of America’s largest retailers. Believe me, I love my country, but the last time I checked there was nothing patriotic about going bankrupt. Maybe someday I’ll design a line of exclusively American-made items, but I have my doubts. Most of the quality machine shops and efficient low-to-medium volume factories have closed their doors, and even if I opened my own facility I don’t know if I could find the skilled personnel to run it!”
Leonard’s story is typical of many American entrepreneurs who’ve found themselves dependent on the price points of major retailers and a market too used to those prices. While there is keen competition from companies selling directly via the Internet, potential customers still want to “kick the tires” and handle the products before opening their wallets, which should ensure that foreign-made products will stay on our shelves.
One thing is certain: The manufacturing paradigm has shifted, and if America’s companies want to compete they’re going to have to do it without much help from their government – or from America’s retailers.
We will never be able to completely go back to the way things were. Our only hope is to make American companies, consumers and the government aware of the consequences of doing nothing.
Stephan Helgesen is a former diplomat who served in 24 countries over a 25-year period. He is also former director of the New Mexico Office of Science and Technology. Today, he owns a high-tech consulting company and is the honorary consul for Germany in New Mexico. He can be reached at firstname.lastname@example.org.