The Red Scare

American manufacturers are raising a hue and cry about supposedly unfair competition from a new Asian rival, China

Newsweek International, August 11, 2003

Tom Hopson runs the last American-owned TV factory: Five Rivers Electronic Innovations in Greeneville, Tennessee. All the others have been killed off or bought out by Japanese competitors, and now Hopson says his plant, too, is near extinction due to a new Asian rival, China.

The threat became clear to him one day earlier this year, when he saw an Internet ad for one of his projection TVs right next to a Chinese-made model listed for $100 less.

Later a customer—Five Rivers assembles TVs for brands like Philips and Samsung—threatened to stop using his company unless it matched Chinese prices.

“We can’t understand how they’re cutting the price so low,” says Hopson.

In May, Five Rivers joined a petition asking Washington to slap tariffs of up to 84 percent on Chinese and Malaysian TV makers for allegedly dumping sets below cost. A ruling is due in October, and Hopson says he has to win, or his factory will be out of business by next summer.

This is not the first time American industry has raised the alarm about rivals from the East. In the late 1980s, the rise of another Asian economy scared America into believing it was doomed to be the world’s second superpower—and fueled a cottage industry of best sellers and magazine covers about Japan’s rising sun.

Now most of America is focused on terror, but within manufacturing industries, managers and workers alike see China as far more scary than Japan (or its copycat, South Korea) ever was. They say the Chinese are cutting prices much more dramatically, and seizing U.S. market share more quickly—yet also far more quietly—across a broader array of industries than any other competitor has before.

The backlash is now in full steam, driven in recent months by explosive growth in the U.S. trade deficit with China, which totaled $44 billion for the first five months of 2003, up 27 percent from the previous year. Since May, companies and unions in businesses from bedroom furniture to luggage, textiles and machine tools have all appealed to Washington to step in and stop “unfair” Chinese competition.

Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers, says calls about China from his 14,000 member companies have been doubling every month for the past year. “For our smaller member companies, China has become by far the No. 1 trade issue,” says Vargo. “It’s all they want to talk about.”

However, bald protectionist tactics like tariffs and quotas run counter to the free-market fashion of the age. So the focus of U.S. protests has shifted to the state-controlled and artificially low price of the Chinese currency, the renminbi, which makes Chinese products far cheaper in the United States.

This tactic has gained allies on Capitol Hill, where New York Sen. Charles Schumer and Illinois Rep. Don Manzullo are leading a push to get the Bush administration to demand the floating of the renminbi. Officially, the administration supports more flexibility in the exchange rate, but it is not lobbying Beijing with enough urgency to satisfy U.S. manufacturers.

They say time is running out. “There’s not a day that goes by that [China] is not the centerpiece of conversation,” says Edward Tashjian, vice president of marketing for Century Furniture, which plans to join the drive for protection.

Trade barriers are falling fast under the deal that brought China into the World Trade Organization in 2001. U.S. textile manufacturers say the scheduled end of textile quotas in January 2005 could spell the end for their industry. “We’ve got to put political pressure on this administration, or we’re not going to survive the removal of quotas,” says Cass Johnson, senior VP of the American Textile Manufacturers Institute. “We’re literally transporting our manufacturing sector to China.”

The numbers are striking. Imports of Chinese and Malaysian color TVs leaped to 2.7 million units in 2002 from 210,000 in 2000, according to the International Trade Commission’s preliminary investigation in the Five Rivers case. Imports of wooden household furniture from China rose from $1.14 billion in 1999 to $2.89 billion in 2002. Imports of man-made-fiber luggage from China surged 262 percent in the year ending May 2003.

Kate Bronfenbrenner, director of labor-education research at Cornell University’s School of Industrial and Labor Relations, says calls are flooding in from small manufacturers asking for the latest data on U.S. production moving to China. “You can feel the panic there,” she says.

Of course, they’ve felt this before. Japan at its peak bought big swaths of the United States, including all the surviving TV factories other than Five Rivers. But the Japanese soon stumbled, and experts like William Overholt, author of “The Rise of China,” say competition has made the U.S. economy stronger. “We don’t have a crisis,” says Overholt. “What we have is a gradual adjustment of our economy that has been making us rich for half a century.”

The decline of U.S. manufacturing has been underway for decades, says Dan Ikenson, a trade expert at the Cato Institute, adding that the current protests have a “Chicken Little” feel similar to the one that accompanied the anxiety about Japan.

Such talk gets manufacturers hot under the collar. “Go down to North Carolina and talk to manufacturing workers,” says Johnson. “These guys are in terrible shape.”

While the Japanese might have undercut prices by 20 or 25 percent, the Chinese are undercutting them by 60 or 70 percent in some markets, says Vargo. China also has a much larger supply of workers, and weaker protections for labor and the environment.

“When you’re talking about Japan, you’re not talking about slave labor, you’re not talking about child labor and you’re not talking about sweatshop labor,” says Bronfenbrenner. While Japan rose to power in select industries like automobiles, China is rising in everything from textiles to computer chips. China can also launch new industries at an astonishing speed, says Vargo, like power tools, in which he says Chinese production boomed by as much as 1,000 percent in the past year. Says Vargo, “China can go from 0 to 60 almost overnight.”

The manufacturers are preparing for political battle. Their demand for a stronger Chinese currency and punitive tariffs would mean higher prices for American consumers and other businesses. New tariffs would also further undermine U.S. global leadership on free trade at a time when George W. Bush is already accused of hypocritically protecting steel and agriculture.

Now the manufacturers are threatening to make the China scare an anti-Bush issue in next year’s congressional elections. With pressure on Washington to hold the line on free trade, expect a hot fight.