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It’s Free Trade, Not Fair Trade -- Let’s Level The Playing Field

By Michael Collins, MPC ManagementAmerica generally grants access to its markets, but American manufacturers don’t feel that other countries -- especially China -- play by the same rules or on a level playing field.

I want to begin by saying that, like most manufacturers, I believe in the free enterprise system -- which leads to the obvious conclusion that competition should be open. I am in favor of open markets, getting rid of tariffs and a general fairness in trading over time.

The United States is by far the most open country in the world in terms of free trade and fair trade. But the United States is also running a very dangerous trade deficit and, unlike all of its trading partners, can’t manage to balance its imports with its exports.

It’s not enough to simply set a good example for all of our trading partners since many of them don’t really offer free or fair trade to the U.S. like we offer them. A good example is China which is now our third leading trading partner.

In 2000, China was admitted to the World Trade Organization and trade barriers were dramatically reduced. We opened up our markets willingly to a Communist country in the hope that capitalism, in some form, would catch on with the Chinese. It has to a degree, but it appears that the Chinese have a different approach to capitalism than the West.

America generally grants access to its markets, but American manufacturers don’t feel that other countries -- especially China -- play by the same rules or on a level playing field.

Here are several specific areas of concern:

Manipulation Of Currency. Manufacturers have been complaining about currency manipulation by China for many years. They are talking about unfair exchange rates caused by China pegging the Yuan to the dollar. The exchange rates are set by government intervention rather than market forces, which lead to lower U.S. exports and stronger Chinese imports to America. American manufacturers have wanted the U.S. government to demand that competition and the market set the exchange rates rather then the Chinese government, but the U.S. has not taken a tough stand on this issue.

Legal Agreements. It is now obvious to most U.S. companies that the Asian view of business ethics is much different than ours. Even a signed contract may offer no protection. A report from the New York-based Conference Board suggests that outsourcing is not living up to its expectations. The report says, “With an estimated half of all offshoring operations destined to fall short of expectations, companies are under increasing pressure to calculate the risks -- not merely the rewards -- that offshoring entails.”

These offshoring ventures are always based on some kind of legal agreement defining exactly how business will be done. But American companies are finding that the Chinese interpretation of agreements is much different than American “Rule of Law” assumptions. The Chinese view agreements as general outlines that may change with time and circumstances. Therefore, many American companies are into litigation over their agreements with the Chinese.

Trademark Laws And Intellectual Property. Intellectual property is a big issue when dealing with China and the Asian Pacific region in general. Americans want the Chinese and other competitors to honor trademark laws. They want the same respect afforded to U.S. manufacturers that we show to them. Indeed, U.S. manufacturers indicate a willingness to compete in a global market, but they want to make sure that the ground rules are the same for everyone and that those ground rules are enforced.

As Frank Johnson of the Manufacturing Alliance of New Britain, Conn., says, “If a manufacturer in China can steal pictures from a Connecticut manufacturer’s advertising brochure and put them on their Web site and use the company’s trademark name to sell products in China, that’s not fair. We want fair trade. We understand free trade, but we want it fair trade.”

For U.S. manufacturers, protection of intellectual property is not an abstract concept. America’s competitive edge ensues directly from innovation and rising productivity. Intellectual property protection is the best means for ensuring that American manufacturers enjoy the benefits of their investments in research and development and their efforts to raise productivity

Pirating, and Counterfeit Parts. Copying, reverse engineering and even counterfeiting products are not unusual business practices in China. There are many variations of this theme. Most of the counterfeit parts come from rogue operators and there appear to be too many of them for the government to trace down. We have to face the fact that many Chinese and other Asian companies see counterfeiting, copying or even stealing technologies as a good business opportunity.

Counterfeit goods costs the motor vehicle suppliers alone about $3 billion per year which translates into about 250,000 fewer motor vehicle supplier manufacturing jobs, according to a Federal Trade Commission study. The same study shows that 80 percent of all pirated goods seized at U.S. borders originate in China.

Columbia Machine Concrete Products Division of Vancouver, Wash., had been manufacturing and installing complete concrete block plants for China for many years. Less than five years from the first installation, they found that many of their most popular machine models had been copied and manufactured by local Chinese manufacturers. In many instances these local manufacturers sold copies of the machines at one third of the American prices.

Brett Kingstone of Supervision International in Orlando, Fla., is a manufacturer of fiber optic and LED lighting products. A Chinese company set up office in Orlando and paid a Supervision employee to steal Brett’s engineering drawings and technology secrets. Brett began to lose various markets to the Chinese including the Asian market. He was finally able prove that the Chinese company had stolen his technology and subsequently won a $43 million lawsuit in the Florida courts. However, Supervision International has not received any payment from the renegade Chinese company and the U.S. Government has not been willing to help prosecute the case.

Tariffs taxes and subsidies. Legal counsel inside the country may be necessary to understand and anticipate all taxes and duties before an agreement is signed. For instance, in China there is a 17 percent value added tax on any product sold within its borders. Also in China, various government agencies can change regulations that can lead to additional costs or barriers to entry at any time.

A good example is a die cast tool company trying to compete in China. The owner says, “I can’t compete with the Chinese imports, and I can’t export my product over there. Bringing a die cast tool into the United States, the total taxes equal 3.9 percent. Bringing a die cast tool from the U.S. into China, the taxes equal 30 percent.”

The Chinese government says that any foreign supplier can apply for special permission to eliminate these duties and taxes by following the protocol of the local government. The problem, however, is that the Central government designs the rules and regulations but every local government has their own rules as well and they change them continuously. Navigating this maze of bureaucracy is difficult and expensive. You must have knowledgeable and trustworthy Chinese on your staff to succeed.

Manufacturers understand that tariff protection abroad is not only a barrier to its exports, but it also represents a means of subsidizing foreign manufacturers by limiting the competition they face. What most manufacturers ask for is not protection from international competition, but to level the playing field by lowering trade barriers abroad.

Leveling the International Playing Field

Terry Straub, senior vice president for government affairs and public policy for U.S. Steel, says the United States has a failed trade policy by almost any measure. “We [the steel industry] are a barometer of what will happen to other industries in the future,” he says. “There is rampant cheating going on in the system. We are playing by one set of rules, and China is playing by another set of rules, and that’s a zero-sum game. That is a trade policy that will not be able to sustain itself.”

The current administration has said they would undertake a number of significant initiatives to address these issues: an increased focus on intellectual property rights enforcement, heightened efforts to promote the adoption of U.S.-developed technical standards, focused efforts on enforcement and compliance (particularly with respect to China) and expanded export promotion activities. However, many American manufacturers believe that the federal government is not aggressive in defending the interests of American manufacturing in its international economy.

These manufacturers believe that we must get a lot tougher on enforcement and put a lot more pressure on the Chinese government. But the irony is that China is in essence our banker. Even though all of these issues need correcting or enforcement, remember that China is a major financier of the U.S. debt for the trade deficit. America is simply not in a good position to demand or negotiate anything on unfair trade practices. The only alternative may be to bring production back to the U.S.

Michael P. Collins is president of MPC Management, a manufacturing consulting company, and the author of the book, “Saving American Manufacturing.”