Tuesday, July 24, 2012

Don't Sweat the Small Stuff ... Made In China or Bought in Canada?

The Olympic clothing story and Chinese versus American manufacturing is both a new and old story. But is it a big story? Well, that depends on how we choose to look at it.

Maybe there's a much bigger one brewing after Monday's announcement about a huge proposed Chinese purchase of Canadian energy assets. Cnooc's Deal for Nexen Is China's Biggest Foray Abroad says something to us, or at least may, about the Keystone Pipeline Project in the U.S.  At least that's the way I see it.

 The Oil Story

"BEIJING—Cnooc Ltd. unveiled what would be China's biggest foreign acquisition yet, as the Beijing-controlled oil company on Monday said it struck a $15.1 billion blockbuster deal to acquire Canadian energy producer Nexen Inc. 

If completed, the deal would mark China's most significant move yet to secure supplies of oil and natural gas to feed its rapid growth, especially in potentially fruitful but technically complex areas such as shale gas and oil sands. It would also underscore how the increasing flow of investment capital from China to the rest of the world is transforming markets ranging from energy and other commodities to real estate and art. . . .

In recent years, Canada has warmed significantly to China. Canadian Prime Minister Stephen Harper has recently ratcheted up his courtship of Beijing. The move coincided with a decision by the Obama administration to reject a key oil pipeline expansion that would boost crude exports from Canada to the U.S. Canadian officials and industry executives were stunned, after spending years lobbying for the line. While the decision on TransCanada Corp.'s Keystone XL line was seen as a political one in Washington—and Canadian officials say they believe it will ultimately be approved after the U.S. presidential elections—it triggered a fresh push to send oil and gas westward to Asian markets.

Currently, pipeline executives are pushing two big new projects to ship oil to the West Coast."

Could it be that with respect to the Keystone Pipeline, our friendly neighbors to the north will simply tell us that "if we don't build it, they won't come." Oh well, let's talk about more important stuff like Olympic uniforms and where they're made. After all, we have to get our priorities straight. Right?

Looking at the priorities of our hard at work politicians, the uniforms story is a pathetic one. Don't these people have anything better to do with their time? Oh, I almost forgot. It's election season, and the pols believe We the People are pretty dumb.

Does It Matter China Made the U.S. Olympic Uniforms? makes the silliness political gamesmanship point very well:

"In a perfect world, here's what Sen. Harry Reid and Rep. John Boehner might have said when confronted last week with the revelation that China stitches together U.S. Olympic uniforms:

"Small potatoes. Call us back after we've fixed the deficit, the economy, Iran, and our real problems with China."

But no such luck. Democrat Reid said we should "burn" the clothes. Republican Boehner said, "They should have known better." Several senators this week spent their time, and the public's money, introducing the "Team USA Made in America Act," which would require that future Olympic uniforms be made—guess where.

Election seasons often bend sensibility, and this year is no different. Populism gets votes. It also distracts from tackling the big China issues that actually matter to U.S. business: protection of intellectual-property rights, market access, forced transfer of U.S. technology to China, and the ability of China's state-owned enterprises to crush competitors. These days that agenda is largely on the back burner.

Says an executive with a U.S. manufacturer that has operations in China: "The comments reflect either a lack of understanding of comparative advantage and how trade works (the Chinese are really good at producing low-cost uniforms, the U.S. is really good at innovative technology and advanced manufacturing—which would you rather be?), or cynical politics. More likely both.". . .

It's "grandstanding," says another manager with a tech multinational. "There are far more important bilateral business and trade issues for both countries."

The flap over the uniforms has a lot to do with America's fraught relations with China—a sense that the U.S. is losing the race to this commercial juggernaut. Ask the average man on the street what percentage of what we buy in the U.S. is made in China—including those Olympic uniforms—and you'll probably get estimates well into the double digits.

And yet researchers at the Federal Reserve Bank of San Francisco calculate that in 2010 goods labeled "Made in China" accounted for just 2.7% of U.S. personal-consumption expenditures on goods and services—all the things we buy in a given year, from cars to clothing to health care. (Services account for about two-thirds of our spending and are chiefly produced locally.)

U.S. businesses transport, sell and market those Chinese goods. Strip that value out, and the percentage attributed to the actual cost of Chinese imports drops to just 1.2%. Products that are made in America also sometimes include made-in-China components. But when the researchers added those components into their calculations, the final figure inched up to just 1.9%.

"Although globalization is widely recognized these days, the U.S. economy actually remains relatively closed," the researchers said in their report. "The vast majority of goods and services sold in the U.S. is produced here."

China can clearly make clothes and Olympic uniforms more cheaply than we do in the U.S. That said, Ralph Lauren used employees in America to design the uniforms. And if the San Francisco Fed's calculations are correct, more than half of the value of any public sale in the U.S. of the made-in-China clothes will flow to American companies.

"Across the business community there's a recognition that we need to talk about trade in a more sophisticated way—that global value chains can't be boiled down to three words: 'Made in China' or 'Made in America,'" says John Murphy of the U.S. Chamber of Commerce. . . .

This assumes, of course, that America can get past the critical issue of who should sew our Olympic duds."

My Take

U.S. politicians should spend their time addressing what urgently needs fixing in our economy.

And one of the top one thousand issues needing to be addressed is not where our Olympic uniforms are made.

In no particular order of importance, a few suggestions for topics where they could more productively use their time are the following: energy independence, postal operations, Solyndra type investments, cronyism in government spending, entitlements and transfer payments like Social Security, Medicare and Medicaid, public education, the tax code and encouraging private sector economic growth to increase employment.

Of course, these important things are not even a serious part of the political discussion this election season. Instead we're focused on the evils of capitalism, more government stimulus, same-sex marriage and why our Olympic uniforms aren't made in America.

Isn't our dysfunctional U.S. political system more than a little sick? And becoming a little more irrelevant each day as well?

Thanks. Bob.

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