(Article previously published in the July 2011 South Coast Market Update)
The loss of sovereign independence on this Independence Day
People across the United States gather early each July for barbeques, parades, and fireworks to celebrate the anniversary of the creation and adoption of the Declaration of Independence. In 1776, a full year into the Revolutionary War, our founding fathers sought to utilize the Right of the People to alter and abolish a government which they deemed destructive in order to manifest a society based on the inalienable rights to Life, Liberty and the Pursuit of Happiness.
It is not without some irony that today we as a society find ourselves on the eve of the 235th anniversary of this grand statement of independence, living in a country where we have become more and more reliant on the will of outsiders in order to keep the delicate fabric of our “free” society from coming apart at the seams. Each and every day as our budget deficits grow larger and larger, we as a nation are forced to reach out to the rest of the globe for support in a variety of fashions in an attempt to allow our citizens to continue their individual pursuit of those inalienable rights.
We seek funding for our healthcare, our retirement, and much of our day to day operations through the sale of US Treasuries. We also reach out to many of these same foreign nations for access to inexpensive goods and services to fund our desires for everything from cheap manufacturing for our businesses to the low-priced goods we yearn for as part of our collective pursuit for (short-term) happiness.
Regardless of whether you lean politically to the right or the left, you would probably agree that our nation is becoming more beholden to foreign governments each and every day and unfortunately is losing more and more of that independence with which our great nation was founded.
In light of this tectonic shift from self reliance toward foreign dependence, I’d like to highlight just one of the external parties that has been “kind” enough to bankroll our American way of life. I’d like to place a spotlight on the relations between the People’s Republic of China and the good ole US of A – though as you’ll soon see, the US is not China’s only “trading” partner that many of the follow issues affect directly or indirectly. I intend to provide a glimpse through the looking glass into five avenues with which China has created an unfair playing field for its global trading partners.
Chinese Currency Manipulation
For over a decade, China has dominated the trade imbalance with the US which has slowed our domestic growth rate and has been a root cause of our (structurally) higher unemployment. China would not have been able to control this trade dominance if it hadn’t pegged its currency to the dollar at an extremely undervalued, fixed exchange rate. This ultra-cheap yuan provides a nice little subsidy for Chinese exporters while imposing a large tax on US exports to China.
Opening up a new business can be a tremendous undertaking given that you typically must secure a home for your business, capital to cover start up costs and operations and a means of getting your goods and services out to their intended end-users. In China, the government provides entrepreneurs with access to free land, subsidized energy, and low or no interest loans (some loans don’t even have to be paid back). Once your enterprise is ready to export your goods overseas, the government provides you with a direct subsidy for every item you sell. Now that the income is rolling in, you’ll even be provided with some hefty income and property tax breaks.
Counterfeiting, Piracy & Theft of Intellectual Property
The Chinese entrepreneurs mentioned above also benefit from knowing they will not have to face any foreign competition in their own backyard. Foreign companies desiring to operate on Chinese shores have to develop joint ventures or partnerships with Chinese companies whereby the “outsider” assumes a minority interest and provides their intellectual property (IP) to the endeavor. The controls we have in place to protect IP in the states don’t extend to China and often times technology, designs, or processes developed (at great expense) in the US are taken by their Chinese counterparts at no cost and used to create a 100% Chinese controlled competitor.
Just imagine the advantage a company would have in the global marketplace if they did not have to spend 20% of their sales on Research and Development like Merck and Pfizer, or 15% in the case of Microsoft and Intel, or even 5% for companies like Ford and GM. Every dollar not “wasted” on innovation is a dollar less they can charge for that copycat product.
Profits Up – Environment Down
In the US, we currently have ongoing debates about policies like “Cap-and-Trade” because there is a general concern about the impact of our actions on the environment around us. In China, while on the surface there are strong environmental laws on the books, the reality is that their government has very little concern about any environmental damage so long as the profits continue to roll in.
Consider this, a chemical manufacturer or a steel company in the US must spend a considerable amount of working capital ensuring that they have appropriate environmental protections in place while their Chinese counterparts do not face the same scrutiny or cost.
First off, please understand that the World Trade Organization bans export restrictions outright (China became a member of the WTO in 2001). Despite their membership in the WTO, China has continued to press on with export restrictions on some very important raw materials used the world over. These include but are not limited to industrial building blocks like bauxite, coke, fluorspar, magnesium, manganese, silicone, carbide, and zinc. This means that foreign competitors have to pay higher prices on an inflated world market for their raw materials while Chinese competitors get preferential access and regulated domestic prices.
Death of the American Way
I did not mean to place a cloud of gloom and doom over your holiday festivities. I merely wanted to bring to light a serious and significant problem that has managed to somehow remain swept under the rug as far as the average American is concerned. We are not without tools to fight against these wrongs and protect our American way of life. We simply need to recognize what is going on and take action by declaring our dissatisfaction with the path on which our nation is currently traveling. We need to embrace some of the courage from our founding fathers and challenge the status quo to retake our independence so that generations to come can celebrate this great nation like we will this Independence Day.