China Is the World's 'Factory Floor' Because It's Still Poor

China Is the World's 'Factory Floor' Because It's Still Poor
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"Technology is a boom or bust business, but it’s mostly busts. I’ve always assumed 10% of my technology investments will succeed – and succeed wildly. The other 90% I expect to fail.” Those are the words of Microsoft co-founder Bill Gates.

They came to mind while reading a recent Wall Street Journal opinion piece by Rich Danker, a former adviser at the Trump Treasury. He’s convinced that an “overvalued” dollar has pushed manufacturing work out of the U.S. to the detriment of the American people, and that China’s allegedly wise leaders in Beijing have been the masterminds behind the economic warfare that made their country the world’s “factory floor.” Apparently “China” did this all the while “leveraging its dominant position in global trade” in order to “steal intellectual property, conduct cyberwarfare and export deadly products like opioids.” Oh dear…. Danker is but the latest individual associated with the Trump administration to publicly pretend 1+1 equals 1,000 in order to placate the protectionists who populate the Administration he served.

Gates’s expression of reality is a useful antidote to Danker’s innocent proclamations about how the world works. Brilliant as Gates is, he’s well aware that most everything he tries will fail spectacularly. And this is the wildly talented Bill Gates we’re talking about. It’s a loud reminder that Danker is writing well out of turn as he spouts simplistic talking points about allegedly stolen “intellectual property.” Wouldn’t life be oh so simple if genius could be stolen, only to be executed on once stolen? Back to reality, even if it’s true that the Chinese, for being Chinese, have a thieving problem, well over 90% of what they steal would be less than worthless away from Gates’s uniquely brilliant hands. This helps explain why world-leading American companies like Apple have a substantial manufacturing presence in China notwithstanding Danker’s confident proclamations that being there amounts to them being pick-pocketed. Apple is in the proverbial arena defined by actual market forces, while critics of China almost invariably offer up their alleged insights rather distant from market pressures.

Indeed, missed by the overnight protectionists who populate the Trump administration (and others who cheer its protectionism on from the outside in order to curry favor) is that for actual American businesses operating in the world of profit and loss, China represents huge opportunity for them. Readers of this column are already familiar with the happy truth that in concert with the growing prosperity of Chinese workers, so has prosperity increased for some of the greatest American companies operating there. Evidently they didn’t receive Danker’s memo. China is the 2nd largest market for fast food icon McDonald’s, Starbucks has 3,400 stores in China on the way to 7,000, Apple sold $52 billion worth of product to Chinese consumers last year, while Amazon’s very own ocean shipping service sent nearly 5 million cartons of consumer goods last year from China to voracious consumers in the U.S. Notable here is that 5 million cartons is but a fraction of what Amazon carries out from China in order to meet the needs of its growing customer base.

The above stats reveal a great deal, and none of it supports what Danker imagines is happening in China. For one, he writes that in “its quest to dominate global markets, China is upending the rules that make them run in the first place.” Except that if China’s economy were state planned as Danker so naively presumes, it logically wouldn’t be such a great market for the world’s most successful businesses to begin with. Unless Danker wants to admit that the thieving Chinese are also skilled central planners such that the murderous horror that has long defined the latter doesn’t apply to them, he would have to acknowledge that “China” didn’t plan this wondrously beautiful economic revival as much as a lack of planning was the cause. And if Danker really believes the Chinese government planned immense prosperity that has proven a magnet for the greatest of great American companies desperate to sell to the increasingly acquisitive Chinese people, then it’s also true that central planners the world over should be rushing to Beijing to watch China’s bureaucrats rather closely. The previous statement is rhetorical. Free markets always work, and central planning never does. Get it?  

And while the U.S. remains the biggest retail market in the world such that the world’s best and brightest pine for the opportunity to meet the needs of the country’s prosperous workers, the Chinese consumer is growing by leaps and bounds too. This doesn’t mean that the Chinese people are anywhere close to as rich as the American people are, but it does mean they’re gaining. What this signals is that while China may be the world’s “factory floor” today, it happily won’t be for long. Figure that U.S. companies wouldn’t be so feverishly competing for market share in a country economy defined by factor workers simply because factory work doesn’t pay very well. China is attractive to the world’s greatest companies precisely because its economy is evolving as America’s once did whereby the jobs of the past (manufacturing) migrate elsewhere. In short, Danker’s excitement about factory work speaks loudly to the facile nature of his argument in total: the loss of factory jobs in the U.S. is what makes the country’s consumers so attractive to producers, while China’s “gain” of those jobs is not what has the world’s biggest companies clamoring for a presence there. Basically Danker is piling naivete on top of innocence on top of flattery (the toadying directed toward the Trump administration) in order to make an argument that brings new meaning to empty. And we haven’t even gotten to the money part yet.

Speaking of, Danker asserts that the Bretton Woods gold standard caused “the price of American exports to rise,” thus allegedly rendering U.S. manufacturing companies less competitive thanks to an allegedly “overvalued” dollar. The problem is that Danker’s history is way off, as is his analysis.

In truth, the U.S. Treasury defined the dollar as 1/35th of an ounce of gold, and other countries pegged their currencies to the dollar. About this, the markets never fully trusted any of the Bretton Woods currencies, and this includes the dollar as evidenced by how often the market price for gold moved above $35 during the last stable-dollar era. But that’s a digression. Global currencies were pegged to the dollar such that any alleged overvaluation of the dollar would have meant the same for the currencies pegged to it. Translated, a weak dollar was a global currency event under Bretton Woods, as was the opposite.

At which point Danker’s op-ed predictably missed that money is a veil. It can’t change the real price of anything. Reality always intrudes. Stable money’s sole purpose is to facilitate exchange among producers who are ultimately exchanging products for products. Trade isn’t war, and no “country” can “dominate” (as Danker presumes) what is always and everywhere about a product or service for a product or service. Money’s only role is as an agreement about value that enables real value among producers to be exchanged. The more stable the currency arrangement, the better. The U.S. economy boomed during the Bretton Woods years despite what Danker would have readers believe, and it did so because the dollar was rather stable as a measure of value.

Still, in ascribing to money a power to actually change the terms of trade, Danker dug himself yet another hole. Implicit in his argument is that cheap, devalued currencies confer an advantage on producers, particularly when it comes to exporting. Except that they don’t, and for obvious reasons. Devalued currencies don’t render products and services cheaper simply because any product and service is always and everywhere the happy result of global cooperation, and the use of inputs from the around the world. So if the currency is being devalued, then the costs of production are logically rising; thus depriving the producer of any price advantage. More important, crucially so, is the investment angle. Figure that the biggest driver of falling prices is investment in productivity enhancers, investors are buying future currency income streams when they put money to work, and those same investors are less likely to put money to work if policies of devaluation mean any returns will come back in soggy dollars, euros, yen, etc. In short, a weak currency is the biggest barrier to competitiveness simply because a weak currency makes the investment which enables competitive products much less likely. Assuming the dollar did hold its value better than the currencies pegged to it during the Bretton Woods years, this relative dollar strength logically redounded to U.S. companies for it existing as a lure for all-important investment. Notable here is that in the 1970s and 80s, the yen soared against the dollar. During that same timeframe, Japanese exports to the U.S. went skyward.

Which brings us to Danker’s impressively obtuse comment that in the aftermath of Bretton Woods, demand for dollars spiked such that “the price of U.S. exports has risen relative to its peers, and trade deficits have become a fact of American life.” Where does one begin? Needless to say, books could be written….

For starters, the dollar collapsed against foreign currencies like the yen, Deutschmark and Swiss franc in the 1970s, thus wrecking Danker’s odd assertion that leaving the Bretton Woods gold exchange standard somehow made the dollar more attractive. No, that’s just silly. Once the dollar’s relationship to gold was severed, the same dollar went into freefall. Based on Danker’s belief that devaluation is the path to prosperity, the ‘70s must have been boom times in the U.S. More specifically, if Danker’s view is correct, then the Jimmy Carter economy was a roaring one given how much the dollar fell during his presidency….

Taking this further, Danker’s reasoning is that a dollar without a stable definition became even more attractive to investors such that deficits were easy for the U.S. Treasury to run up. About such a view, did anyone edit the former Treasury adviser? The question is raised in consideration of how separated from reality is Danker’s thesis. Lest readers forget, we can’t eat dollars. Dollars are only valuable for what they can be exchanged for. The problem is that contrary to Danker’s history, the value of the dollar plummeted after President Nixon de-linked the dollar from gold, which means the exchangeable value of the dollar plummeted throughout the ‘70s. Some would call this inflation. Oh well, call it what you want but don’t presume that investors are so blind as to heavily demand that which is exchangeable for less and less. The question about whether Danker was edited is asked mainly because his opinion piece suggested in straight-faced fashion that post-Bretton Woods investors clamored to stockpile a currency that was losing exchangeable value by the day. Sorry, but markets aren’t this stupid.

Which brings us to Danker’s laugh line that the so-called “trade deficit” has resulted from a rising price of U.S. exports. Oh my. No. The U.S. runs a “trade deficit” because it’s a magnet for investment, and it’s a magnet for investment precisely because it’s no longer the world’s “factory floor.” Since it isn’t, as in since U.S. workers long ago left behind low-value manufacturing jobs much as China’s workers are and will, the desire among investors to commit capital here grows and grows. There’s your “trade deficit.” It’s an effect of American companies exporting shares to voracious foreign buyers; those exports not counting in an accounting of trade that logically balances. Rest assured that demand for U.S. equities would be very slight if the economy were still manufacturing based.

You see, manufacturing employment for instance peaked at 1 million in New York City in 1947 when it was still the #1 manufacturing locale in the United States. Over seventy years later it’s safe to say that there are very few (if any) factory-style jobs there. Is New York a city in ruins thanks to the mass closure of factories? The question is a rhetorical one. Readers know the answer. New York would be nearby Newark’s recessed, endlessly pathetic neighbor if it were still a manufacturing town. The investment without which there’s no economic progress does not flow to cities, states and countries stuck in the past. Manufacturing work screams the past as few other vocations do. It’s evident Danker’s never been to Aliquippa, Detroit, or Flint.

Funny about all this is that Danker comically presumes that China’s “cheap-labor advantage allowed it to dominate the world export market by the early 2000s,” but then the so-called U.S. “trade deficit” that excites Danker reveals the exact opposite. Indeed, if “cheap labor” really conferred an advantage, then such an advantage would show up in slowing investment into the high-wage (U.S.) country. Except that as evidenced by the mass export of shares by U.S. corporations, the U.S. economy is the biggest investment beneficiary of this globalization of trade. Basically rich Americans let others (including the Chinese) make low-margin goods for them, and this frees up American innovators to create companies that investors around the world want to own. Translated, the U.S. would be a very poor country if it lacked the accounting abstraction that some naively call a “trade deficit.”

After that, Danker offers up various unserious ways for the federal government to ensure the world’s producers cease using the dollar as their measure to facilitate exchange. Lots of luck there. If the dollar presently liquefies trade is Cuba, Iran and Venezuela (which it does), the odds of limiting its usage in the rest of the world (short of wrecking it, which Danker would probably cheer) are slim to none.

But that’s really not the point, or the question. The question is what’s happened to conservatives? Though they used to be for limited government, they’re now calling for the federal government to manage the highly individualized act of trade through control of currency flows. It’s all very sad. While President Trump is a protectionist, he’s always been one. He can’t disappoint in a sense. What does disappoint is seeing so many seemingly principled people cheaply sell their free-market bona fides in order to win(?) the favor of an individual whose affectionate thoughts will likely never extend beyond the Oval Office.

John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading ( His new book is titled They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers. Other books by Tamny include The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at  

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