Why the Jobs Went to China—And How to Get Them Back

If the yuan were revalued the Mack companies could start making computer servers again

Three years ago, my friend Don Kendall employed 2,100 Americans in gleaming, highly automated plants in Massachusetts, New York, North Carolina, South Carolina, and Vermont, making high-end computer servers, mass-storage devices, telecommunications routers, and hundreds of other products. Now, those same plants employ just 1,100 workers. Most of the 1,000 who have been laid off have had to take retail, tourism, or other service-sector jobs paying about half of what they made before—if they have found jobs at all.

At least 90 percent of those lost jobs went to China, Kendall says, as did three Fortune 500 computer companies that had been his biggest customers. The main reason for these American job losses is not China's cheap labor or any other efficiency-based advantage, Kendall stresses. It is that China is cheating on international trade norms by manipulating the value of its currency, the yuan (or renminbi), which it has pegged to the dollar at the artificially undervalued rate of about 8.3 yuan/dollar, rather than letting it float, or pegging it closer to its true value in international currency markets.

The layoffs at Kendall's two family-owned companies, Mack Molding and Mack Technologies, are representative of the 2.6 million manufacturing jobs that American workers have lost since March 2000, as the trade deficit with China has soared above $100 billion a year. Manufacturing and labor groups attribute these hammer blows to our economy in substantial part to China's pegging of the yuan at what economists estimate to be 15 percent to 40 percent below its market value.

As my colleague Bruce Stokes detailed last week (see NJ, 10/4/03, p. 3056), the undervalued yuan puts American, and other, manufacturers at a disadvantage by effectively subsidizing cheap Chinese exports and creating a tariff-like barrier to imports. This has spurred bipartisan pressure in Congress—and so-far feeble efforts by the Bush administration—to persuade China to revalue.

Some economists and multinationals that profit from Chinese-made products have countered that getting Beijing to revalue the yuan would make little difference, that China will never yield to pressure anyway, and that sudden revaluation could cause economic turmoil both here and in China. Stokes makes a strong case that these are "myths," and that the United States should push China to revalue.

But Stokes also echoes some of the pessimism that pervades discussion of the future of American manufacturing, when he writes that it is "probably true" that even if China revalues, "it won't improve the overall U.S. trade imbalance," because "production will merely shift to other low-wage countries." That may well be right. But count Don Kendall, who has created hundreds of jobs over the past 29 years, as a dissenter from the pessimistic view that our relatively high wages doom our manufacturing sector to a slow death—if not a fast one.

"I think there's absolutely a future," he says. "The advantage that we have in this country is that we invent the stuff that the rest of the world uses. The stuff that's easy to make will be made abroad, but we can always make the stuff that's most difficult to make. I am in favor of free trade. I think it helps manufacturing in this country. But if our trading partners are able to break the rules, they can really hurt us." Kendall says his Chinese competitors pay their workers 20 cents per hour, about 1 percent of the $21 an hour in combined wages and benefits that he pays. But "the labor differential has always been there, and that's not why we're losing this business," he says.

"It costs more to ship a server from China to the U.S. by air—which they have to do for reasons of time—than the labor savings, because assembly labor is only about 2 percent of the cost of the finished product. And we can be quicker because we're closer to the market. But still, their price is about 20 to 30 percent under our price. The reason is that their currency is out of balance." If the yuan were revalued by, say, 30 percent, the Mack companies could start making computer servers and other discontinued products again, eventually bringing back most of those 1,000 laid-off workers, Kendall says. But if the current situation continues, the workers' skills will atrophy and those jobs will be gone forever.

China's currency policy violates the spirit, and arguably the letter, of World Trade Organization, International Monetary Fund, and domestic law provisions designed to prevent countries from manipulating currency values in order to gain competitive advantage. But the legal remedies are cumbersome, and the Bush administration has hesitated to invoke them, partly because many U.S. companies have interests in cheap Chinese imports, and partly because we desperately need China's help with the North Korean nuclear threat.

Sens. Charles Schumer, D-N.Y., Lindsey Graham, R-S.C., and others have proposed hitting all Chinese imports with a 27.5 percent tariff, if necessary, to combat what Schumer calls "unfair play by China" that is causing "the free-trade consensus in this country to fall apart." This bill is a legally problematic sledgehammer. But it may take a sledgehammer to get anything done.

Some economists maintain that low-cost, subsidized imports from abroad always confer large benefits upon American consumers that outweigh the harm to American workers whose jobs move overseas. If China wants to subsidize our consumption, in this view, we should lie back and enjoy it. I don't buy it. Sure, subsidized imports are good for consumers in the short run. But in the long run, if we become ever-more dependent upon imports for an ever-higher percentage of the goods we consume, with an ever-weaker manufacturing base, with ever more of our people relegated to low-paying service jobs that produce little or no export income to pay our debts, and with ever-more-gargantuan trade deficits, the world will eventually lose confidence in America as a safe place to invest. Capital will flee to more-productive nations. And both our standard of living and the technological leadership on which our national security depends will inexorably decline.

Don Kendall's optimism that we can avoid such a decline is rooted in his own companies' success in "growing and adding people every year" since 1974, when he took over at the age of 26 upon the sudden death of his father. Mack Molding was a small plastics company then, with about 200 employees in two small Vermont towns, and it was near bankruptcy because of the OPEC oil embargo and recession.

Mack survived. It expanded into making computer housings, then entire computers and other high-tech equipment. It acquired plants in the Carolinas, Massachusetts, and New York. It bought out the Sun Microsystems manufacturing operation in 1993. Kendall created Mack Technologies as a corporate umbrella for high-tech product lines, including cellphones and airline instrument panels, as well as computer products. Mack Molding moved into making disposable medical products and plastic office furniture. While foreign imports—especially from post-NAFTA Mexico—invaded some markets, the Mack companies kept growing by making more-sophisticated products requiring superior technology and quality control.

But the past three years have been a different story. No amount of innovation has been able to create jobs as fast as the undervalued yuan has wiped them out. "We've never had to lay people off before," Kendall says. "It's been very difficult. I know a lot of these people personally. I live in the same community with a lot of them. They're getting laid off for no fault of their own."

Meanwhile, some of Kendall's competitors have given up on their U.S. plants and followed the multinational giants to China. Kendall bought one company about six years ago that has a plant in Scotland that now employs 15 people (down from 70), and another last November, that has plants in Mexico and in Melbourne, Fla., that now employ 200 (down from 700) and 60 (down from 300) people, respectively.

Next stop: China? Probably not, Kendall says. "It would be quite easy to do, actually," he explains. "But I view China as not an ally of ours. I don't really want to be doing business in a country that's not our friend. And here, I get to know a lot of the people who work in these factories. That doesn't seem possible with a factory that's 10,000 miles away." Besides, he adds, "if we lose our ability to produce, we'll eventually lose our ability to consume, because we'll all be working minimum-wage jobs flipping burgers."