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Shifting Paradigms

There is probably no topic in the U.S. plastics industry today that incites more emotion or distress than the challenge presented by the U.S. trade balance (or imbalance). Processors are watching customers head to China with mounting concern about the lack of response from the U.S. government. A recent conference addressed the issues.

When Rodney Groleau recently showed off several plastic toys he purchased from a local “$1” store, he believed it spoke volumes about the trade imbalance impacting the plastics industry. The RJG Inc. chairman questioned how foreign companies—in China in particular—make money on such products when freight costs are comparable to retail prices.“I think we should send everyone (in Congress) these toys or e-mail pictures of them,” he suggested. “I feel if everyone on Capitol Hill was inundated by toys made in China, they’ll get an idea of how we feel.”

The demonstration took place in Washington DC in May during the China Fly-In, a one-day conference that focused on the state of U.S. trade with China and its effect on the plastics industry. The conference, organized by the Society of the Plastics Industry (SPI) and attended by about 50 industry members representing processors and suppliers, featured presenters from Congress, the Office of the U.S. Trade Representative (USTR), the U.S. Dept. of Commerce (DOC), the National Assn. of Manufacturers (NAM), and the U.S. Business and Industry Council. “This is one of those generic issues that gets to the core of the plastics industry,” SPI President Donald Duncan said at the outset.

At issue are U.S. trade agreements that SPI member companies contend have led to a dramatic increase in Chinese imports and the loss of U.S. manufacturing jobs. Plastics processors say they are having a difficult time competing against companies that sell products made in China, where manufacturing and raw material costs are significantly lower. “China is a competitor we have to deal with,” said Frank Vargo, NAM’s vice president, international economic affairs. “We have to find a way for U.S. manufacturing to prosper.”

NAM reports that in the past 20 years, U.S. imports from China grew 20 percent annually while U.S. exports to China rose 12 annually. This created a $103-billion trade deficit with China in 2002, up $50 billion from five years ago. “To close the gap, we need faster export growth and a realistic exchange rate to level the playing field,” Vargo said.

The situation has really hit home. Plastics processing, the fourth largest U.S. manufacturing industry, incurred a $1.4-billion trade deficit in 2002 after maintaining a surplus for many years, SPI said. “We are having a tough time getting new work because so many jobs are going to China,” observed Gordon Wright, president of 21st Century Plastics Corp. (Potterville, MI) “We are going to have to cut costs by 30 percent in order to stay in the game.”

The manipulation of China’s currency—undervalued by an estimated 15 to 40 percent—is also hindering competitiveness in the plastics industry. By comparison, the U.S. dollar is valued about 30 percent higher than it was in 1997, Vargo said. “A stronger dollar has led to U.S. exports costing more and imports costing less.”

Industry members aired these and other grievances to federal officials who spoke at the meeting. Attendees also visited Capitol Hill and lobbied congressmen to address the situation and promote industry growth. “This was just a tiny first step we took,” Wright said. “We’ll have to take an awful lot more steps if we are going to change the situation and get people in Washington to understand the extent of the problem.”

The consensus among speakers and attendees was that most federal lawmakers do not understand the challenges the plastics industry faces, nor the significance of an industry providing more than 1.5 million jobs and $321 billion in annual shipments. “This economy will never recover unless manufacturing is re-established,” said U.S. Rep. Donald Manzullo (R-IL), who has become a vocal advocate of manufacturing. “The policymakers just don’t get it.”

One thing attendees at the conference did get was agreement that time is of the essence. “Too many people feel we can be patient and wait for China to comply with the rules of the World Trade Organization (WTO) and free trade agreements we executed with China,” said David Skala, vice president of marketing at D-M-E Co. (Madison Heights, MI). “I don’t think we have 10 years to sit by and watch them take advantage of the agreement.”

The China economy is growing by about 8 percent annually, experts say, with three quarters of that growth fueled by exports. But China’s reliance on its export business is creating problems, experts say, rather than opportunities for U.S. industry. For instance, materials representing an estimated two-thirds of U.S. exports to China are used to produce goods that are imported to this country. “China welcomes foreign investment, but ultimately serves the U.S. market,” noted Alan Tonelson, research fellow, U.S. Business Industry Council.

In recent years, China has become Asia’s primary manufacturing center and the top nation for foreign investment. “A lot of manufacturers in Southeast Asia have moved production to China,” observed John J. Tkacik, Jr., research fellow for China, Taiwan, and Mongolia, The Heritage Foundation. “As a result, imports have leveled off.”

How can trade between the U.S. and China be rebalanced? Suggestions run the gamut. “Nothing fundamental is going to change in the manufacturing sector unless the global trading policies change,” Tonelson said.

SPI is urging the Bush administration to enforce policies under the WTO and International Monetary Fund (IMF) to correct the manipulation, as well as under valuation, of China’s currency; enforce China’s commitments to the WTO on such issues as subsidies, intellectual property rights, and market access; and enact legislation that renews and grows the U.S. manufacturing base. “We have to compete against companies paying employees $35/week in China,” 21st Century Plastics’ Wright said. “There is not much we can do about that. But there is something called fair trade and there are ways to address these grievances.”

SPI advocates a level playing field that allows the U.S. to counter market-distorting trade practices via U.S. trade law. “The market access to China is not good and we’re doing what we can to rectify that,” said Heather Clark, China trade specialist at the DOC.

Similarly, China’s WTO membership obligates it to change certain trade policies. “By entering the WTO, China will adhere to the economic rules of trade,” said Paul Neureiter, USTR’s China specialist, adding that part of USTR’s work is to monitor the situation.

Indeed, there are significant social, economic, and political pressures exerted on China as a result of WTO membership, experts say. These factors could result in one of two outcomes. “The internal strains will be so great that China could implode,” said William Reinsch, president, National Foreign Trade Council (NFTC). “Others believe China will grow into an 8000-lb gorilla.” In any case, the compliance process is one measured in years, not months.

Tonelson of the U.S. Business Industry Council offered a more radical plan, suggesting the U.S. either leave the WTO or change its trading rules. “China’s membership has gutted U.S. trade laws,” he said. “I never want American public policy made by foreign officials who are not (accountable) to American citizens.”

“I’m not suggesting that China be expelled from the WTO, but that it compete fairly,” added D-M-E’s Skala. “If the referees are calling penalties against you but not against the opposition, it’s going to be hard to win the game.”

A weaker dollar could address some of the trade imbalance as imports across the board become more expensive. In fact, the greenback has grown weaker than the euro in recent months. But in China, the currency is pegged to the dollar, so devaluation of the dollar has minimal effect. “To close the gap, we need to foster export growth and a realistic exchange rate to level the playing field,” NAM’s Vargo said.

NFTC’s Reinsch was asked whether U.S. companies should stop trading and investing in China altogether. “Those things are unlikely to happen,” he said. “We live in a global economy.”

There are plastics manufacturers operating businesses in North America and Europe that have maintained a happy medium. “As China has grown for us, it has stimulated new Nypro growth in the U.S.,” said Alfred Cotton, Jr., public affairs director at Nypro Inc. “During the past seven years, we went from less than 100 to about 5000 employees in China. At the same time, we went from about 2500 people to almost 4000 people in the U.S. So it has been a win-win.”

Some experts believe that as the China manufacturing sector becomes more sophisticated and adheres to common industry standards—compliance with environmental and worker safety regulations—it will lead to higher production costs. “The consequence is a less significant gap in cost [of goods],” Reinsch said.

Moving forward, conference attendees agreed that lobbying efforts must continue to make U.S. government officials more aware of the challenges facing manufacturers. “When I left, I felt worse than when I got there,” said Wright. “I realized this problem really isn’t on the radar screen in Washington.”

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