Why a 700 Mile Fence makes absolutely no sense by Carlos T Mock, MD

Why a 700 Mile Fence makes absolutely no sense
by Carlos T Mock, MD
November 11, 2006

Legislation authorizing 700 miles of fencing along the southern U.S. border was signed into law by President Bush on Thursday, October 23, 2006 at a ceremony that underscored Republican divisions over immigration policy and left questions about whether the entire barrier will be built. However, the wall will not address the real problem of immigration, nor will it address the real problem behind job losses: outsourcing.

Between 2001 and 2004, under the President Bush's watch, 400,000 manufacturing jobs were lost, with one quarter of these going to China. In the same period, Mexico lost 70,000 manufacturing jobs to China. The 700-mile wall will help neither Mexico nor the United States.

The Federal reserve Chairman spent the same period raising interest rates from 1.25% to 5.25%, fearing an overheated economy, and hoping for a soft landing. Again, The Federal Reserve Bank is ignoring the deflating forces of the "China Price." The cheap labor in China is what's keeping inflation under control. Raising interest rates at home just makes it harder for us to compete against cheap labor in China.

Take Wal-Mart. According to China, Inc, by Ted C. Fishman, Wal-Mart is so strong and big that "it alone can force companies to change the way they make things. One of the ironies of global supply networks is that they often appear to take the form of exactly the kind of industrial organization they have defeated." So nearly every Wal-Mart shopper will save money by shopping there, which is to say that the shoppers will profit from Wal-Mart's outsourcing to China.

China has a workforce of 300 million employees that will work for one dollar a day and no benefits (that equals the total US population). Not only this, but also it produces 325,000 engineers each year, five times what the US produces. When Motorola came to China to set up a factory to produce cell phone parts, China admitted them into their market in exchange for the know-how. Within years, Chinese manufacturers were making the phones for a fraction of the cost. The biggest conundrum for American and other foreign large corporations is this: miss the Chinese market, or risk transferring the technology to China, creating their own worst competition.

The good news is that you can walk into nearly any retail store, examine price tags and labels, and it is clear that China saves consumers enormous amounts of money. The interest rate increases by the Fed did not consider this.

Since the Chinese currency is pegged to the dollar at 8.3 yuan/dollar, when the dollar rises or falls against other currencies, the yuan moves along with it. To do this, The Chinese central bank is the keeper of nearly every dollar in the country. Dollars accumulate in the government account as Chinese businesses that have earned money from foreign sales exchange dollars for yuan. China's total reserves of dollars in 2004 topped $460 billion dollars, buying them at a higher rate from its own countrymen than the official exchange. If China simply spent her dollars, it could flood the world market with American currency and quickly drive the dollar down. So instead, the Chinese lend them to the United States by purchasing U. S. Bonds. On November 7, 2006 the Financial Times announced that China's reserves had surpassed 1000 billion dollars!

Because of the peg, America does not experience price changes forced by a changing yuan, but other nations do. As the Euro climbs against the dollar (as it has from 2001 to 2004), Chinese goods become cheaper for Europeans to buy, and investment in China from Europe all the more affordable. (Again another reason not to raise interest rates.)

Thus, the routes to prosperity chosen by China and the USA put both countries at great risk. Without the USA to buy Chinese goods, China can't sustain its growth; without China to lend money to the United States, America can't spend.

Of the jobs moving in 2004, one quarter went to China. Yet, the role of China in the migration is far disproportional to its numbers. The pressure that China or Wal-Mart puts on low wage countries to drop their labor rates makes them more attractive to American enterprises looking for cut-rate homes. Such is the case in the Mexican maquiladoras where workers were forced to accept wage concessions under the threat of losing their jobs to lower-wage workers in China. The same can be said of the Mexican experience with the auto-parts maker, Delphi.

China's role is so important that the shift is evident in the mix of jobs that are exported. In 2001, the jobs lost were in electronics and toys, for which low wage countries were always attractive. By 2004, the jobs lost to China represented every large publicly held, highly profitable, and well-established job. Nearly three out of four of the workplaces that shipped jobs out were branches of multinationals.

As you can see, increasing the interest rate runs contrary to this picture of lower prices presented by outsourcing. All we've done is increase the Chinese coffers and dollar reserves.

American ingenuity and competitiveness requires a highly educated workforce. On that score, the news is not promising, especially when one looks at the grade schools and high schools where the vast majority of American students are not getting the skills they will need to be sharp enough to flourish in a future controlled by China.

To survive the China Price, we must also depend on American innovation. Innovation happens when the employees have the benefit of an environment that gives them deep knowledge of their industry. Chip designers who are removed from the assembly lines do not get the feedback from the factory pros that help them optimize their designs. Software firms that work far from the world's tech corridors (India), do not benefit from the crosscurrent of workers who come and go among firms, or from the ideas shared with industry pals at lunch.

Finally, ingenuity. The hottest market in China right now is cell phone ring tones. Why? Because they can only be bought from the licensing company when the Chinese buy the phones, and can't be obtained in any other way. This guarantees no cheap imitations can be sold.

Let's stop playing politics with the American workforce. We deserve better. The 3 billion dollars for a useless fence should be invested on education, innovation, and ingenuity.