Monday, January 23, 2017

America First

America First
Let's Hope Trump Fixes That

The other day I needed some plain butt hinges for a project, an item that isn't used much anymore in modern cabinet shops.   Butt hinges, silly name that it is, are called that because they are mortised into the wood, butting against the wood which carries much of the actual load rather than the screws.  Ten hinges off eBay from a Chinese seller, 99 cents total,  nine cents each…Okay, gonna cost a fortune to get the U.S., right?     Nope, only 63 cents to bring the hand sized package from the other side of the world.

Prior to 2010 you saw few Chinese sellers on eBay as the shipping made it unprofitable to sell small items.  The Chinese needed to sell to importers who stocked the product in the U.S. after arrival via shipping container (less than $2.00 per cubic foot shipping regardless of weight) so the American importer made a good profit margin from selling the cheap items.

That all changed thanks to a U.S. Post Office/China Post/eBay agreement that set up ePacket, subsidized incoming shipping from China and Hong Kong.  Were the deal two ways it could have been defended but here is an example of how it works:

You buy a cheap item of eBay from a seller in China for $6.00 plus $1.50 in shipping. But the item arrived broken so the sellers offers to send you a replacement or refund if you ship the item back.  Cost back to China:  With the required delivery confirmation $34.87, First Class without tracking, $11.48.   Obviously that trinket isn't going to be shipped back for a refund and the consumer eats the loss.  Obviously no American company is going to be shipping exports to China due to the enormously different shipping rates.

Meanwhile in the U.S. something with the size and weight of that packet of ten hinges that are being shipped in from China will cost around $3.62 to ship from Oklahoma to either of the Left Coasts.   Six times the cost for 1000 miles or 42 times the cost when you compare the miles traveled.

 The U.S. Post office refused to negotiate a reciprocal agreement to deliver U.S. mail at the same rates they delivered Chinese mail/packages.  In 202 USPS handled almost 27 million Chinese ePackets, losing a dollar per packet.    The U.N. has a Universal Postal Union treaty that USPS has to abide by and in 2014 that treaty allowed no more than $1.50 to deliver a one pound package from a foreign carrier.

The bottom line for a U.S. retailer or eCommerce business is that it costs half as much to send a package from China to any state and any address in the U.S. as it does for that same package to travel from one state to the state next door.  The Chinese packages come in subject to no tax, no duty, no import fees while a U.S. importer or customer  pays the import fees, duty, sales tax, and federal and state taxes on the income from selling an item at a profit.

USPS and eBay have set up a one way tax free funnel to transfer billions of dollars and hundreds of thousands of jobs to China while American patrons of USPS subsidize the losses on delivering the Chinese packages.

Another Example of Why America First Has to Happen

A few years ago there was a product, exactly what it is is of no consequence to the example.  It was being shipped in from New Zealand for nearly $300.00 once the shipping charges were added.   Local competition sprang up as American companies realized there was a need and a market, leading to similar products well under $100.00, then another company dropped the price for a better product to $65.00.  Creative destruction, the New Zealand company was greed on pricing and hampered by overseas shipping so that created an opening and capitalism filled the hole.

For a few years the U.S. companies did well until the Chinese manufacturers saw the market was large enough to enter and they shipped a container load to a Chinese importer in California.  Suddenly a Chinese product was being sold for $48.00, shipping included.  As the Chinese eBay sellers fought for market share the prices dropped to $28.00 plus $12.00 shipping.

The product can be bought off for between $10.00 and $15.00, full container shipping to the center of the U.S. is going to add $1.62 to the cost, so $11.62 or $16.62 per item including less than $200.00 for duty on the entire container of product, around six cents per item.

To the Chinese businessman his additional profit is almost $12.00 at the cheapest sales price, more than what he sold the item for in China.  He has some warehousing costs involved and some labor handling the packages at the most.

Chinese manufacturing got its beginning from U.S. retailers like Wal-Mart and thousands of other retailers searching for lower prices to increase their profits.  Once Wal-Mart had played all the U.S. manufacturers against each other, cutting the profits to set up a factory,  meaning the costs to buy materials, buy machines, hire labor, and train the workers to produce the product was no longer viable.  So Wal-Mart shopped overseas where labor rates were under one dollar per hour, regulation nonexistent, worker benefits were nonexistent or paltry compared to the cost of running U.S. labor.

There as they do here, when a manufacturer starts up eventually a salesman or executive leaves and starts a competing company with the sales contacts and inside information needed to source the materials and know how to build a competing product.  Find one boat maker or trailer maker and you will find several other younger companies nearby.  Soon the Chinese capacity to make a product outstripped the sales ability of the original client and the customer put the product up on or brings it to U.S. trade shows to market to other retailers.   Growth of production continues till even the new clients can't absorb the output and you find the Chinese manufacturer or their agent on Ebay or Amazon cutting the throat of their own U.S. customers.

Where once a retailer bought a cheap product and make a hefty profit retailing it from a local store or company website you now have a foreign national renting a warehouse and dumping his product at just over his costs onto the U.S. market.  As far as how low ill the U.S. wages have to go to regain competitiveness?  See the chart below compared to what you are making now.  This leaves out  countries like Vietnam, Indonesia, Bangladesh, and the Philippines where skilled labor rates can be had for under a dollar per hour and professional services such as accounting or IT can be had for under $2.00 per hour.

Creative destruction and capitalism depends upon a level playing field.  If free trade means that a labor intensive product can't be made in the U.S. it would be understandable as long as it was U.S. retailers and distributors selling the item and churning the profits and jobs back into our economy.   U.S. manufacturers could focus on bulky items that were expensive to ship  and cater to the local markets.  But these days even upholstered furniture is being made overseas.  Do a search for prefab chicken coops, small intricately made 3' x 3' x 7' coops that sell in China for under $50.00 and can be had for under $100.00 locally.

Once the long shipping time and higher costs prevented American jobs from bleeding out to China as fast.  Those days are behind us now as Amazon and eBay both have rolled out the welcome mat for the Chinese manufacturers.  Instead of American businesses making the retail profits and American manufacturers making the goods while income tax, sales tax, and employment  taxes flowed to state, local, and federal governments you see Amazon, eBay, a few shipping companies, and a few warehouse companies making a profit while billions and billions of U.S. dollars flow back into China.

Trump talks about a 35% tariff on imported goods.  News flash…. That isn't going to make a dent in the problem unless state and federal governments clamp down on retailers both online and brick and mortar, and ensure they are ran by U.S. citizens.  Couple that with forcing China to allow their currency to float with the world market and you will have a shot at bringing back jobs to the U.S.. 

In the mean time gut the regulations that serve no purpose other than keeping bureaucrats working and environmental nuts smiling.  Allow employers to hire people and pay them every dollar of their pay and let the state and federal governments collect their tax money directly from the worker.  Let the courts collect their child support on their own instead of forcing employers to deal with withholding pay if demanded.  Just let manufacturers focus on creating jobs and making a profit.