Industry Today: The World of Manufacturing

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 Date:7/20/2009

 

It's Your Call
Domestic Strength
“Buy China” Is A Principle, not just a policy, argues William R. Hawkins.

When Congress included “Buy America” language in the $757 billion stimulus package adopted in February, the official Chinese Xinhua news agency called it an act of “protectionist poison.” China has fueled its economic growth on exports and did not want to be shut out of what it felt was its rightful share of American taxpayer’s money. Now, however, China has issued an even stronger “Buy China” directive in its own $580 billion stimulus package. There is nothing hypocritical in these two statements because in both cases the Beijing regime is pursuing its own interests.

For governments to “Buy National” (whether it’s the U.S. China, India or the EU) makes impeccable economic sense. The whole rationale for spending such huge sums is to generate economic activity in the domestic economy to end the recession, renew production, and put citizens back to work. Any money that leaks out of the home economy weakens the nation’s recovery. Senators understood this when they voted 65-31 to reject an amendment offered by Sen. John McCain (R-AZ) to strip the Buy America language from the stimulus bill.

The misdirection of funds overseas was one of the reasons recovery from the much milder 2000 recession was so slow despite the Bush administration’s large tax cuts. As Business Week noted in April 2003, “the fiscal and monetary stimulus of the past two years has helped global producers as much as U.S. companies.” Business Week returned to this problem with its Dec. 8, 2008 cover story by chief economist Michael Mandel who stated, “The financial crisis was caused, in large part, by U.S. consumers borrowing trillions of dollars from the rest of the world to buy imported cars, clothes, and gasoline, even as jobs slipped overseas. As long as the U.S. is running a big trade deficit and borrowing from abroad, a fundamental cause of the crisis remains.”

Beijing has dismissed foreign criticism as illegitimate because China has not signed the international Government Procurement Agreement. The GPA is supposed to open bidding on a non-discriminatory basis except where national security is at risk. Only 39 countries have signed it. Of these, 27 are members of the European Union who are trying to promote economic integration within the bloc. Most countries are not willing to give up sovereign control of their fiscal policies. Even the EU carved out sizeable exceptions for public works to exclude those outside the bloc. The Europeans understand the need to create a large domestic economic base if they are to compete with such large nation-states as the United States and China.

On July 6, Beijing and the Group of 77 developing nations told the United Nations that that they may need to impose new restrictions on imports to address deterioration in their trade accounts. But for China, formal and informal restrictions on imports in support of domestic production is not just a response to the current recession, it is a basic principle of political economy.

On June 18, Foreign Ministry spokesman Qin Gang argued that China had promulgated a government procurement law in 2002 “years before the outbreak of the financial crisis” that had included this principle. The 2002 law established that government procurement should use domestic goods, construction and services except when the products cannot be obtained in China or cannot be obtained on reasonable commercial terms in China. According to a Xinhua commentary on June 22, “Government procurement is not about foreign trade, but about how to best spend the taxpayers' money, so guiding policies cannot constitute protectionism.” This is playing with words when the best way to spend taxpayer money is to boost the home economy against foreign rivals.

Consider two major areas of manufacturing whose supply chains extend across the entire industrial and engineering sectors: automobiles and aircraft. Beijing’s principle that to sell in China, firms must build in China is in full swing in both. General Motors, which has fallen into bankruptcy in the United States, is the leading automaker in China. According to corporate statements, “Shanghai General Motors Co. Ltd. is a 50-50 joint venture with Shanghai Automotive Industry Corp. Group (SAIC), a leading passenger car manufacturer in China. Shanghai GM was formed in June 1997. It is fully supported by a network of sales, aftersales and parts centers.” It builds Buick, Chevrolet and Cadillac models. What the GM statement does not mention is that SAIC is stated-owned and a tool of Chinese industrial policy. It runs some 50 factories that make everything from tractors to motorcycles. It also has a joint venture with Volkswagen.

China is a fast growing market, with 2009 sales expected to top 10 million vehicles, but it will not be supplied by imports. Beijing’s home market will be used to expand Chinese capacity and jobs. Its own automakers are expanding rapidly, as information gained from joint ventures like Shanghai GM is disseminated through the state-dominated industry.

China will need an estimated 2,800 commercial airliners and 470 air freighters worth $300 billion over the next 20 years. Last month, the first Airbus A320 passenger jet rolled out of a factory built in only nine months outside the northern Chinese port city of Tianjin. As Airbus and Boeing have competed for sales, Beijing has played the two firms against each other to pressure them to build more components in China, transfer more technology, and train more engineers, managers and production workers. The objective is clear. China wants to be able to build its own aircraft and reduce its dependency on imports to fill its needs.
Locating the aircraft plant in Tianjin has symbolic meaning to the history-conscious Chinese. The port was often used by the Western powers to land troops for punitive expeditions that would march up the railway to Beijing. The days when foreigners could carve China into spheres of influence are over.

At the moment, Tianjin is putting together the fuselage, wings, engines, tails, noses, and doors imported from Europe. But Airbus is expanding the production of components in China. And as A320 work expands in Tianjin, it decreases in Hamburg and Toulouse.

The Tianjin Airbus plant is a joint venture with China's Aviation Industry Corp (AVIC), the state agency that runs the country’s aerospace sector, including both civilian and military programs. Under AVIC is the Commercial Aircraft Corporation of China (COMAC) which builds a Chinese-designed regional jet, the 90-seat ARJ-21. "We believe after six to eight years development, our aircraft will over take Boeing and Airbus," said COMAC chairman Zhang Qinqwei last year.

Boeing has not (yet) moved to final assembly of jets in China, but has been expanding production of components there. According to statements on Boeing’s website, the company “is pleased to have been invited to help Chinese companies develop skills, achieve certification, and join world aviation and supplier networks.”

“China has a sophisticated and expanding part to play in the commercial aviation industry and has a role on all of Boeing commercial airplane models-737, 747, 767, 777 and the newest and most innovative airplane, the 787 Dreamliner. China builds horizontal stabilizers, vertical fins, the aft tail section, doors, wing panels, wire harnesses and other parts on the Next-Generation 737; 747 trailing edge wing ribs; and 747-8 ailerons, spoilers and inboard flaps, and parts of the horizontal stabilizer. China also has an important role on the new 787 Dreamliner airplane, building the rudder, wing-to-body fairing panels, leading edge and panels for the vertical fin, and other composite parts.

The company also claims, “Today, there are more than 5,200 Boeing airplanes flying throughout the world with parts and assemblies built by China.” China is the home of the new 747-400 Boeing Converted Freighter. “Many parts and assemblies are built in China. Conversion, test and certification are performed in China and airplanes are delivered from China,” says Boeing.

When I attended the Zhuhai international air show, materials distributed at both the Boeing and Airbus displays showed that the companies understand they must help China develop to win orders, even if it means creating a competitor who will eventually displace them in China and other export markets. Short-run corporate actions, permitted by indifferent Washington policy-makers, are thus empowering a rival who will be a danger not only to the American economy, but to national security. Beijing’s growing wealth and manufacturing capability is already being used to support its geopolitical ambitions, which run counter to U.S. interests around the world.

Academic trade theory is based on the untenable notion that countries will be content within a harmonious international division of labor based on comparative advantage. But both history and current events tell a different story. China rejects its assigned place as a “big emerging market” for western firms, paid for by low-end producers in a static Ricardian system. Beijing aspires to create the advanced capabilities that will make it a first class world power. And behind China, India, Brazil, South Africa, and other nations seek the same right to rise by their own efforts and gain as much independence as possible in a contentious world. As the U.S. economy reels from decades of fundamental policy errors in trade and finance, it needs to relearn a few key principles about the priority of domestic production in the generating of national income and power.

William Hawkins is a consultant specializing in international economic and national security issues.