U.S.-China Economic & Security Review Commission
January 30, 2004
U.S. China Commission Field Investigation
China’s Impact on the U.S. Manufacturing Base
Jon T. McClure
ISO Poly Films, Inc.
101 ISO Parkway
Gray Court, SC 29645
jon@isopoly.com www.isopoly.com
Executive Summary
China is the fastest growing contributor to the plastics trade deficit. The U.S. plastics producer, in general, is highly efficient and automated. Labor is not a major component of cost. In most cases, shipping cost from Asia is greater than all direct cost to produce the identical product in the U.S. Thus, it is this author’s opinion that the data strongly proves that the U.S. plastic producer would be more than healthy and thriving on a level playing field. There is great debate concerning China’s exchange rate with the dollar, direct and non-direct subsidies and the effects on U.S. competitiveness with China. Below you will find my case documenting undeniable facts that something wrong is going on in China and it has nothing to do with the cost of labor in the United States as it relates to production of plastic related products.
Both the South Carolina and United States Departments of Commerce tout the plastics industry as an example of a high tech growth industry. This is the case today; however, there is an abundance of data showing that our industry is under attack. If this is allowed to go unchecked, most small to medium size plastic producers will be forced out of business or forced to move off shore.
ISO Poly Films, Inc. shares the opinion presented by the The Society of Plastics Industry (SPI) to the House Ways and Means Committee of October 30, 2003. Further exploration into the causes of the deterioration of the U. S. plastics trade surplus resulting in a rapidly increasing plastics trade deficit needs to be understood, especially with regard to the double-digit growth in imported Chinese products. Much of the deterioration in the plastics industry trade balance has been with China. Where it is due to deleterious domestic and international policies that have coalesced to drive plastics processors out of business or offshore and forced workers into unemployment, U.S. policymakers must undertake efforts to change these policies. If unfair trade practices are responsible, then the U.S. must use its resources to address and rectify such policies. We want to compete with the Chinese on a fair and level playing field both internationally and in our domestic marketplace.
Plastic Industry Size (Source: Society of Plastics Industry)
Overall, the U.S. plastics industry employed approximately 1.4 million workers nationwide in 2002. Another 772,000 persons were employed by upstream industries that supplied the plastics industry, which brought the employment impact to 2.2 million – about 2 percent of the U.S. workforce.
The nearly 20,000 plastics industry establishments operating in 2002 generated approximately $310 billion in shipments. Another $83 billion was generated by upstream, supplying industries, bringing the total annual shipments from plastics activity to $393 billion.
Rate of Growth (Source: Society of Plastics Industry)
Employment in the Plastics Manufacturing Industry grew 1.7 percent per year between 1980 and 2002. The total of Plastics Manufacturing and Plastics Wholesale Trade was the same, at 1.7 percent per year.
Real value added in the Plastics Manufacturing Industry grew 3.1 percent per year from 1980 to 2002. The value of shipments by this industry grew 2.9 percent per year.
The comparative growth rates suggest that productivity in Plastics Manufacturing grew about 1.2 percent per year from 1980 to 2002. This is almost equal to the productivity growth rate achieved by manufacturing as a whole.
As mentioned above, plastics industry growth rates slowed significantly in terms of shipments, employment and establishments toward the end of the 1990s and into 2002. This slowdown mirrors what happened to the rest of manufacturing as a result of various economic factors.
Over the past 22 years, plastics industry employment, real shipments and real value added grew significantly faster than manufacturing as a whole.
Current situation (Source: Society of Plastics Industry)
The U.S. plastics industry amassed a $14-billion trade deficit in contained plastics products in 2002, with more than half the total shortfall attributable to China, according to a new report from The Society of the Plastics Industry, Inc. (SPI).
Unique to the SPI report is data collected on the import and export of plastics that are contained in other products, such as automobiles, appliances, medical devices, computers and phones. Government data on the plastics industry takes into account only per se plastics, or those that are included in the plastics chapter of the Harmonized Tariff Schedule. The schedule includes some plastics products, but does not take into account plastics that are incorporated into other goods, such as automobiles and televisions.
According to the new SPI report, U.S. imports of both contained and per se plastics products grew 43.6 percent between 1997 and 2002, while exports in both categories grew only 10.7 percent in the same time period.
Data from the report also indicates that the plastics industry's per se trade surplus (not including contained plastics products) that existed through the 1990s reversed after 2000, with net exports falling 23.3 percent in 2002.
Examples of Plastics Business Lost to China (Source: Society of Plastics Industry)
Case 1: A plastics cutlery and house wares manufacturer lost 14% of his sales valued at $4 million to imports from China. The imported products are being sold for less than the U.S. manufacturer’s raw material cost alone. The manufacturer says he cannot understand how this is possible when the products have to be made then shipped half way around the world. Lower-wage Chinese labor is not the issue because the manufacturing process is quite automated. This manufacturer would like to see the U.S. government do a study to understand how his prices can be so undercut by the Chinese. To retain customers, the manufacturer has had to lower selling prices while absorbing higher prices for raw material that have resulted from high natural gas prices in the U.S. This company has taken the right steps to remain competitive and successful among U.S. and European competitors, but it is worried about the impact on his business from the increasing imports from China. The manufacturer is concerned that his lost profits means less money to invest in the company to help ensure its future and the jobs of his employees.
Case 2: A manufacturer makes Class II patented medical devices, which are registered with the FDA, and sells them internationally. He discovered that unauthorized copies of his patented products made in China were being offered for sale in Canada. For this manufacturer, the lack of enforcement of Intellectual Property Rights is his biggest concern for the long-term viability of his business because he is convinced that China is developing the capability to make and copy increasingly sophisticated products.
Case 3: A household goods manufacturer found his product for sale in Europe packaged to look like it was his, including the Made in the USA label. However, the U.S. manufacturer did not make it here or anywhere. It came from China, including the Made in the USA label!
Case 4: A packaging company, which believes that it is THE low cost producer in the U.S., lost a $600,000 per month customer to China for whom he had already cut his price to the bone.
Case 5: A medical molder that makes proprietary stints for the medical imaging market had his product knocked off overseas for sale in less regulated markets overseas.
On January 20, 2004, the Department of Commerce (the Department) announced its preliminary determinations in the antidumping duty investigations on imports of polyethylene retail carrier bags (PRCBs) from the People's Republic of China (PRC), Malaysia, and Thailand. We have preliminarily found that producers/exporters have sold PRCBs in the U.S. market at less than fair value, with margins ranging from 0.12 percent to 122.88 percent.
Import Statistics: In 2000 PRC exported to the Untied States 20,404,942,000 bags for $107,326,789 at $5.25 per 1,000 bags, in 2001 PRC exported 23,467,582,000 bags for $132,696,703 at $5.65 per 1,000 bags, in 2002 PRC exported 29,154,545,000 bags for $146,959,406 at $5.04 per 1,000 bags.
On average the approximate weight of 1,000 plastics bags is 12 pounds, which would give the average selling price of $.42/lb. This is at or below U.S. raw material costs.
Apart from subsidies, the Chinese producer cannot compete with the American producer. Below is an actual data showing a hypothetical USA vs. Chinese a producer. As you can see without exchange rate & or other subsidizes the Chinese could not compete in the U.S producer.
See Appendix
The Chinese importer to the U.S. in now quoting $.60 per pound delivered to the U.S.A. on plastic film. This model clearly demonstrates that their cost savings is not in labor, but in raw material subsides, other subsides, and their exchange rate. For argument sake, lets conclude the only way to beat the U.S. producer is through some type of subsidies. It is our opinion that if the above model is used, even more production will be moved to China in the near term unless something is done to counter balance these subsidies.
China’s Currency Policy (Source: Society of Plastics Industry)
China continues to follow a policy of one-way market interventions to maintain its currency at a level that economists estimate is between 15 and 40 percent undervalued. We believe that the artificially undervalued Chinese Yuan is having a serious adverse impact on the competitiveness of U.S. manufactured goods and is contributing to a migration of world manufacturing capacity to China, and to an erosion of the U.S. manufacturing base. We believe that China is in violation of both its IMF and WTO obligations by manipulating its currency for trade advantage. Therefore, we think that the Treasury Department must immediately enter into negotiations with the Chinese Government to successfully resolve this matter. Otherwise, China’s continued maintenance of an undervalued exchange rate with the U.S. dollar will continue to promote major distortions in trade and investment, to the detriment of American companies and workers, including plastics.
China’s Industrial Policies and WTO Non-Compliance (Source: Society of Plastics Industry)
China has attracted over $400 billion of foreign direct investment (FDI), most of it in the last six years. This compares with $1.3 trillion for the U.S., $497 billion for the U.K., $482 billion for Belgium-Luxemburg, and $480 billion for Germany. As FDI flows to China are now expanding by over $50 billion per year, China will soon have accumulated the second largest amount of FDI in the world.
Experts have concluded that China’s undervalued currency is just one of several factors behind its success in attracting massive inflows of FDI, particularly into its manufacturing sector. China has pursued industrial policies that have catalyzed its growth as a manufacturing powerhouse. The Chinese Government has designated a number of “pillar industries,” for which it provides preferential benefits for domestic development and foreign investment. Manufacturers in China are supported through a wide range of national industrial policies, which include: tariffs; limitations on foreign firms’ access to domestic marketing channels; requirements for technology transfer by foreign investors; government selection of partners for major international joint ventures; preferential loans from state banks; privileged access to listings on national and international stock markets; tax relief; privileged access to land; and direct support for R&D from the government.
Some of these industrial practices violate China’s WTO obligations. The Administration needs to engage more forcefully with the Chinese government where it violates China’s commitments under the World Trade Organization (WTO).
We do not fear our global competition; we fear playing in a game that is dominated by large multinational corporations and their lobbyists to set the rules that benefit only the shareholders of their corporations. ISO Poly Films, Inc. and the US plastics industry could thrive and provide good paying jobs for our citizens and a tax base for our communities, however we must have a level playing field.
It is our opinion that multinational corporations are complicit with the Chinese government’s willingness to subsidize their operations in China. How long will it take for small to medium size businesses to follow suit? Eighty percent of Americans work for small family-owned businesses. These businesses cannot withstand the willingness of our government to stand by and allow unfair and subsidized trade to overtake the American plastics industry and other manufacturers that are the foundation of our country’s economy. our [global] competition, we fear playing in a game