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 Richmans' Trade and Taxes Blog

Caterpillar's New Chinese Factory ignites Voter Rage
Howard Richman, 9/30/2010

This week, Caterpillar  announced that it will build its new factory in China in order to have access to the Chinese market. Meanwhile, many of Caterpillar's American workers are laid off.

In a few years, the Chinese government will demand that Caterpillar move its R&D laboratories and patents to China as a condition of continuing to sell to the growing Chinese market, and Caterpillar will do so, partly because of Chinese government demands and partly because it will be more convenient to have its R&D near to its factories. All should be profitable, until Stalinists in China's Communist Party end China's version of Lenin's "New Economic Plan."

But Caterpillar doesn't have any choice, were Caterpillar to expand its American factories it would be able to protect its proprietary technologies, but it would have little access to China's rapidly growing market due to the Chinese government tariff, non-tariff, and currency-manipulation barriers. And U.S. markets are not growing, due to our government's toleration of Chinese tariff, non-tariff, and currency-manipulation barriers.

Tim Sullivan, CEO of American heavy-equipment manufacturer Bucyrus International, explained the Chinese market to Presidential candidate John McCain back in April 2008. Business columnist John Torinus witnessed the exchange:

Fresh from a business trip to China, Sullivan informed McCain that China had slapped a 40% tariff on the kind of giant mining equipment that Bucyrus makes in South Milwaukee.

He also said the Chinese had restricted foreign ownership in Chinese mining equipment companies to a minority position. In other sectors, a majority - even 100% - can be owned. Sullivan said his Chinese competitors are opening three new plants behind the protective tariff walls.

Meanwhile, American voters are furious with Washington and with American corporations according to the latest Wall Street Journal/NBC News poll. Here's how WSJ reporter Janet Hook summarizes the results:

A new Wall Street Journal/NBC News poll released Tuesday found outsourcing was the top factor cited by Americans as the cause of the country's continuing economic distress.

Eighty-six percent of those surveyed said outsourcing of jobs by U.S. companies to low-wage foreign countries contributed to economic sluggishness. Among other factors cited 76% pointed to corporate profit-seeking and 72% blamed high health-care costs.

The poll also found that 53% of respondents believe free-trade agreements have hurt the U.S., up from 30% in late 1999. The shift was mostly attributable to a change in thinking by upper-income people, according to the poll.

Bill McInturff, the Republican pollster who conducted the survey with Democrat Peter Hart, said the declining popularity of trade deals opened one of the largest rifts between public opinion and the views of Washington policy makers, among whom free-trade policies have enjoyed strong bipartisan support.

Democrats are hoping that voters will fail to note that they completely failed to solve these problems when they had control of the House, Senate and Presidency. So they are promoting bills designed to take advantage of voter sentiment:

  • Currency Bill. House Democrats with a lot of Republican support, passed a currency bill which urges, but does not require, that the Commerce Department consider currency manipulation when deciding countervailing duty suits brought by American industries.
  • Outsourcing Bill. Senate Democrats, with 100% Republican opposition, tried, but failed, to pass an outsourcing bill that would take away a corporate-income-tax break from companies that move their factories abroad in order to sell back to the United States, unless those companies also move their headquarters out of the United States.

There are common sense solutions available that would be embraced by American voters should they be implemented by either party:

  1. Scaled Tariff. Balance trade through a tariff whose rate would be scaled to our trade deficit with each currency-manipulating country. Such a tariff would force China and the other currency-manipulators to take down their barriers to American products.
  2. Eliminate Corporate Income Tax. Replace the corporate income tax with a value-added or sales tax on goods so that foreign-produced products would have to pay our taxes, not just American-produced products.

Voters are seething. Democratic leaders are starting to listen, but are proposing ineffective solutions. Republican leaders have not yet started listening.

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Comment by Jose Rodrigues, 9/31/2010:

Wow...ever heard of mercantilism?  It didn't work.  How about the tariff wars in the great depression?  Your going after the symptoms and not the disease.  I find your advocation for more currency manipulation absolutely horrific.  Big government needs to end and a good start would be shutting down the empire along with the merchants of death.  After that abolish the dept of energy, transportation, agriculture, and education. Then forget about free trade agreements and just set the damn tariffs low.  When thats done burn the IRS building.

Look at it (the federal government).  Is it in some competition to be the next soviet Russia?  Central planning never works and empires always fall.  Quit trying to confuse people by advocating more power to the central planners and start advocating for the demolishing of the leviathan.


Response to this comment by Howard Richman, 9/31/2010:
I beg to differ with you. Mercantilism does work. By maximizing exports and minimizing imports, England, France and Holland brought down and replaced the world's leading power in the 15th century by destroying its industries.

Comment by Poorman, 9/31/2010:

Are you RIchman running for congress or are you brain dead ?

Comment by Elvenrunelord, 9/31/2010:

You people who don't understand that the usa worker cannot compete against slave wage labor and continue to have a decent quality of life in America need to get a clue.


Screw that watered down version the demos presented....go with a strong " If you sell it here, you make it here or get out of dodge " bill


Do we let corporations control our government or do we take back control?


Response to this comment by Howard Richman, 9/31/2010:
The problem is not low Chinese wages, it is lack of trade balance. Normally trade is balanced, but the mercantilist countries maximize their exports while keeping out our imports by using currency manipulations to keep their products underpriced and ours overpriced. If trade were balanced, then the jobs that were being lost in import-competing industries in the United States would be replaced by even higher-paying jobs in exporting industries.

Comment by save our country, 9/31/2010:

Two things need to happen.

make the stuff in china and sell it there only. do not import it back in US since chinese gov. is subsidizing their exports so us can never compete aginst chinese make products.we should not every do research in china as we will loose our tech confidentiality. these chinese are very famous in stealing and copying other people's ideas. never do reserach there. next thing we will see otherwise is have chinese cos selling their excavators in US at half the price. that will destroy caterpillar

bring all profits back to us from overseas operation. but chinese won't let us do that. they have grown very strong and are bullying their unfair trade regulation. we should bully them back.

dems are doing right things but corporation governed repubs are not going to let good things happen to this country.

Response to this comment by Howard Richman, 9/31/2010:
Why shouldn't Caterpillar be able to make goods in the U.S. and sell them in China? Why should American markets be wide open to Chinese products while Chinese markets are closed to American products? President Obama sent Hillary to China in February 2008 to beg for loans to pay for his government expansion, not to demand balanced trade. The Democrats want your vote without doing anything effective.

Comment by Jim Dugan, 9/31/2010:

Full disclosure. I work for Caterpillar.  The company did announce plans to open a new factory in China to produce mini excavators.  In the last several months Caterpillar has also announced multiple plans for new factories in the United States.  New factory in Texas (500 jobs), grand opening of factory in Arkansas (600 jobs) investment of $500 million for capacity and new products at two existing factories in Illinois where Caterpillar employs more than 20,000 people alone.  New factory in North Carolina where we already employ 2,000.

The factory in China to produce mini excavators is not outsourced from the U.S.  Caterpillar makes products like these in China to sell in China because it is not possible to make small machines like these in the U.S. and export them to China without losing money on each machine.  That is not a business model (selling product at a loss) that is sustainable.  Our factories in China to provide a base of operations that allows Caterpillar to export other products from the U.S. to China.  Caterpillar is a NET EXPORTER to China.  What we make in the u.S. and sell to China and other countries supports jobs in the U.S.

Response to this comment by Howard Richman, 9/31/2010:
Jim, Thank you for your comments. I have a question for you: What is the current Chinese duty on small crawlers that are imported from the United States?
Response to this comment by Howard Richman, 9/31/2010:
Joe, I looked it up myself. China's tariff on crawler excavators is 30%.

Comment by Doug, 10/7/2010:

After much consideration, I wonder just how much we can do about this.  I've worked in the related field of airport equipment here in China and have seen huge Euro-machines reverse engineered and replicated in just months. I hear BYD (Buffets investment) in Shenzhen has reverse engineered a top of the line Merc. Do patents really matter here in China? Even if companies don't play ball with China, their products will just appear a little later on the market with a new brand.  The whole premise of this opening up is to develop their economy enough to become consumers of our sophisticated goods. Well I don't know about that... they seem to trying to produce those goods by themselves too. Will the jobs ever come back without a virtual import ban? Or will they move to cheaper countries China is investing in now, like Africa. Well, that's another story...

Comment by tmor4, 10/20/2010:

simple solution          tariff us    we tariff them

Comment by ARCHIE KELLY, 11/6/2010:


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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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