I have recently finished reading Rod Oram’s book Reinventing Paradise which has the tag line “How New Zealand is starting to earn a bigger, sustainable living in the world economy.” While James Kynge does not research the impact on a remote country like New Zealand he does research its effect on Europe and the US.

…

The following conversation when James was on a train in Europe was quite insightful.

I went by train from Prato to Chiasso, a town just over the Italian border in Switzerland. By Chance I found myself sitting next to two Chinese, one older, thick-set man in casual clothing and his young, keen colleague in a suit. The older man was the boss of a textile company based in Zhejiang and his associate was the company’s representative in France, where they had recently acquired a linen manufacturer, Terre De Lin. The young man had taken it upon himself to be his boss’s eyes, ears and cultural compass among the alien corn, offering up an effusion of unsolicited observations in a cloying voice. So when the boss asked him why he had been unable to arrange any business meetings for the next day, the young man went into a discourse on the laziness of Italians. They never wanted to meet because they took so much time off. ‘Their lives are just too comfortable,’ said the young man screwing up his mouth as if the thought tasted bitter. The boss nodded silently as he stared out at the Tuscan countryside.

Both men seemed interested by this theme. A while later the boss remarked that they had been traveling for an hour and a half and had hardly seen a single factory. ‘Foreigners like looking at scenery,’ the young man offered. The boss paused for thought, and then asked: ‘Scenery or production. Which is more important?’

My mobile rang and I answered it.

‘You see, some foreigners can be quite low-quality too,’ the young man said to his boss. ‘And look at his phone. So old. Yours is so much better than his.’

It was true. My phone, with its scuffed corners and dull gray display, was certainly inferior to the boss’s all-beeping, all-flashing, full-color model. Nevertheless, I found myself unable to resist letting them know I could understand what had just been said. ‘Is that so?’ I asked in Chinese.

Disappointingly, the young man did not skip a beat. ‘Yes. I was just telling my boss that your phone does not match up to his. How much did you pay for it?’ he asked.

As the journey went on, we struck up a lively conversation. The boss’s curiosity ranged over many subjects, some familiar, some surprising. Why were foreigners lazy? What was Europe going to do when it did not have much industry left? Could you really run an economy on services alone? Did European cows really consume $2 a day in farm subsidies? Was there any reasons for the European Union to exist? Hadn’t it come into being because a few French and German politicians had wanted to play political games?

In among the questions, there were statements. China, the boss said, would be finished if it took its eye off economic construction and started to play politics again. Playing politics was the worst thing that could happen to a country. During the Cultural Revolution, playing politics had cost the formal education of millions of people, and the boss had been one of them. Making money was the only objective truth, he said. But foreigners already had enough money, so now they were playing games with politics.

(Chinese view all non-Chinese as foreigners even when they themselves are living in a foreign country). I asked the boss how he found doing business in an alien culture such as Europe. ‘It is better than before. Five years ago, hardly anyone in the textile industry would meet us. Some would not even take our calls,’ he said. ‘Now, wherever we go, we meet the CEOs. You know what the difference is? Money. It is the only thing that foreigners respect.’

…

At lunch, the conversation was somewhat somber. The business of gold was in trouble. Northern Italy was home to over 10,000 jewelry manufacturers, most of them small-scale artisan outfits that, taken together, make up the largest gold jewelry industry in the world. But competition from China and Turkey was threatening to wipe them out. You could see the changes already in Italy’s demand for refined gold; in the last four years it had slumped from over 600 tons annually to around 350 tons. Camponovo saw little prospect for an improvement. Every year, he said, Chinese entrepreneurs and designers decended on the big jewelry fairs in northern Italian towns such as Vicenza to buy speciems to take home and reproduce at less than one-tenth of the Italian price.

What really exercised him during our lunch and later during discussions in his office was how ignorant the Italian and Swiss governments seemed to be of the nature of Chinese competition. From his perspective, the threat came less from China’s rise than from the failure of European governments to understand it and formulate policies to deal with it. For instance, he said, corporation tax rates in his canton of Switzerland were effectively over 50 per cent of profits. But in spite of this heavy burden, the canton announced larger budget deficits year after year. The reason for these deficits was not any significant increase in spending on essential infrastructure; Chaisso is one of the wealthiest places in Europe and the roads, railways, schools and hospitals are already excellent. The main cause of the deepening deficit was state payments to individuals for medical treatment. Of some 300,000 people living in the canton, around 90,000 qualified through various loopholes for help in paying their health costs. ‘We are killing ourselves with comfort,’ he said.

Healthcare was one cost. Unions were another; there were ten different unions represented among the staff who worked in Componovo’s gold refinery. The red tape and the welfare payments were suffocating, he said. In every company and profession it was the same story; the socialist welfare state had turned from a boon to a burden. A couple of years ago, he said, there had been a move to increase the twenty-five-hour working week of school-teachers in the canton by one full hour. But many teachers opposed this, so a public, canton-wide referendum had to be held to resolve the issue. Camponovo shook his head at the memory of it.

I thought of the boss and his assistant on the train and wondered what they would make of a conton-wide referendum on a twenty-five-hour week for teachers.

… Switch now to small town USA…

The last person I meet before the speeches started was Eric Anderberg of Dial Machine, a fair-haired man in his thirties with an open face and a quick intellect. He had been to China on a trip led by Manzullo and Dennis Hastert, Speaker of the House of Representatives, and he sat on a committee in Chicago that provided the Federal Reserve Board with feedback on the state of American industry. He saw Rockfords predicament from both a micro and a macro perspective. Dial Machine had had to let go thirty of its seventy staff in the last couple of years and Anderberg seemed deeply affected by the experience.

‘How do you tell people who have worked for you for all of their life, people whose families you know, that they no longer have a job? Everyone knows that a skilled, qualified machinist earning $16 an hor will not find another factory job in Rockford now,’ he said. The place his former workers were most likely to end up was behind the counter at the discount end of East State Street working in Lowes, Home Depot, Target, Sam’s Club, Menswear House or Wal-Mart itself for $7 an hour without a pension. ‘The government says that it is creating jobs for those people leaving the manufacturing sector. But I say what kind of jobs? No wonder real wagers were falling across the economy,’ Anderberg said.

His view of free trade was that it was fine as long as it was fair. But competition with China was structurally and qualitatively unequal. The Chinese fixed the value of their currency against the US dollar, keeping it undervalued so as to give their exports greater competitiveness. They provided little or no welfare for their workers, so their costs were artificially low. There were no independent unions in China, so the safety standards he had seen in Chinese factories would have been illegal in America. The state banking system provided cheap credit to state companies that could default without consequences. The central government gave generous value added tax rebates to exporters that were not available to US companies. Restrictions on emissions in China were lax, so companies had to pay relatively little to keep the environment clean. Chinese companies routinely stole foreign intellectual property, but it was difficult to prosecute them because their courts were either corrupt or under government control. Finally, the state kept the price of various inputs, such as electricity and water, artificially low, thereby subsidizing industry.

As the main course of the dinner arrived, Frink got up to speak. From the start he was at pains to identify himself with his audience rather than with the bureaucrats he worked for.

He explained that his position had been created in response to criticism from small and medium-sized manufacturers towards the policies and efficiencies of the US Department of Commerce. He did not know why the government had not seen fit to appoint a lead advocate for manufacturing before. After all, agriculture has its own full Secretary even though it contributed about 2 per cent to GDP. Manufacturing makes up 15 percent of GDP, and with the multiplying factors added in, its influence spread up to 30 to 40 percent of the economy.

Until that point he had the audience in the palm of his hand. There were deep nods, eruptions of laughter and amused smiles. His ‘champion of the little guy’ build-up had raised hopes for a piece of good news; a promise, a pledge or a projection that everything was going to be OK. But none came. In fact, he seemed to switch sides. It turned out that he thought outsourcing, a prime cause of Rockford’s malaise, was a good thing. ‘Who knows where it will lead. But we can’t be protectionist.’

As people filed out of the hall after the dinner was over, there was disappointed murmurs and complaints. How could the so-called champion of US manufacturing support the wave of outsourcing that had decimated small and medium enterprises nationwide and thrown 3 million onto the job market? Manzullo helped me understand. Missing from the Rockford dinner, were the representatives of the Fortune 500. America’s big multinationals were the ones who benefited from outsourcing, and they were also the ones who controlled US political attitudes towards the manufacturing sector. They financed the campaigns of most of the Congressmen on Capitol Hill. If the multinationals said outsourcing was good for America it was good for America until such time as ordinary voters could convince Congressmen otherwise at the ballot box. ‘We have lost a lot of market share to China, and a lot of guys here have gone out of business because of that,’ Manzullo said. ‘Nevertheless, Boeing has about a $250 million presence in northern Illinois and the largest purchaser of Boeing aircraft is China. You gotta fight this thing and yet you gotta do it correctly because their economy has to be robust enough to buy the stuff that [companies such as Boeing] are manufacturing.’

This dichotomy of influence springs from globalization’s great failing: that although goods, services and capital are mobile across borders, jobs (human capital) are much less so. Even if workers wanted to move their lives and families to different countries to work in unfamiliar conditions, the restrictions on such types of movements are legion.

The result is that the beneficiaries of the cheap, diligent and often and often skilled labor available in China are overwhelmingly the multinationals. And the benefits they have reaped have been handsome. According to a recent study, about 25 percent of the profits that American multinationals make these days derive from their foreign subsidiaries. Or, to put it another way, 25 percent of the market value of these companies – a whopping $2.7 trillion – is built on profits earned by overseas arms.