Archive for the ‘China’ Category

China and Solar and Jobs

Posted: September 19, 2011 in China, Economy, Jobs, Politics

As we are all aware, the Obama administration issued a $500 million loan to a California company called Solyndra.  Solyndra’s business was making solar panels, and the loan was part of Obama’s Green Jobs Initiative.  I say “was” because we are all aware that Solyndra closed its doors, laid off 1100 workers, and filed for bankruptcy protection at the end of August.  Their chief reason behind their actions was that they could not compete with low-cost competitors from China.

American Solar Efforts

According to a paper by the Center for American Progress, the United States is currently ahead of China in installed solar capacity (2.6 GW vs. 700 MW for China), and the U.S. is also ahead of the curve regarding solar equipment, with $1.9 billion in overall net exports in 2010, and a $247 million trade surplus with China, but that is primarily in the raw materials, not in the job-creating manufacturing of finished products.  But U.S. policymakers are gearing up to slash funding for the basic support programs that created this impressive lead, and that means we could easily lose our edge to China.  Compounding this is the failure of not only Solyndra, but several other U.S. solar companies filing bankruptcies recently.  According to a recent NPR interview, even the solar companies that have been established for a while are having a rough time managing their costs, especially compared to their main Chinese competition.

China’s Subsidies

For most of the past decade, the Chinese government has been subsidizing their home-grown solar manufacturers.  They haven’t been working necessarily at innovation but rather at simply providing existing technology at a much lower price than anyone else out there.  This is pattern that has been seen other times in other places.  Japan indirectly subsidized its fledgling auto industry in the 60s, 70s, and 80s, primarily by placing large tariffs on vehicles imported into Japan, requiring compliance with overly stringent regulations, etc.  This allowed their cars to be overly competitive on price, which allowed them to gain market share in the U.S.  Once that market share was established, the subsidies were no longer needed.  China’s auto industry is benefiting from similar regulatory assistance…for U.S. (or other) auto manufacturers to do business in China, they need to enter into an ownership agreement with a Chinese manufacturer.  With regards to solar, the Chinese government is simply subsidizing the companies, allowing them to establish their processes and gain market share without having to worry about cost.  In the aforementioned NPR interview, it was noted that U.S. Department of Energy estimates were that the Chinese government provided more than $30 billion to their solar companies.  Compare that with the $500 million given to Solyndra, as a cornerstone of the Obama administration’s Green Jobs efforts.

What Can Be Done?

Obviously there are as many opinions as there are people with some sort of ability to publicize those opinions (see this blog!), and those opinions are as varied as anything.  Tariffs, regulations, subsidies, further innovation, the suggestions are endless.  Personally, I’m looking at it from the overall economic development (meaning jobs) perspective.  I have argued in this blog, as well as other outlets on the web, that the U.S. really needs to revive, reestablish, restore its manufacturing capacity.  Manufacturing breeds innovation, as evidenced by the innovations we are now seeing coming out of the countries we have outsourced much of our manufacturing to.  We are a country of innovation, and innovation can occur without the symbiotic presence of manufacturing, but where does that leave us?  The U.S. becomes a net exporter of knowledge and innovation…we sell ourselves to the highest bidder and become dependent on others for any and all durable goods.  We effectively become a service economy for others, and not to disparage the service industries, but that is not a recipe for a successful, vibrant, growing economy.  As much as I have been a free market advocate, desperate times do call for desperate measures.  The measures I will outline are desperate and have a slim chance of being implemented, but they are interrelated and offer what I feel is the best chance to not only save the U.S. solar industry, but create green jobs, improve the environment, and stimulate the economy…both directly and as a methodology to apply to other industries within our economy.

First,there needs to be regulatory relief for U.S. firms.  There are many angles to attack in this regard.  The most obvious would be in the form of tariffs on Chinese imports.  Other methods could be in the form of tax benefits, relaxing of labor or environmental regulations, or the imposition of safety/manufacturing standards geared towards U.S. firms.  These sorts of efforts have worked for the Chinese, as well as the Japanese and others.  We know that Chinese environmental protection policy has historically been lax, as evidenced by this Reuters article, and their safety and quality performance hasn’t quite risen to those of the Western economic superpowers.  All one needs to do is hear stories about suicidal working conditions in the plants that make the iPad, or search for Chinese Automotive Crash Test on YouTube to see where they are able to save costs.

Second, I would institute a serious program of subsidies for manufacturing efforts, and by serious I mean on a scale comparable to that of the Chinese.  As the Solyndra case illustrates, there would be an obviously rigorous vetting of applicants, but a major subsidy program is necessary, in my opinion.  China has taken the tack of not going for the innovation initially, but rather letting the companies establish themselves and refine their processes to the point that they can compete with anyone.  As I stated previously, manufacturing does encourage innovation, and the establishment of a stable manufacturing element by the Chinese will only serve to facilitate their own innovations.  Particularly as they gain market share and revenues with which to finance said innovations.  Such a program would be difficult to implement under good economic conditions, but after the debt ceiling debacle in Congress, it would face an extremely rough path.  But as I noted earlier, desperate times call for desperate measures.  Raising the debt ceiling would obviously have to happen.  A comprehensive rewrite of the tax code that standardizes rates, minimizes exemptions and applies to all would probably upset a lot of people, but figuring out the appropriately “fair” rate to apply to everyone would likely improve the tax burden of many while potentially increasing tax revenue to the government.  Pie in the sky thinking, but why not go for a moon shot?

Third, and this would be the most difficult aspect of my glorious program, I would somehow require our elected officials to actually work together.  Our current state of government can barely pass its own budget to stay open, much less agree on a massive financial and regulatory overhaul of international policy.  My inner optimist likes to believe that everyone would recognize how close to the edge we are teetering, recognize that something needs to be done, understand the benefits that can be realized from such a program, and finally come together for the common good to implement such a program.  This is where the public will have to get involved en masse.  We must recognize that a goal of economic development can ultimately benefit everyone individually, as well as their individual projects, goals, and desires.  Everyone needs to compromise a little, with the understanding that success in this endeavor should more than make up for any individual sacrifices that are made.  Once we the people agree on a course of action, we need to decisively act to elect representatives at all governmental levels that will heed our direction and implement these programs.  Extremely uphill battle, but I think we’ve reached the point where we have to make a stand.

Sometimes my inner optimist needs to be slapped in the face with a wet fish, but I want him to be right.

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In a previous post, I laid out what I thought would be the best possible jobs program that had the proverbial snowball’s chance of actually creating jobs and generating economic growth. My rationale exhibited elements of both Keynesian thought (government spending) and Reagan-esque/Tea Party mantra (people working will generate revenue which will go back into the economy, thereby creating more jobs, and create more revenue, and so on and so on). I know that Democrats would be less than enthused about the idea of spending the money on private sector firms and letting them do business with as little regulatory impediment as possible. Conversely, I know that Republicans would be every bit as frustrated at the notion of further government spending on giant public works projects. Frankly, it is that element of annoying those on both sides of the aisle that tells me I might actually be onto a workable idea.

So. Having finished up a good workout at the gym, I decided to see what was happening in the world and fired up NPR’s website. The top center article was an article about the SF/Oakland Bay Bridge project undertaken by Caltrans. The focus of the article wasn’t that it was a prime example of the type of long-term infrastructure project that I (and President Obama) have talked about. Rather, the focus of the article was that a good portion of the fabrication and manufacturing work was outsourced to China. In the article, California Assemblyman Luis Alejo (D-Salinas) states, “When you have a project of that size here in California, it has a multiplier effect…it gives thousands of families those jobs, and then those paychecks and their subsequent spending ends up going back into our economy. And so now all that money has permanently disappeared from California.” That certainly sounds familiar…and it’s a Democrat that’s agreeing with me! In the article, it noted that the contractor who won the bid was approximately $400 million cheaper than the next bidder, partially due to the fact that (as an example) Chinese steel polishers make approximately $12 per day. A district director for the United Steelworkers Union noted that it was impossible for American workers to compete with workers earning only $12 per day. And he’s correct.

In the course of dissecting the unemployment figures, there have been discussions floating around the media and the internet (Linkedin is a prime source) as to whether America needs to revive/maintain its manufacturing base. Personally, as you may have surmised, I fall into the camp of revive/maintain. I feel this way for several reasons (many of those out of work come from manufacturing-related industries, manufacturing breeds innovation, without a manufacturing base we become a contributory economy, without manufacturing we become dependent on/at risk from other countries for our manufactured goods, etc.), but I’m not blind to the fact that manufacturing in the US has a hard time competing on a global stage. On one hand, you’ve got places like Malaysia, India, and yes, China paying their workers a microscopic percentage of what US workers make, while the government not only subsidizes the companies’ work but also passes all sorts of regulatory measures designed to maximize protection and competitiveness of those same companies. China even requires foreign companies who want to do business in their markets to enter into an agreement with a local firm (who would otherwise likely be a competitor), usually involving some level of ownership interest by the Chinese firm in the foreign firm (very true in the Chinese automotive industry, for example). On the other hand, businesses actually operating in the US are subject to extremely rigorous regulations in the financial, labor, and environmental elements of business, not to mention much of the manufacturing work is done in union shops. Where other countries minimize restrictions and maximize support, we seem to do the opposite.

It will certainly upset the true believer, free market members on the right, but it may be time to consider some protectionist actions. If nothing else, simply imposing increased import duties on imported products. Possibly even going all the way to sectoral reciprocity, where we would impose regulations/conditions/restrictions on products (for example) from China that were effectively identical to those that China would impose on similar products from the US. On the other hand (see, I’m really good at finding that middle ground that can piss everybody off!), I would certainly look at abolishing the unions. There may have been a time when they were genuinely effective at protecting workers, but the combination of the labor laws that are currently in place, the other regulations that govern the workplace (i.e. safety, environmental, etc.), and the seemingly instant transparency of the media (CNN, TMZ, Drudge Report, internet), I question whether the unions are genuinely necessary to ensure that the workers are not wholesale taken advantage of. On a semi-related note, there have been some new manufacturing jobs created, primarily in the automotive industry. Foreign automotive manufacturers from Toyota to Mercedes Benz to Hyundai to Volkswagen have set up major (and sometimes multiple) manufacturing facilities in the United States. And the one thing that most, if not all of them share…they are not unionized. And despite not being unionized, the workers at these manufacturing facilities don’t seem to be abused, exploited or otherwise placed in harm’s way or taken advantage of. As with other suggestions I’ve made, the majority of the ideas I’ve shared should ultimately be temporary in nature. Once the economy has found its footing and developed positive momentum, these measures should be slowly dialed back so as to restore general market activities.

Ultimately, it boils down to the fact that we are suffering a jobs crisis. Every economy needs some sort of core or base, and a base that consists of manufacturing and other similar/related uses ensures that not just the economy but society as a whole rests on a stable and supportive base. Even on a temporary basis, I believe that these types of measures can definitely have a positive effect and do it quickly