It was not a difficult choice to make. Between 1998 and2001, US imports of house

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It was not a difficult choice to make. Between 1998 and2001, US imports of household cooking equipment from China more than doubled to $640 million, forcing National Presto to decrease the price of its pans from $49.99 to$29.99 during that period. Cheap labor—Chinese labor is six times lower than Mexican labor—accounts for this price deflation. Continuing operations in the United States and remaining price competitive was simply not feasible. Competition on quality, which can shelter domestic manufacturing from outsourcing to developing countries, was not an alternative because Chinese products for export are just as good. When high labor intensity is tied to quality, the Chinese can outdo industrialized countries.

Another factor is that the Chinese have a combination of highly skilled management and low-skilled labor, ensuring that production is efficient and that quality standards are met. This ability to produce high-quality goods is also what allows China to move from export manufacturing of Christmas decorations, toys, footwear, and clothing to household, consumer appliances, and, increasingly, the IT manufacturing sector. National Presto, a US firm that makes high-quality pressure cookers and electric frying pans, had a difficult decision to make in the early 2000s. It could either outsource its production to China or see its market share continue to deteriorate. In 2002, the company closed plants in Mississippi and New Mexico, reducing its US workforce to less than half, and expanded its production in China. By 2003, all significant products marketed by the company were to be sourced from China. Proponents of free trade argue that political rhetoric against trade with China is meant to appease US fears of job losses. Yet, as seen in the following table, only 2.5 percent of all job losses in the United States in the first quarter of 2004 were the result of overseas relocation. While some argue that this percentage is undervalued because it does not take into consideration potential job gains that never materialized, others argue that given economic conditions there was no assurance that firms that created new jobs in China would have chosen to create these jobs in the United States if outsourcing to China has not been a possibility. Like many other US, European, and Japanese companies, National Presto uses an agent in Hong Kong to subcontract production to manufacturing plants in mainland China. Larger companies like Motorola, Philips, IBM Toshiba, and GE have more control over their manufacturing plants in China. Kyocera of Japan, for example, invested $90 million in the early 2000s to construct a high-tech industrial park in Shilong Town of Dongguan City, Guangdong Province. Only 20 years ago Guangdong was dominated by paddy fields; today it is China’s largest manufacturing cluster. China has become the world’s fourth largest manufacturer, after the United States, Japan, and Germany. It has outpaced Japan to become the country having the largest trade surplus with the United States. US politicians and lobby groups blame Chinese protectionist practices for the growing trade deficit between the two nations, which in 2003 was estimated at $124 billion. Among the barriers the United States claims prevent a free flow of its goods to China are import barriers, unclear legal provisions applied in a discriminate manner against US imports, limitations on foreign direct investment, and an undervalued yuan. The last one has generated the most controversy in the last few years. The Chinese yuan has been fixed at8.28 to the dollar since 1994, a rate that critics argue to be up to 40 per cent undervalued. Yet economists do not all agree that the yuan is undervalued. Some fear that a sharp deterioration would hurt not only the Chinese economy but also those trading partners that are most heavily dependent on Chinese imports.

How can distribution of gains from free trade cause much of the political debate regarding trade with China?

Explanation / Answer

Due to free trade --

hence apart from gaiins from trade, protectionist measures imposed by China has created unrest in the political arena in U.S. Undervalued Yuan might hurt Chinese economy as well as of those country who are heavily dependent on it for manufacturing outsourcing.

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