Should We Give Up American Jobs to Protect Jobs in China?

An opinion piece by Kip Howlett

This is the second blog in a 3 part series that addresses the countervailing duty and antidumping case filed by 6 of the largest U.S hardwood and decorative plywood manufacturers against Chinese manufactured hardwood and decorative plywood imports into the U.S. market.

Economics matter – Whose job really got gored?

Due to the erosion of U.S. producer’s market share of the overall U.S. hardwood plywood market, many American manufacturers went out of business. Those remaining reduced their production shifts which meant more Americans lost their jobs and were put out on the street. Twenty five percent of the U.S. capacity shut down as more than a dozen companies went out of business. Some survivors even went through bankruptcy.

The remaining reduced capacity produced hardwood plywood at less than a 50% production rate. Total volume production in the U.S. was lower in 2012 than 2011 even with a slow general economic recovery and new housing construction coming out of the lowest rate since the Great Depression. Chinese hardwood plywood imports on the other hand have just kept growing.

Chinese hardwood plywood imports have returned to 2007 (pre-recession) levels while U.S. production is still about a third less than the 2004-2006 peak.

All the industries that supported those American factories were hit as well. Machinery and equipment suppliers, veneer suppliers, loggers, truckers, warehousemen, electricians and maintenance, accountants, office suppliers, the list goes on and on. We estimate that 25,000 people throughout the value chain were put out of work. And as the preceding chart indicates, the U.S. jobs have not come back.

So how can Chinese hardwood plywood producers sell so cheaply into the U.S. market? The importers and Chinese manufacturers belittled American manufacturers during the International Trade Commission hearing because of the high degree of automation in our factories. They compared Chinese producers as more labor intensive. Automation drives up costs in that theory while cheap Chinese labor costs gave the price advantage to them.

There are three serious flaws in that assertion. First, automation increases productivity per worker and fewer workers are needed. More wealth is created which is reflected in better wages. The wage scale in the U.S. is about $15/hour plus benefits versus $15/day in China. There are anecdotal reports of children working in these factories.

Second, product quality suffers. Bloggers refer to “crap” and “need for protection from the product”. (1) In testimony before the ITC using labor to dry the veneer in the sun was lauded by the importers. (2) Solar energy was drying the veneer to 16% moisture content which happens to be over the allowed moisture content in the American standard. Combine that moisture level and irregular inner layer veneer plies due to more labor needed to put little pieces of veneer together and erratic glue spreading and delamination and voids will be common quality problems.

Third and most importantly, labor is not that important cost input in HWPW production. The primary cost component (80-85%) is wood. China has an advantage for all the wrong reasons.

China has a significant wood competitive cost advantage because it is the largest consumer of illegal logs in the world. Contrary to the false assertion that the Chinese industry is sourced from the poplar plantations in China, China imports $3.877 billion of hardwood logs (44% of the world’s total in 2012). Chatham House in London, Environmental Investigation Agency, World Wildlife Fund, Interpol and others estimate 10-15% of those are illegally harvested. Illegal wood bought at a discount provides a significant raw material cost advantage to Chinese producers. (3)

What about the purchasers of hardwood plywood in the U.S.? Will they lose their markets because their Chinese sourced hardwood plywood prices have increased because it is priced more fairly with duties imposed to address the subsidies and dumping currently occurring?

The answer depends on how much hardwood plywood is contributing to the total cost of production. If hardwood plywood is 20-25% of the total cost of a cabinet, the impact is not significant. Product quality will improve because of the better product quality of the U.S. made product. Fewer claims or consumers deselecting are positive effects on both the cost and revenue side. The recall cost is a 100% and probably more of the original price.

Will U.S. cabinet producers lose market share in the new housing market? That depends on the builder choice for quality and demand sensitivity of the cost of cabinets in a kitchen to the overall price of the house. If there are $6,000 of cabinets in a $250,000 house (2.4%) and hardwood plywood is 25% of the cost of the $6,000 cabinets, then the cost of the house will affected 0.06% by the price change. How sensitive is consumer demand to that change when the cost is amortized over a 30 year mortgage? A half per cent increase in mortgage rates drives up the price paid far more.

It is hard to turn down a competing product that is offered at a 30-40% discount. Just because it’s cheap doesn’t make it right.

This case against Chinese hardwood plywood producers is about the fairness of that market advantage. If that advantage is related to government policies providing subsidies, looking the other way on illegal logs coming into the country, dumping into the U.S. market at prices below the actual cost of production, and skirting U.S. regulatory requirements because weak enforcement encourages risk taking, then the remedy is simply what the 6 U.S. producers of over 80% of the hardwood plywood are asking for.

It’s only fair.

(2) Transcript of Preliminary Conference, Hardwood Plywood from China, Inv. Nos. 701-TA-490 and 731-TA-1204 (Preliminary) (October 18, 2012) at 122- 23 (testimony of Mr. Simon, Vice President, Far East American).
(3) ‘Appetite for Destruction: China’s Trade in Illegal Timber’ highlights China’s lack of action against illegal logging

Next: Fairness matters – doing the right thing?