Editorial: Fair Trade Yes, Protectionism No
Nowhere on earth will you find a more beautiful land or a friendlier population than in our neighbor nation to the north. It was a special treat being invited this past June by the Canadian Institute of Plumbing and Heating to participate in a panel discussion at its annual meeting about the impact of imports on the plumbing-heating industries of our respective countries.
Other panelists included Marc Bouthillette of BMI Canada, a master distributor; Paul Lachance, president of Wolseley Canada; and Brent Widdifield of fittings manufacturer Canvil. Moderator was distribution consultant Scott Benfield. Benfield also presented programs about the global economy and its impact on distribution industries, plus a review of a channel survey he had conducted on behalf of CIPH. One part of that survey is particularly instructive.
Respondents were asked to agree or disagree with the statement: “The movement of PHCP manufacturing offshore has offered more opportunities than it has taken away.” Altogether, 52% of Canadian reps and 58% of manufacturers disagreed with the statement. No surprise with the manufacturers, but I was a little jolted by the rep response. Although I have no hard data to support it, anecdotally I sense among American reps a more favorable attitude toward imports. Keep in mind, however, that Canadians view the United States as a foreign exporting nation. Living next door to the world's economic superpower can be troublesome in many areas.
Canadian wholesalers were a bit more circumspect about imports. Some 30% agreed with the “more opportunities” statement, while 25% were “somewhat” in agreement. Wholesalers tend to see more opportunity from imports than manufacturers and reps.
Manufacturers, of course, most directly see their businesses threatened by low-cost imports. While reps and wholesalers may suffer competitive disadvantage with some of their lines, they also have the option of representing foreign companies.
United States attitudes aren't too dissimilar from that of our northern neighbors. PHCP industry citizens in both countries are especially troubled by the flood of ultra-cheap imports from China. So is Mexico. Since 2000, upwards of 500 factories and more than 300,000 maquiladora jobs south of the border have moved to China.
In my presentation, I strove to distinguish unfair competition from free trade. I also drew attention to various benefits arising from low-cost imports. Judging from some of the audience response, this wasn't an entirely popular position to take, but I stand by everything I said, and will reiterate some of it as you read on. Here are some excerpts from my presentation.
R.I.P. “buy American”A recent survey commissioned by Chicago-based advertising and marketing communications firm Marketing Support Inc. (MSI) found a dramatic decline in “buy American” sentiment in the United States. Whereas a Gallup Poll in the early 1990s found 84% of Americans seeking out American-made goods, a survey completed for MSI last spring found 68% saying it doesn't matter who makes the goods. Younger people (18-24) are far more inclined not to care (84%) than seniors 55 and up, although even a slight majority of seniors, 51%, said country of origin doesn't matter.
Manufacturer concernsMoving plants overseas, outsourcing and joint venturing are among the ways United States manufacturers are staying competitive with imports. However, large manufacturers are much better positioned to do these things than the relatively small companies that predominate in the PHCP industry. It takes quite a bit of relationship building, often coupled with capital investment, to strike a deal with foreign firms and governments. Fortune 500 companies have sufficient staff and capital to cover the risk and expense, but it can be daunting for small-business executives.
Private labelingPrivate labeling is starting to take hold among United States wholesalers as a way to compete against low-cost imports. Ferguson Enterprises, Interline Brands and YOW are among the major distribution organizations with a stake in privately branded products made overseas. I've also gotten wind of dozens of smaller United States wholesalers proceeding in semi-secretive fashion with this “if you can't beat 'em, join 'em” practice.
Unfair tradeUnfair competition was the main subject of Brent Widdifield's remarks. His company, Canvil, is the Canadian arm of Anvil. Both companies have succeeded in petitioning their respective federal governments for tariff relief against Chinese fittings importers for dumping products in North America at below-cost prices. It's a heartening story as far as it goes, although Widdifield detailed the considerable time and effort it takes to document grievances and nudge complaints through our respective trade bureaucracies.
I drew attention to the problem of illegal product knock-offs, which have long been an irritant to certain PHCP manufacturers and seem to be on the increase. I used to associate knock-offs with small consumer goods such as CDs, designer clothes, fake Rollex watches, and faucets to some extent in our industry. However, I recently was told of an HVAC equipment manufacturer who discovered a rooftop chiller bearing his company's insignia but which upon closer inspection turned out to be counterfeit. If rooftop chillers are getting knocked off, then nothing is sacred.
In-sourcingDespite all the talk of America losing its manufacturing industry, a considerable number of foreign companies find it profitable to open factories in the United States and Canada. The situation is reminiscent of the 1980s when American auto makers were losing big chunks of the market to Japanese models and begging for government intervention.
Two things happened. The American auto industry stopped making lousy cars and became competitive again. And, Japanese auto manufacturers started setting up plants in America to be closer to their main foreign market - and perhaps to alleviate some of the political pressure urging protectionist measures against them.
In our industry, I cited Wirsbo, Grundfos, Toto, Viessmann, Chicago Faucet and Gerber among foreign-owned firms with production facilities in either the United States or Canada. I'm sure there are others I missed. This is proof that manufacturing businesses do not thrive on cheap labor alone.
The case for free tradeAnyone arguing on behalf of free trade has to buck hurricane-force emotionalism. That's because victims of free trade are easy to identify. We can pinpoint specific industries, companies and individuals that have lost sales and jobs due to lost-cost imports, and it's natural to feel they got a raw deal. More than one person has tweaked my conscience with remarks to the effect: “Easy for you to support free trade, because you have the kind of job not likely to disappear overseas.” And they are correct. Maybe I would feel different if I felt my livelihood threatened.
Nonetheless, that would qualify as emotionalism rather than reason. What's not so easy to identify, but just as real, are the numerous benefits of free trade to our nation, beginning with the fact that low-cost imports increase everyone's buying power and play a big role in keeping inflation from ravaging our economy. Numerous studies also have shown a net gain in sales and job growth due to imports and outsourcing, although some industries may lose while others gain.
For instance, the United States Department of Commerce pegged a $53.6 billion trade surplus in services in 2003 - this despite all the publicity about call centers and other services being outsourced around the world. What we hear much less about are numerous foreign firms setting up warehouses, sales offices, call centers, etc., in our country to help service their United States business interests.
The Organization for International Investing says there were 6.4 million jobs created from in-sourcing in 2004, including 34% in manufacturing. A study by McKinsey-Global Institute pegs $1.14 return for every $1 outsourced. Global Insight, Inc., says that United States real wages increase due to outsourcing. Virtually all of the nation's leading economists support free trade as a net plus for the United States.
Studies and educated opinions do little to erase the pain of those hurt by globalization. Even if you regard free trade as so much academic hogwash, the question remains of how to deal with imports and outsourcing. And that leads us down the road to ever-increasing tariffs and trade restraints, which inevitably lead to retaliation against American-made goods and services. Been there, done that. The result was the worldwide Great Depression of the 1930s. Curing the harmful side effects of globalization would be far worse than the disease itself.
None of this is to say we shouldn't take action against blatantly unfair trade practices, as Anvil and Ward Manufacturing have done successfully with their anti-dumping complaints to the International Trade Commission against certain Chinese fittings producers. Knock-offs are pure thievery, and should be fought with the full force of law and public education. Business interests are absolutely correct in insisting that free trade must be fair trade.
But every cost advantage can't be labeled as unfair. The protectionist lobby is fond of citing deplorable working conditions in many foreign plants as evidence of unfair trade practices. Yet, today's Third World factories resemble American plants of the 19th and early 20th centuries during our industrial revolution. Unions, labor laws, federal regulations and a sympathetic electorate arose over time to make life better for factory workers. Comparable phenomena may well eventually take hold in Third World industrial nations.
As part of his CIPH presentation, master distributor Marc Bouthillette displayed two photos of a Chinese factory taken several years apart. The first showed a decrepit workplace, the second a clean, modern factory of the kind that prevail in North America. The need for quality control by United States firms helps to shape up their importing or outsourcing partners.
It's an imperfect world we live in, and thus impossible to make free trade perfectly fair. Yet, it's hard to see how the world would be better with every nation selfishly protecting its markets from outsiders.