Asian Manufacturers : Is Turnabout Fair Trade?

When the British troops laid down their arms at Yorktown, Virginia, a colonial band played "The World Turned Upside Down," a popular air marking the absurdity of the occasion. Now the American economy is turned upside down, and the small businesses that once fortified it have exchanged places with Asian manufacturers that America once sought to protect. No man’s enlightenment is complete without the deepening amazement that comes with having seen such a reversal.

In the case of the US economy, it happened in a piecemeal fashion — with Fair Trade laws playing a pivotal role — that was all the more insidious for being deliberate. The national agenda that was followed was intended to prevent the fragile nation states of the world from going communist.

As a kid, I had a zoomed-in view of the transition. My father was part of it, as president of a company that attempted an end run around the nation’s Fair Trade laws, which, for those too young to remember, specified the minimum retail price at which a product could be sold. These laws were intended to protect small mom and pop businesses from being bankrupted by chain stores during the Great Depression. And they largely succeeded in their mission. Main Street thrived because outfits like Wal-Mart were prohibited from rolling back prices.

Needless to say, the Fair Trade laws weren’t fair to consumers, who were forced to pay virtually the same price for goods sold at linoleum-floored outlets like Wal-Mart as they did at marbled emporiums like Saks Fifth Avenue.

The complexity of the market, which created gray areas in the laws and made their enforcement difficult, was seized on by my father as an opportunity. He bought surplus stock from well-known manufacturers, re-labeled it, and sold it for considerably less. His private label, “Amcrest,” is still remembered fondly by smart shoppers as having been an economical way to buy everything from mouthwash and undergarments to watches and refrigerators. The brand became so big that the government sued my father and nearly put him out of business.

End of story? Not quite. Shortly after the government filed suit, someone at the State Department had a bright idea. While the government would not permit my father to continue to buy surplus output from American manufacturers, it encouraged him to do the same thing...from manufacturers in the Far East.

The State Department considered this an act of enlightened self-interest along the lines of the Marshall Plan. Experts opined that it would save Japan and Taiwan, and possibly the rest of Asia, from falling into the communist orbit. After all, China and North Viet Nam had already fallen to communism. Singapore was toying with the ideology. Who could say where it would pop up next? People like my father would bring jobs and prosperity to Japan and Taiwan, and the grateful citizenry would form vibrant democracies and become bastions of anti-communism. Nobody ever imagined that these once backward nations would someday be eating our lunch – and our dinner.

The U.S. policy further allowed manufacturers in these nations to sell their wares largely free of American tariffs. So what began as a trickle of surplus output became a flood of finished goods. At the beginning, most of the stuff was simply cheaply made. But it didn’t take long for Japan to learn the gospel of quality from the American engineer Edward Deming, whom American manufacturers shunned.

Japan moved up the value chain. My father was among the first to begin importing Sony TVs, which were leagues better than American sets. South Korea followed Japan’s arc. Taiwan, too, stepped up, though it did so with industrial policies that targeted the software and microprocessor industries.

As these trends were taking shape, the U.S. was hit with high inflation. By the 1970s, most states decided to repeal their Fair Trade laws, setting Wal-Mart on a trajectory to become the nation’s largest corporation. Later, under pressure from Wal-Mart and others, Taiwanese businessmen moved their factories to China, where they could turn out the same umbrellas and Tupperware at one tenth the cost.

Taiwan didn’t suffer. It went on to manufacture the first IBM desk-top computer, and to found Taiwan Semiconductor, whose chips run most of Dell’s products. By the mid nineties, Taiwan, no bigger than New Jersey, had a larger store of foreign currency reserves than the United States did.

Wal-Mart and other American firms that were committed to low cost production then lobbied the U.S. to permit China to join the World Trade Organization. This would allow China to sell its wares in America without tariffs. Once China was accepted as a member, American-based factories found themselves unable to compete with the cheap goods that flooded in from the Middle Kingdom. To survive, they, too, moved their production and jobs there.

By the new millennium, the government policy that had begun years earlier to prevent nations like Japan, South Korea and Taiwan from going communist had been turned upside down. The economic forces that our policies unleashed effectively mandated that all production take place in China, a communist country that has no interest in democracy, freedom or human rights. The transplantation into China of millions of American jobs and thousands of U.S. industries that once paid taxes to the U.S. Government has forced that government to borrow from China, now America's largest creditor, just to meet expenses.

Ironically, China is providing a significant amount of the money needed to bail out our sick economy. The U.S.'s high unemployment, tottering banks and vast trade and government deficits actually mirror conditions in Japan and Taiwan after World War II, conditions that our own government believed to be fertile ground for communism.

It is as if the points of the compass were reversed, and the United States was suddenly in the grip of antipodal forces intent of turning our world upside down. And what’s left of our treasure is falling fast from our pockets, and into the iron rice bowl of a communist dictatorship.

Tim Koranda is a former stockbroker who now works as a professional speechwriter. He can be reached at koranda@alum.mit.edu.