When Gus Armstrong set his sight on China in early 1990s, he saw China as a huge market to sell his products made in Michigan. So, he established sale office on West Coast in Sunnyvale, CA and hired sales representatives in Shanghai. For years, he could barely crack into the market due to tariffs and foreign exchanges controls. Under China’s Central Bank, the Foreign Exchange Administration(FEA) controls the flow of foreign currencies in and out of the country. Chinese exporters must sell the US dollar, Euro or other hard currencies for their exports to the FEA at the official exchange rates and receive Chinese Yuan in payment. Chinese importers must have their imports approved by the FEA so they can buy the hard currencies to pay international manufacturers and sellers. The potential business partners and government officials all told him that he needed to set up shop to make products in China. There were many incentives for international manufacturers, chief among them is income tax waiver for up to five years. Sales to Chinese customers can be completely in Chinese currency. The first Armstrong joint-venture in manufacturing was born in Beijing. Key parts were imported with tariff from Michigan, spare parts were purchased from local suppliers. Local labors, paid at much lower rates than their US counterparts made the finished products.
If the finished products were sold on international market, the tariff on the imported key parts were refunded. If the finished goods were sold in China, the tariff would not be refunded. Additionally, a 17% value-added tax(VAT) was imposed on the local purchases of spare parts, labor costs and profit margins.
Armstrong found out that the tariff, coupled with much cheaper labor made the country a very profitable manufacturing base rather than a huge market it thought it would be. Slowly, but surely production volume shifted from Michigan to China to achieve higher profit margin. Armstrong is a private company and does not have to report quarterly earnings to shareholders and hedge fund investors. For public traded companies, the pressure to cut costs was always on! What made matters worse was that our government was not on the side of US businesses and workers. China was admitted into the World Trade Organization(WTO) as a developing country in 2000 under the Clinton Administration. The tariffs Chinese exporters face in the US are much lower than the tariffs our manufacturers face in China. The word “outsourcing” was coined and the phenomenon swept America. Our factories were shuttered, job moved to low costs countries. Our entire industrial base was hollowed.
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