Marketplace: Made in (China) Israel

If workers do not have jobs, they lack income, they cannot spend, and then everyone suffers, not just those in manufacturing.

Pharmacist pouring something 311 (photo credit: NATI SHOHAT/FLASH90)
Pharmacist pouring something 311
(photo credit: NATI SHOHAT/FLASH90)
MY WIFE RECENTLY BOUGHT A lovely white dress with a floral pattern. She showed me the label. It had a long string of check boxes: Made in Italy, France, Britain, Turkey, China, India, Greece – everywhere but Israel.
But Sharona’s new dress was indeed made in Israel. So the dress company scribbled “Israel” on the label, in handwritten Hebrew. “Made in Israel” was not important enough to merit its own English-language printed check box.
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As I read the label, I think of three newly-unemployed workers, Lena Cooperstein, Zena Shpadov and Damian Singer. They were thrown out of work, along with 107 other workers, when Sderot’s Nisan Industries medical- bandage plant, where they worked, closed in August. Cooperstein, a divorced mother of a little girl, worked at the plant for 18 years. Shpadov worked there for 20 years, and Singer for 27 years.
What are their chances of finding new jobs? “We will all find ourselves at the Employment Office, which has no jobs to offer,” Shpadov told the daily newspaper Yedioth Ahronoth. On June 1, 109 employment seekers were registered at the Sderot Employment Office. In that month, only 39, or about 40 percent, actually found work.
The villain is not Hezi Nisan, who owns 60 percent of the company. Nisan moved his plant from Tel Aviv to Sderot in 1990, out of both business and Zionist motives. (Plants in development towns like Sderot get government grants and tax concessions.) Nisan has other plants on the periphery, in Tiberias and in Kibbutz Shamir, near Kiryat Shmona in the North. In Sderot, his factory endured numerous rocket attacks and took a direct hit from a Hamas rocket in 2002. He closed the plant in August, in sorrow, because of mounting losses.
Who is to blame? “It’s tough to compete with East Asia,” Singer says.
Should we blame China? No, we should blame ourselves and our impotent leaders for surrendering to China without a fight.
Why does it matter where the dress, or anything, is made? My fellow economists say, free trade is win-win. Everyone gains. My response is, we don’t have free trade. It’s free in one direction only (the direction where goods flow from Asia to Israel and the West), and moreover, free trade is not always win-win, it can be lose-win; and guess who is on the losing side? America, Europe and Israel.
Here is a simplified example to explain why Cooperstein, Shpadov and Singer are jobless. Suppose you own a falafel stand called “Made in Israel Falafel.” Business is good and you employ a dozen workers in two shifts, whose wages feed and clothe their families. You sell falafel for 12 shekels and turn a profit. Then, a competitor opens a similar stand right next door, called “Made in China Falafel.” The competitor sells falafel for six shekels, half your price. How come? Arich uncle covers all his losses. Within three weeks, “Made in Israel” is out of business. Twelve families no longer have a breadwinner.
The “rich uncle” is the People’s Bank of China. The bank sets China’s exchange-rate policy and keeps its currency, the yuan or renminbi (which means “money of the people”) at about 7 yuan per dollar. So a Chinese bandage priced at 7 yuan costs $1. If supply and demand were allowed to operate freely, the exchange rate would be about half, or 3.5 yuan per dollar. The same bandage would then cost $2. Maybe then Nisan Industries could compete.
What keeps the dollar so high relative to the yuan? The People’s Bank of China buys $1 billion worth of dollars daily. China now holds nearly $3 trillion in dollar assets as a result. If China stopped manipulating its currency, its “falafel” would cost double, in terms of dollars (or shekels), because you would get only 3.5 yuan per dollar, instead of 7, or about 1 yuan per shekel instead of 1.8 today.
China’s exchange rate been manipulated for 15 years. The exchange rate was 8.35 yuan per dollar in 1995. It stayed at that level until 2004. The exchange rate was then allowed to appreciate very slowly to 8.19 (2005), 7.97 (2006), 7.61 (2007), 6.95 (2008) and 6.83 (2009). At that rate, this excruciatingly slow Chinese “water torture” global rebalancing will be completed by the year 6583.
As I write this, Chinese Prime Minister Wen Jiabao is speaking to American businessmen in New York. He tells them, mockingly, even if we did let the yuan rise to 3.5 per dollar, it would not help you. After all, you import nearly all your manufactured goods anyway. It won’t help to make imports more expensive. You have to buy them from us anyway. America, he might have noted, has lost 6 million well-paying manufacturing jobs since the year 2000. Guess where most of them went?
But don’t blame China. Their leaders are stubbornly protecting the long-term wellbeing of Chinese workers. Our own leaders are asleep.
The unfair global playing field created huge American trade deficits and led to the global crisis in 2007-9. As a result, world trade fell by 12.2 percent in 2009. But in 2010, the World Trade Organization predicts that world trade will rise by a strong 13.5 percent, with Asian trade growing by 17 percent and with America’s trade deficit remaining stubbornly and unsustainably high. The result will eventually be another crisis, because the underlying causes of the 2007-9 collapse have not significantly changed.
Israel must act quickly to prevent China from kidnapping its factories, as it did to America’s. In 1996, manufacturing workers comprised 17 percent of Israel’s workforce. By 2009 that proportion had fallen alarmingly to 11 percent.
The well-being of every nation’s economy and society depends on its middle class. The middle class, in turn, depends on wellpaying manufacturing jobs. Those jobs, in turn, depend on the government pursuing tough, smart, strategic industrial policy and strategic trade policy. That implies fighting China’s permanent half-price sale with Israel’s own equivalent.
No American president since Ronald Reagan (1980-88) has done this. Look at the result.
Here are four immediate measures that would help Cooperstein, Shpadov, Singer and other Israelis, who still work in factories. First, order all government ministries, especially Defense, to pursue Buy Israel policies. If a product is made both in Israel and in China and if quality is comparable, buy the Israeli product, even if it is somewhat more expensive. Ordinary Israelis should do the same. The Defense Ministry once applied such a policy but no longer does, and the results for some plants are disastrous. Second, pursue an aggressive policy to buy dollars, just like the Chinese do, to keep the Israeli shekel from rising in value. Bank of Israel Governor Stanley Fischer recently had the Bank buy $70 million in one day but the shekel still rose, making Israeli exports more expensive. Third, let Israeli companies band together with the Histadrut labor union and government ministries to make manufacturing competitiveness a top national priority.
Let each plant manager visit Teva Pharmaceutical Ltd.’s plants in Kfar Saba and Jerusalem. Teva has plants all over the world. The two plants in Israel are the most cost-efficient of all, despite relatively high wages. Let plant managers visit Intel’s amazing microprocessor plant in Kiryat Gat, also among Intel’s most efficient plants worldwide. If some Israeli plants are world-class, why can’t all of them be?
Fourth, let us print a million labels that read Made in Israel and distribute them to every single plant in Israel, large and small. And then let us work with all plant managers to create conditions that make it wise in the long run to sew or glue those labels on every product they make. We owe this to Shpadov, Cooperstein and Singer and every plant worker to help them keep their jobs, or to find new ones.
And note that this is not altruism but self-interest. If workers do not have jobs, they lack income, they cannot spend, and then everyone suffers, not just those in manufacturing.
Ask not for whom the Chinese gong tolls. It tolls for every one of us and it has been tolling for a very long time. It is time we heard it.