Mack Molding Co. thought it had a good strategy for dealing with low-wage countries - build high-end, high-tech goods such as components for computer servers, where labor isn't a big factor.
That worked well until 2000, when three of its biggest customers abandoned their U.S. factories and moved to China, leaving the company ``stunned and confused,'' said Mack executive Jeff Somple. The effect was devastating, ultimately cutting the Arlington, Vt., injection molder's workforce and sales in half, to 1,100 employees and $200 million.
Mack's story became one of the latest examples in the government's debate about how to respond to manufacturing challenges from China, as Somple testified Oct. 31 before a hearing of the House Ways and Means Committee.
Somple said company executives believe their customers relocated not because of cheap labor but because of cheap currency. He urged the U.S. government to address China's policy of pegging its currency to the American dollar, which some U.S. economists say keeps China's money 15-40 percent undervalued and makes Chinese exports cheaper.
``We are not asking for tariffs and trade barriers,'' Somple said in written testimony submitted prior to the hearing. ``All we are asking for is a level playing field, where the same rules apply for all participants.''
Interest in the topic is picking up in Washington, although views on whether that will result in meaningful changes vary widely, depending on who is talking. The House, for example, voted 411-1 on Oct. 29 for a resolution chastising China for not letting its currency float on the market.
But tougher measures floating around the Hill, such as bills that would enact steep punitive tariffs on Chinese goods, face an uncertain future.
And administration officials who testified at the hearing said that while they understand the problems facing American manufacturers and are strongly pressing China, negotiations, not tit-for-tat trade sanctions, remain the best path to resolving differences.
Another plastics executive who had been scheduled to testify at the hearing but was dropped due to lack of time, said the government should consider stronger medicine, like quotas.
``I don't care if I'm labeled a protectionist,'' said Frank Yurisic, owner of toolmaker and prototyper Advanced Modeling & Consulting Inc. in Fairview, Pa. ``It's the big corporations that are making out from this and damaging the companies that hire most of the people.''
Yurisic said employment at his small company has dropped from 16 in 1997 to four now, and he attributes much of the loss to his customers moving their manufacturing to China.
One of President Bush's top economic advisers told the hearing that the biggest challenge facing U.S. manufacturers has been the downturn in the economy, followed by productivity growth that dampens hiring and thirdly, international trade.
``U.S. job losses are more closely related to declines in domestic investment and weak exports than to import competition,'' said N. Gregory Mankiw, chairman of the Council of Economic Advisers. He testified Oct. 30, on the first day of the two-day hearing.
Mankiw said that China's trade picture is not unique. While trade deficits with China are growing - up 20 percent to an estimated $125 billion this year - deficits with the rest of the world are growing just as much, he said.
Administration officials said the 7.2 percent growth in gross domestic product in the third quarter, the fastest since 1984, will help manufacturers and indicate that President Bush's economic stimulus plans are working.
Still, members of Congress at the hearing said the public is increasingly impatient over China, and the 2.8 million U.S. jobs lost since 2000. Rep. Sander Levin, D-Mich., told the administration officials that ``what is missing in your testimony and in Washington is a sense of urgency.''
Josette Shiner, deputy U.S. trade representative, said the government does understand the seriousness and actively is pressing China on currency, protecting intellectual property and meeting its obligations under the World Trade Organization. She said China is starting to respond. However, when asked if the government will bring trade complaints against China, she said, ``I think we're early in this relationship.''
For Mack, China has forced a rethinking. The company now focuses on medical devices, office furniture, shower bases and other large components - markets it believes will stay in the United States. The currency disparity makes it impossible to compete in its traditional high-tech markets, said Somple, who is president of Mack's Northern Division.
In its traditional server market, for example, labor savings in China amount to about a $200 price difference on a $10,000 server - not enough to matter when you factor in shipping and the risks of getting your supply from so far away, Somple said.
But when you factor in a Chinese currency that is estimated to be 15-40 percent undervalued, the $10,000 server in effect drops to $8,500, he said. ``We cannot compete with that.''