Booming China trade rankles US

Trade deficit with China, now running at $120 billion a year, surpasses the total US trade gap of six years ago.

She was the weaver; he was the loom-fixer.

For the past 20 years of their marriage, Delores and Robert Gambrell strode the heart-of-pine floors at Pillowtex's Plant 16. The noise from the looms forced the couple to communicate in a sign language. They even had their own signal for "I love you."

Those days are over for now - the victim of a flood of imports from China. The nation's third-largest textile company, where the Gambrells worked, closed its doors last week. For the moment, that means the end of sheets and towels with the household names of Cannon and Fieldcrest.

The trend reaches far beyond the textile industry or Kannapolis - a community whose name means "city of looms" but which is shedding 5,000 Pillowtex jobs. Manufacturing businesses from electronics to furniture and fishing lures are closing their doors or moving production to China.

The rapid erosion of well-paying jobs has wide implications for the economy. Consider that the US trade deficit with China is now running at an annual rate of $120 billion - a record single-country amount that is larger than America's entire trade deficit only six years ago.

"This will become the dominant economic policy issue in the US [over] the next five years," says Don Straszheim of Straszheim Global Advisors in Santa Monica, Calif.

Indeed, China's export push is already becoming a front-burner issue in Washington. Congress has asked everyone from think-tank experts to Federal Reserve Chairman Alan Greenspan for answers to the problem. Three members of the president's cabinet on a cross-country jaunt to promote the Bush economic plan have gotten an earful from angry businesspeople trying to compete with Chinese imports made by workers getting 50 cents an hour. The loss of jobs to imports is almost certain to be a recurring theme in the Presidential campaign next fall and beyond.

The numbers are eye-opening. Chinese exports soared 22 percent last year. And it's not just low-cost towels. Exports of computer and telecom products are growing 60 percent annually. While American firms have struggled, Chinese companies reported profits rose in the first quarter by 56 percent from the previous year.

To some, this may seem like a replay to the 1980s, when the US trade deficit with Japan swelled to about $50 billion a year. It seemed as if Japanese automakers and semiconductor companies would devastate the US economy.

"The atmosphere today reminds me of the 1980s," says Clayton Yeutter, who was the United States Trade Representative back then. "Everyone worried about the Japanese being 10 feet tall, and all of that turned out to be inaccurate," recalls Mr. Yeutter, now of counsel at Hogan & Hartson, a Washington law firm.

Back then one of the major complaints was about the Japanese yen, which many felt was kept unreasonably low to benefit the big exporters. Today, business is complaining about the value of the Chinese yuan, which is pegged to the US dollar. "It is hugely undervalued," says Frank Vargo, of the National Association of Manufacturers. "It could be as much as 40 percent undervalued, and that is a major reason for the trade deficit." The argument has been picked up quickly by members of Congress. Last week, Rep. Donald Manzullo (R) of Illinois, chairman of the House Small Business Committee, was among 14 cosigners of a letter to the administration encouraging "stronger action."

Last week, Treasury Secretary John Snow said it was a critical issue that he intended to discuss with the Chinese during a planned trip this fall.

Yeutter says a floating yuan would make China, now a corn exporter, a net importer of corn and soybeans.

Mr. Manzullo says his district is among those feeling the heat from China. Unemployment in Rockford, Ill., is now 11.3 percent. Machine tool manufacturers, tool and die companies, and bolt and screw manufacturers are all struggling.

One of those who has testified at the end of June before Congress is businessman Jay Bender of Falcon Plastics Inc. in Brookings, S.D. In an interview, he recounts how one of his customers, a manufacturer of fishing lures, has decided to move its production from the US to China. This would allow the company to cut its manufacturing costs by half. It asked him to bid on molds to make the plastic bait. He bid $25,000 per mold. "That was a competitive price," he says.

Instead, the company found a Chinese source for $3,000 a piece. "I can't even buy raw materials for that," he says. "There are two possibilities: Either they are subsidized by the government or they gave away the molds to get the manufacturing business," says the businessman, who has to lay off 30 percent of his workforce so far.

But Mr. Bender has fared well compared with the US textile business. US markets are getting flooded by Vietnamese and Chinese goods. "People are moving jobs faster than you can count," says Charles Bremer of the American Textile Manufacturers Institute, which is lobbying for emergency protection.

It may get worse for the industry. In 2008, all quotas come off Chinese imports. "At that point, the Chinese will completely dominate the market," says Mr. Bremer.

The effects can be seen in Kannapolis, where the Cannon Mill closing has taken on the air of a natural disaster. The layoffs are the largest in state history, and social workers are descending on the town to set up satellite offices. People are turning off cellphones, cutting cable TV, and pleading with creditors. Already, 200 have had their water shut off.

"They're going from $35,000 a year with overtime to making maybe $9,000 a year," says Joe Rogers, a local official with the Union of Needletrades and Industrial Textile Employees (UNITE!).

Sen. John Edwards says he will try to secure $38 million in federal aid, and Sen. Elizabeth Dole is opening an office in town to take questions. But workers are leery: "We don't want questions answered, we want a paycheck," says Mr. Rogers.

Hundreds of businesses rely directly and indirectly on the mills, including everything from pizza palaces to mortgage brokers. For the Gambrells, the plan now is for Ms. Gambrell, in her early 50s, to go back to school, while Mr. Gambrell tries to find a job - doing what, he doesn't know. "We always said we wouldn't do anything if we couldn't do it together," says Ms. Gambrell, offering a tired smile to her husband.