China raises the Price of Cotton and Chases the Textile Industry out of China

Posted by PITHOCRATES - June 9th, 2013

Week in Review

Communists think they are smarter than capitalists.  They think they can manage an economy better than market forces.  Despite the failure of the Soviet Union, China (under Mao), North Korea, Cuba, etc., there are many Western nations with activist governments.  Believing like the Chinese that smart bureaucrats can make the economy operate better than those market forces can.  But the problem is they can’t control all market forces.  So when they intervene there are always unintended consequences that usually make things worse after their intervention.  As this example in China shows (see China’s cotton procurement policy hurting textile industry by Staff Reporter posted 6/9/2013 on Want China Times).

China has jacked up the domestic price of cotton to 20,400 yuan (US$3,325) per tonne as of May 13, 4,500 yuan (US$730) higher than the international price, reports Shanghai’s First Financial Daily.

Industry insiders said that the current procurement policy does nothing to benefit cotton farmers and will have a serious effect on the domestic mid-stream textile industry, forcing many firms to move their operations overseas, the paper said…

The government has justified its cotton procurement at prices higher than international levels, by arguing that the policy can protect the interest of farmers and stabilize domestic cotton farm acreage and output, which assures the domestic supply…

The high cost has forced textile firms to abandon orders, with a growing number of firms relocating to Vietnam, Bangladesh, and India. Downstream firms, in dyeing and printing, have also been affected.

China expanded their cotton production when international cotton prices rose.  Then international prices fell.  Leaving them with a surplus of cotton selling at a price that did not recover the costs of that expanded production.  So these wise bureaucrats decided to raise the price of cotton.  And restrict imports.  Problem solved.  They forced the domestic textile industry to buy the higher priced domestic cotton.  Which, of course, raised the price of the textiles they sold.  Above the prevailing international price.  Pricing them out of the international markets.  So this economic reality forced them to relocate to a country that did not force them to purchase cotton above market prices.  Allowing them to produce textiles and sell them at prices the international markets would pay.

This is the same reason why the U.S. doesn’t have a domestic textile industry anymore.  Only it wasn’t government forcing textile manufacturers to buy cotton at above market prices.  It was the unions forcing them to pay labor at above market prices that increased the price of their textiles.  And priced them out of the international markets.  Because there are always unintended consequences whenever we interfere with market forces.  Always.  And the end result is always worse after the intervention.  Always.

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LESSONS LEARNED #45: “The bluest of cities in the bluest of states have the most activist governments, the deepest recessions and the most abject poverty.” -Old Pithy

Posted by PITHOCRATES - December 23rd, 2010

Detroit – The Motor of the World

Detroit.  Do I need say more? 

If you want to see the ultimate destination of liberalism, go to Detroit.  The Motor City.  The birthplace of the assembly line.  Mass production.  The veritable axle of the Industrial Revolution redux.  Detroit put the nation in motion.  In cars.  And in diesel-electric trains.  If it was big and powerful and moved the world, it came from Detroit.  The Arsenal of Democracy.  Detroit could mass produce trucks and tanks and airplanes to win world wars.  And did.  There was nothing Detroit couldn’t do.

Henry Ford.  Thomas Edison.   Albert Kahn.  Some of the greatest names in science and industry called Detroit home.  That place you can point to on your hand.  With pride.  The city grew and became one of the greatest and grandest cities in the nation.

And look at it now. 

Detroit and Government Grow Big

The population of Detroit grew up to and through the 1950s.  That changed in the 1960s.  When Big Government arrived.

Mayor Jerome P. Cavanaugh started it.  He implemented the city income tax in 1964.  The spirit of government spending was in the air.  The Great Society would follow at the federal level.  Government spending upon government spending.  Translation?  High taxes in the city of Detroit.

Then there was all the social engineering.  Lots of rules and regulations.  Some of it good.  But all of it complex.  And costly to business.  Compliance costs and taxes.  Not things that attract businesses.  Not a big deal when the Big Three rule the automobile world.  But that would change.  In fact, that would change because of the compliance costs and taxes.  The Japanese entered the market.  And they were selling better cars for less.  Add all of this together and you get the 1970s.

The Fall of Detroit

Detroit grew to be business unfriendly.  So business left.  And then the people left, following the jobs out of Detroit.  Then some of the social engineering made others leave the city.  School bussing, for one.  Families choose their houses based on the school district the house is in.  Of course, poor families can’t afford to live in those nice neighborhoods with the nice schools.  And Big Government thinks this is just not fair.    So they bussed the poor kids to the nice schools.  And bussed the kids from the nice schools to the not so nice schools.  Thus encouraging the people from the nice neighborhoods to leave Detroit.

They call it white-flight.  A lot of jobs and affluent people left Detroit.  Leaving behind the less affluent in the not so nice neighborhoods with no jobs.  Not good for any city.  Government services grew to help care for the poor.  The Great Society offered Aid to Dependent Children.  Which, according to noted economist Thomas Sowell, destroyed the black family.  Fathers ran away from their responsibilities.  And the state stepped in to raise their children.

Add all this together and you get a lot of people with no money and a lot of idle time on their hands living in rundown neighborhoods wanting for the basic necessities of life.  And that’s never good.  Detroit became infamous.  Crime and drug problems.  Devil’s night arson.  Street gangs.  Murder capital of America.  Crime and drug infested public housing.  Decrepit schools.  Truancy.  Low graduation rates.  And to solve these problems caused by Big Government, one man turned to Big Government.

Culture of Corruption

Coleman A. Young was mayor forever.  From 1974 to 1993.  And he was a Big Government guy.  He took the city from bad to worse.  And he fixed the racism problem.  By implementing racist policies.  After the white-flight, the city was predominately black.  And so would their police, fire department, public sector employees, etc.  They based hiring on color.  Not merit.  This accelerated the white-flight.  And set up a culture of corruption.  Which usually happens when you hire people based on who they know or who they are rather than on merit.

Young was hostile to the suburbs surrounding the city.  He called them hostile suburbs.  Why?  Well, that’s the problem you have with socialism (Young was an admitted socialist).  It just doesn’t work in an open society.  If the tax and compliance costs are too great in Detroit, people can move out of Detroit.  And they did.  Even the city cops didn’t want to live in the city.  They moved out if they could (by concealing their actual residency).  Or they lived clustered together in the city.  The real estate community called one such cluster Copper Alley.  It was near one of those hostile suburbs.  And it was one of the good areas in Detroit to live in.  Young hated this.  And the suburbs that offered safe sanctuary from oppressive, socialist policies.

Detroit was one of the most corrupt cities during Mayor Young’s tenure.  It was crony capitalism at its worst.  Everyone was corrupt.  Even the authorities were forever investigating the mayor.  (A later mayor was doing a lot of the same.  And he went to jail.)  It was during the Young administration that a couple of humorous slogans started to appear on T-shirts.  “Welcome to Detroit.  Now get the hell out.”  And “Detroit.  Where the weak are killed and eaten.”  High praise indeed for the Murder Capital of America.

Detroit’s Future – Returning to the Plow

So what happens after a city suffers at the hands of Big Government for a few decades?  Well, the population declines.  Because no one wants to live in the city.  About a million people have left Detroit since its peak in the 1950s.  And if that ain’t a repudiation of Big Government, I don’t know what is.

So what is the current mayor doing?  Well, the city is broke.  City services are in shambles.  So they’re going to move people out of sparsely populated neighborhoods.  Pack them closer together.   And abandon large tracts of land.  Just let the land return to nature.  Or plow it into farmland.  If anyone wants to buy it.

Ironic, really.  The city that made the world move forward is moving backward.  A sad ending indeed for the Motor City.

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