U.S. Should Require Minimum Investable Content in All Imported Goods

This post's headline is not going to attract many readers. Tough. Let it exclude candy-addicts.

I will try to warn you most times when I make a post that is normative. That is, if the post is pushing a policy, rather than an observation or opinion about what we think might be true, regardless whether anyone wants it to be true or not, then I'll tell you. So here's the warning: This post is pushing a policy.

The U.S. and China have a trade imbalance. China sets exchange rate policies in its self-interest that keep their export prices low, which generate surpluses and tend to have the effect of undermining industries in the trading partner's economy. The U.S. has free-trade principles that tend to reduce our retaliatory actions against nations that set exchange rates in order to capture market share.

For the moment, let's set political and labor considerations aside. Arguing about whether protecting domestic industries is good or bad is a separate debate. There is an alternative.

Presumably, in any trading relationship, both partners benefit when the lower cost producer of goods is permitted to export its goods. If both partners have specialties, then all benefit from the diminished input costs to the two societies taken as a whole.

The problem occurs if one of the countries wants to be the specialist in all goods. From a practical perspective, the only way to pull this off is for one country to set a society-wide policy that allows it charge less for all of its goods. At the national level, the most accessible lever is setting exchange rates, as China does. By holding the exchange rate so your currency is cheap, your trading partner's goods are expensive while your own are cheap, as measured in each others' currency. The disadvantage of this policy is that your profits are lower. If the goods you export have sustainable value, then on an absolute basis you tend to wind with less of the pie. If the goods you export have a rapidly declining value, then in the short term you lose but in the long term you can win.

So here comes the normative (and invented) part: U.S. policy for trade should require a minimum investable content for all imported goods. Investable content is defined as a residual value the product has at the end of its depreciated life. Every good has some nominal value that tends to evaporate as the product is used. Cheap goods that break easily have no investable value, because they tend to be discarded quickly. High quality durable goods that prove to be defendable have high investable content, because they return substantial value even after their nominal life has been served. Anyone who has ever bought a refrigerator, car, television, expensive electronics, or computer knows the difference between getting more than your money's worth from the best, and getting junk that has to be removed and discarded after a short life.

Some simple examples:

Back when it was produced, most Chevrolet Chevettes had negative investable content, because during their short troubled lives they broke down, had high repair and inconvenience costs, and after five years were close to worthless. In contrast, Honda Civics had high positive investable content, because they gave well above-average gas mileage, were reliable, had low maintenance costs, and after five years had high resale value because they had many, many more years of life in them.

Buying foreign goods cheaply is a net positive for the U.S. if the goods retain value. A trading partner that holds exchange rates fixed and which are advantageous to itself should be required to send only the best goods with substantial residual value, not junk. Then, in the future should exchange rates change and the foreign country try to complete its conquest of all goods markets, then the U.S. can simply wait out the attempt, by relying on its existing stock of durable high quality acquired goods, while rebuilding its domestic industries that produce those goods for both domestic consumption and export to the trading partner.

There is nothing unfair or retaliatory about requiring quality. I do not believe that requiring quality would violate any WTO rules. I don't believe that our trading partners would wish to be perceived as defending their right to send shoddy merchandise. Most importantly, requiring quality from imported goods raises the standards for all, sets good examples, and prevents trading partners from cheating on free-trade agreements in the long term.

Since this is a normative post, I'll add that most Americans probably already have too many things, so buying fewer things of higher quality and price is often superior to having more things of lower quality and price. The cheaper stuff requires more diagnosis work when it breaks, results in spending more time buying replacements, takes up more landfill space when it is discarded, and takes up more room in your house. Wouldn't you rather pay for less real estate to store fewer objects? Having fewer things will pay dividends every single day.

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In the absence of official action, it is simple to make a difference and enforce the policy described above. You could, for example, send a short message to some of your favorite stores or vendors:

"Dear [retailer or vendor],

I understand that in the current global economy that opportunities for sourcing your products from countries like China gives you the option of maintaining good margins and passing on low prices to your customers. I want you to know, however, that in our [company, family, group] we feel that it is time China met all of its obligations, not just those based on price. In the future, we will be looking to make sure that products we buy from you have outstanding quality, regardless of price or China content. There will no longer be an implied lower quality standard for cheaper merchandise. We expect you to import only top quality China merchandise that has a very long-term sustainable value, even if it is inexpensive. We don't need things that t go straight to the landfill. Do the right thing. Insist on the best, and reject crappy cheap junk. Send that message, and we will support you.

Sincerely,
A continuing customer."