Among my tools are two versions of a little device called a “thumbwheel ratchet.” They illustrate, in microcosm, issues raised by international trade. While both do the same job, one costs seven times as much as the other.
The two appear virtually identical. They are round handles that fit any ¼-inch drive socket wrench and can be used to tighten or remove nuts on machines. Their small size makes them ideal for work in tight spaces.
The striking difference is their price. One, manufactured in the United States, costs $27.90 at my local hardware store. The other, made in China and paired with a nearly identical version in a 3/8-inch drive, was priced at two for $5.99 at a farm store in Pipestone.
Why is there such a difference in price between a domestic and an imported tool? With such price differences, who would buy the more expensive U.S. version? What does this price difference imply for U.S. tool manufacturers?
If you love tools, simply holding these two shows some differences. The U.S.-made tool is superior. Its finish and chrome plating are better. It has more precise knurling, which might make it easier to grip with an oily hand. The edges are beveled, so it fits the hand a little more comfortably. The ratcheting action is perceptibly smoother, as is the action of the knob that reverses the direction of rotation. The snap ring to disassemble it for repair is easier to remove.
Besides these visible differences, the U.S. tool carries a lifetime guarantee, and replacement parts are available in most towns across the United States. It probably is made of stronger steel with better heat-treating and is more likely to stand up under years of use.
Why the sevenfold difference in price? The Chinese version may be made of slightly cheaper steel, even though the weight is only a few ounces. It probably was forged and machined with less expensive machine tools. Perhaps the heat-treating was less precisely controlled. It probably underwent less time-consuming inspection. These differences might account for a slight difference in price.
U.S. tool factory workers certainly earn higher wages, and the real estate under the plant must cost more. The U.S. manufacturer has to meet pollution-control and worker-safety standards that the Chinese firm can ignore. The U.S. firm probably pays higher taxes at the local, state and federal levels.
While the Chinese manufacturer makes its version in bulk and sells them through discount stores with no guarantee or after-sale provision of repair parts, the U.S. firm maintains a chain of dealers that have to stock parts and make repairs at no charge.
Few people need a thumbwheel ratchet. Only once or twice a year does having one save me time or frustration. I fixed machines for 35 years before owning such a ratchet, and I bought it for the intangible satisfaction of “owning a full set” — not because I had any real need. If I were a full-time auto mechanic or appliance technician, I would probably spend $27.90 for the superior U.S. item. If you use a tool three times a week rather than three times a year, the ergonomic superiority, the lifetime guarantee and parts availability would all be important. So, I doubt that the U.S. manufacturer loses many sales to such professionals because of import competition.
The cheap imports allow farmers, repair technicians who seldom struggle in tight spaces, and hobbyists to have a tool that is handy but not essential. Most would simply not buy a thumbwheel ratchet if it cost more than a few dollars. Again, the presence of an import does not greatly affect demand for the domestic item.
There always are some people at the margin, however, who will not buy a U.S. tool because the cheaper import is available. These consumers’ choices do cost domestic producers some sales. They also pressure domestic producers to limit prices.
The same situation applies to all sorts of manufactured items imported from low-income countries. Domestically made items usually are superior in some aspect, ensuring that customers who value that quality will continue to buy U.S. products. The lower price of imports motivates new consumption by price-conscious consumers unwilling to buy the costlier domestic product. And some group of existing consumers forsakes the more expensive domestic alternative for the cheaper import.
In the case of thumbwheel ratchets, many buyers stick with the domestic product and a lot of people who buy the import would never spend $27 on the domestic one. The number who actually buys an imported tool instead of domestic one is small.
For everyday clothing or housewares, the outcome is very different. Few people stick with the domestic product and most purchases of imports substitute for domestic products rather than add to total consumption.
Imports allow U.S. tool users to have more tools at lower prices than if there were no trade. They also have put some U.S. firms out of business.
Economists are unanimous that society as a whole is better off because the gains from more and cheaper products for consumers outweighs the cost of companies having to shift to making new products and of workers having to find new jobs because of import competition.
Members of the public are ambiguous in their thinking on the issue, but continue to buy imported goods at a record pace.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.