Trade and trade deficits

I found this article in today's Washington Post on a rather dry subject -- trade between the U.S. and Asia -- to be quite fascinating. While nominally about the relationship between a U.S. importer of motorcycle helmets and his South Korean supplier, it manages to illustrate a number of interesting points. The frugality and dedication of the South Korean is amazing:

Speaking almost no English and carrying samples of about 10 HJC helmets, Scott Hong -- whose Korean name is Hong Soo-ki -- arrived in Los Angeles in 1983.

He went to extraordinary lengths to save money on lodging and food when he traveled from his Los Angeles base to meet motorcycle dealers and riders. Sometimes he did odd jobs, such as painting houses, while on the road. When he took trips to Sacramento, 390 miles from Los Angeles, to get HJC's helmets certified as safe by a major helmet-testing organization, he often avoided hotel expenses by driving round trip in one day, starting at around 3 a.m. and returning late in the evening.

...HJC's U.S. sales began to take off in the latter half of the 1980s because the company's helmets cost less than Japanese ones. They now retail for between $70 and $400, depending on the model.

Hong remembers the first time he saw an American motorcyclist wearing an HJC helmet: "I followed him for about an hour in my car, and he pulled over and asked, 'Why are you chasing me?' I told him, 'Your helmet is my helmet.' I cried on that day, I was so happy."

...Back in South Korea, chief executive W.K. Hong was plowing HJC's profits into manufacturing equipment and research and development, with the aim of producing lighter, more comfortable and more crash-resistant helmets. HJC still spends about 10 percent of its revenue on R&D, employing more than 40 engineers -- which has enabled it to approach Japanese levels of quality.

"All the money I made in the company, I reinvested in the company," said W.K. Hong, who is 65 and an engineer by training.

Aside from an occasional tour of an area he is visiting on business, he said, he has never taken a long vacation. His wife, Kim Hee-ki, said she sometimes accompanies her husband on business trips and once traveled to California to visit a daughter who was living there.

"If I used money for personal things, like going on vacation, I don't believe we'd be number one in the world," Hong said.

Basically this guy placed the success of his company above everything else. He sacrificed and put in hard work to create a useful product to consumers. He literally cried when he saw someone using the fruits of his labor. Rather than using the profits exclusively for his own personal benefit he reinvested much of them in order to make his helmets even better.

This is quite a tribute to capitalism. Can you imagine a bureaucrat working that hard for little personal payoff? There seems to be a popular perception of business owners as little more than rapacious scoundrels only out for themselves -- and of course there are some -- but I believe people like Mr. Hong are more the rule than the exception. It's unfortunate that it sometimes seems our politicians in Washington spend so much of their time figuring out ways to punish people like that.

Moving on, the next paragraph makes a worthwhile point:

[American business partner] Miller, who visited Hong's apartment in Seoul for the first time last year, finds the thriftiness hard to understand: "I'm born and raised in Brooklyn, New York, and the apartment where I grew up was nicer than the one in the elite area where he lived." (Hong moved a few months ago to a more luxurious apartment in a Seoul high-rise, though it is still far from the opulence that American multimillionaires typically enjoy.)

Keep this in mind when people point towards the success of Asian economies. South Korea, like Japan and other Asian neighbors, have experienced incredible growth since WWII (although Japan's boom took place more in the immediate aftermath of the war while South Korea's didn't get going until the 1970s and 80s). They did so, however, by relying on an export-led model that emphasized domestic savings over consumption. And at some you have to question what the point of economic growth is if you can't enjoy it.

The model used by many of these countries can be described as essentially corporatist. Corporations get access to large, cheap pools of capital while workers get jobs but reduced consumption -- stuff -- and low returns on their savings. Indeed, evidence of this is seen in following paragraphs:

In contrast with the United States, where the personal savings rate recently has sunk into negative territory -- with people spending more than their income -- South Korea's personal savings rate is about 7 percent, and its national savings rate of 33 percent ranks among the highest in the world. The rate reflects the thrift not only of individuals but also of government and business; the South Korean government has run budget surpluses in recent years, so it need not borrow large sums as the U.S. government must.

In interviews with HJC workers, the least thrifty among them reported saving 10 percent of income, and the most thrifty put saving at 60 percent. Typical was the response of Kim Tae-young, an HJC engineer, who said: "My wife just gave birth to twins. I used to save 50 percent, but the cost of the children is very high, so now I'm down to 20 percent."

...Strolling through the parking lot outside Helmet House's main facility, Miller pointed to a Mercedes SL500. "That's my weekday car," he said. "My weekend car is a BMW X5. My wife drives a Jaguar. We've got about $200,000 in our garage." And opening the door to a small building, Miller revealed his "passion" -- a 1951 Cadillac convertible, a 1955 Mercedes Gullwing, a 1957 Chevy, a 1971 Mercedes convertible, and a 1979 Ferrari in pristine condition.

He usually leaves the office by 5 p.m., he said, and he does not work at home or on weekends. He, his wife and 17-year-old son have traveled widely, both in the United States and abroad. Miller, a fervent Los Angeles Dodgers fan, holds season tickets to the team's games, and his office wall is plastered with memorabilia from a Dodgers "fantasy camp" he attended. Before his son was born, he recalled, "I could say to my wife, 'Let's go to San Francisco for lunch' -- and we'd go up on an airplane, have lunch, and come back." These days, such jaunts are limited to Las Vegas, where "I go every couple of months, to loosen my belt."

Miller has sunk much of his wealth into shopping centers and other real estate, so he does not have to fret about saving.

You see, Miller isn't faced with the low savings problem because what he has saved has been invested in high-return assets -- in this case real estate. And there's the rub. While Asians save more than Americans it's in large part because they have to since they get lower investment returns. You have to save a lot more money at a 5% return to get the same results as someone who invests less at a 10% return. So while many people point towards Asia's high savings as a strength, it can also be interpreted as a weakness.

Having said that, this still makes me worry:

But the lack of thrift characteristic of Americans is evident among his employees. In interviews, several reported saving well under 10 percent of their incomes, and even putting aside that much is difficult, they said. Few put the maximum allowable amount in the company's 401(k) savings plan, according to Chief Financial Officer Randy Hutchings, and a substantial number do not contribute at all.

"I would venture to say that of my 125 employees, 80 percent live paycheck to paycheck, and maybe even before paycheck to paycheck," Miller said. "There are employees I've had, when they earned $50,000, they owed money; when they earned $100,000, they owed money. It's not what they earn; it's just the way they do things."

While I think the savings problem in the U.S. is overstated -- stock market and real estate investments ensure that Americans are not as poor as people think -- this does give me pause. An awful lot of people out there are living above their means and how this all plays out -- especially with those using interest only loans and ARMs to finance their real estate investments -- remains to be seen. I don't see disaster, but I have to think we'll pay some kind of price eventually.