(What’s Left of) Our Economy: A Productivity Collapse in America’s “Industries of the Future”?

Tags

advanced manufacturing, information technology hardware, Labor Department, manufacturing, multifactor productivity, productivity, {What's Left of) Our Economy

To the surprise of exactly no one who’s been following the issue lately, last week’s newest data from the federal government on productivity was literally brimming with bad news.

True, the figures only go up to 2016 – because the report covered multifactor productivity, the broader of the two measures tracked by the Labor Department. These figures take longer to calculate than the narrower productivity measure (labor productivity) because they examine many inputs other than simply hours worked. But the results were entirely consistent with the longstanding story that the U.S. economy’s efficiency keeps growing more and more slowly – that is, where it continues to grow at all.

In fact, America’s recent productivity performance has been so bad that observers could actually take some comfort in the headline finding that multifactor productivity improved between 2015 and 2016 in only 37 of the 86 manufacturing industries looked at in detail by Labor. That’s because this total was significantly higher than in 2014-15 – when multifactor productivity rose in only 21 of those sectors.

I could repeat previous exercises and list the industries with the best and worst latest annual multifactor productivity performances – which as usual, will be full of surprises for those expecting that the stars would be the nation’s technology-intensive “industries of the future.” But for now, let’s focus on what looks like an especially alarming development: Over the last roughly three decades, these crucial chunks of the economy have turned from multifactor productivity growth champs to multifactor productivity disaster areas. Over the same period, several other touted advanced manufacturing industries have also tumbled into the dumps multifactor productivity-wise from much less lofty perches.

The worst examples of literal collapse in multifactor productivity growth are in information technology hardware, and the most dramatic plunge has taken place in computers and computer peripheral equipment. Between 1987 and 2016, these sectors collectively have run away with the American economy’s multifactor productivity growth honors, with their efficiency advancing by this measure by 12.1 percent annually.

Since 2007, however (the year the Great Recession began), their average annual multifactor productivity growth rate has slumped to 1.2 percent, and between 2015 and 2016, it actually fell – by 2.6 percent.

Semiconductors and electronic components fared little better. Their 1987-2016 average annual multifactor productivity growth was 9.1 percent. But it’s fallen throughout the 2007-2016 period, and between 2015 and 2016 – when the current economic recovery was in its seventh year – it also dropped by 2.6 percent.

The ups and downs of multifactor productivity growth in communications equipment (including the gear used by the internet) have been more modest, but undeniably depressing all the same. Average annual growth between 1987 and 2016 was only 2.6 percent, but during the 1990s, it surged to nearly 5.5 percent. But since recession onset year 2007, multifactor productivity has decreased here as well, and declined by 1.6 percent between 2015 and 2016.

The aerospace industry, long America’s biggest net export winner, oddly has never registered robust multifactor productivity growth – at least not since 1987, when the data began to be collected. The average annual multifactor productivity growth rate for finished aircraft, missiles, and their parts? It’s actually -0.1 percent. The golden age (relatively speaking) of multifactor productivity growth for these companies came in between 2000 and 2007, when the average annual advance was 2.7 percent. But since 2007 it’s off slightly (dipping by an average 0.6 percent per year) and between 2015 and 2016 alone, plummeted by 6.7 percent.

Yet even these dismal figures look positively glowing when compared with those of the American pharmaceutical industry – widely viewed (like aerospace) as the global state of the art. From 1987 to 2016, multifactor productivity in this sector has decreased by an average of 2.3 percent every year. That’s by far the worst performance among the 86 industries tracked by the Labor Department. And since 2007, the rate of decline sped up to an annual average of 3.8 percent. Between 2015 and 2016, moreover, the drop-off gained even more momentum, reaching 4.8 percent.

Nor have other manufacturing sectors not typically classified as “technology intensive,” but nonetheless falling into the high value category, been immune from these woes. Here are the average annual multifactor productivity growth (and shrinkage) figures for key time periods for sectors both qualifying for this description, and known for strong exports:

 

agriculture, construction, and mining machinery

1987-2016: -0.2 percent

2007-2016: -2.5 percent

2015-2016: -8.6 percent (the year’s worst nosedive)

 

industrial machinery

1987-2016: 0.3 percent

2007-2016: -1.1 percent

2015-2016: -4.1 percent

 

turbines and power transmission equipment

1987-2016: 0 percent

2007-2016: 0.1 percent

2015-2016: -4.4 percent

It’s always possible that these multifactor productivity numbers have improved substantially over the last two years. But 30-year old trends rarely turn around completely, or even close, in such short time-spans. And multifactor productivity growth trends don’t turn around without the type of capital spending surge – among other developments – that the economy simply hasn’t seen yet. Until business begins spending considerably more, expect multifactor productivity in America to remain depressed – along with the nation’s odds of recreating sustainable prosperity.

(What’s Left of) Our Economy: Mixed Results from a Deep, Dynamic Dive into U.S.-China Trade Figures

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advanced manufacturing, China, commodities, exports, high value manufacturing, imports, manufacturing, Trade, trade balances, Trade Deficits, trade surpluses, {What's Left of) Our Economy

On Tuesday, RealityChek performed its first deep dive into the U.S.-China trade figures for the first half of 2017, and how they compare with the performance of the January-to-June, 2016 period. Today. It goes dynamic, looking through that same, detailed industry-by-industry lens which sectors have seen the biggest improvements and worst deteriorations in their exports to and imports from China, and in their trade balances with the PRC.

The same technical considerations that applied to Tuesday’s static figures apply to those below. The categories presented are from the federal government’s prime system for slicing and dicing the U.S. economy: the North American Industry Classification System (NAICS). And the level of detail is NAICS’ most granular – the six-digit level. It’s especially revealing because it does the best job of distinguishing between finished goods and parts and components and other inputs for these goods – which matters greatly because so much international trade is conducted in these intermediates. Because of data limitations, however, the aerospace results shown below are five-digit statistics, which combine finished goods and their parts and components.

In addition, because services trade statistics come out so much later than goods trade statistics, only the latter are presented here.

Finally, because today’s emphasis is on rates of change, I’ve confined my research to the top 50 industries for all the metrics examined below, in order to prevent the results from being distorted by big percentage increases or decreases for sectors with very low export, import, and trade balance numbers. Fortunately, because U.S. trade is so highly concentrated, the top 50 lists are highly representative of the nation’s trade as a whole.

To begin, here are the fastest growing U.S. merchandise exports to China between the first half of last year and the first half of this year:

1. Crude oil & natural gas: +3,250.25 percent

2. Wheat: +251.29 percent

3. Primary smelted non-ferrous metals: +194.76 percent

4. Cotton: +149.26 percent

5. Miscellaneous engine equipment: +72.10 percent

6. Liquid natural gas: +66.23 percent

7. Petroleum refinery products: +58.41 percent

8. Motor vehicle transmission & power train parts: +52.84

9. Plastics and rubber industry machinery: +45.41 percent

10. Pharmaceuticals: +45.25 percent

Although four of the ten items are high-value manufactures, which generate outsized benefits for the American economy in terms of high wage job creation, productivity growth, and innovation, they dominate the bottom of this list. And their growth rates are considerably lower than those for the commodities and low-value products so prominent at the top of the list.

Encouragingly, though, the China list is a higher-value list than that for U.S. merchandise exports as a whole (presented right below). And by and large, the advance manufactures sectors above are increasing their exports to China much faster than the leaders worldwide are increasing their exports globally.

1. Non-anthracite coal & petroleum gases: +180.9 percent

2. Crude oil & natural gas: +109.0 percent

3. Cotton: +89.9 percent

4. Liquid natural gas: +62.4 percent

5. Semiconductor manufacturing equipment: +58.2 percent

6. Primary smelted non-ferrous metals: +54.0 percent

7. Soybeans: +27.6 percent

8. Petroleum refinery products: +26.1 percent

9. Motor vehicle engines & engine parts: +19.2 percent

10. Corn: +18.7 percent

Now for the goods categories that performed worst in boosting their exports to China:

1. Industrial valves: -32.46 percent

2. Miscellaneous grains: -30.76 percent

3. Broadcast & wireless communications equipment: -20.89 percent

4. Electricity measuring & testing instruments: -20.48 percent

5. Telecomms equipment: -17.58 percent

7. Aerospace: -10.74 percent

8. Photo films, plates, paper & chemicals: -7.9 percent

9. Irradiation apparatus: -4.87 percent

10. Semiconductors & related devices: -2.67 percent

Worrisomely, this list is completely dominated by advanced manufactures. What about the worst performing U.S. global export sectors?  Here they are:

1. Medicinal & botanical drugs & vitamins: -25.4 percent

2. Turbines & turbine generator sets: -15.1 percent

3. Computer parts: -9.4 percent

4. Autos and light trucks: -8.3 percent

5. Telecomms equipment: -6.6 percent

6. Electricity measuring & test instruments: -5.9 percent

7. Aerospace: -4.0 percent (5-digit, due to reporting limits)

7. Surgical and medical instruments: -1.1 percent

8. Electro-medical apparatus: -0.9 percent

9. Industrial valves: -0.1 percent

9. Computers: -0.1 percent

10. Surgical appliances & supplies: +0.2 percent

10. Analytical laboratory instruments: +0.2 percent

There’s considerable overlap between this list and the China list. But whereas the China export winners generally are increasing their sales to China much faster than the best global export performers are increasing their worldwide sales, the biggest China export losers are seeing bigger sales declines than the biggest worldwide export losers.

Next let’s look at those merchandise sectors whose trade balances with China improved the most from January-June, 2016 to January-June, 2017. These trade balance figures matter decisively, of course, because standard economic theory holds that countries that trade products most successfully will become the countries that make these products most successfully. That’s how trade is supposed to create the most efficient possible global patterns of production. In this list, the industries marked with asterisks are those whose trade deficit with China decreased:

1. Semiconductors & related devices: $190 million deficit to $615 million surplus

2. Crude oil & natural gas: +3,250.38 percent

3. Non-anthracite coal & petroleum gases: 1,537.71 percent

4. Niscellaneous metal ores: +807.54 percent

5. Smelted non-ferrous metals: +519.07 percent

6. Wheat: +251.43 percent

7. Cotton: +149.26 percent

8. Treated wood products: +139.62 percent

9. Miscellaneous women & girls’ outerwear: +131.72 percent*

10. Heavy-duty trucks & chassis: +105.11 percent

Here are the goods sectors that have improved their global trade balances the most on a year-to-date basis:

1. Primary smelted non-ferrous metals: $5.00 billion deficit to $0.76 billion surplus

2. Relays and industrial controls: $1.27 billion deficit to $2.26 billion surplus

3. Semiconductors: $1.48 billion deficit to $1.01 billion surplus

4. Non-costume jewelry: +574.44 percent

5. Drawn/rolled/extruded miscellaneous non-ferrous metals: +305.69 percent

6. Miscellaneous basic inorganic chemicals: +300.00 percent

7. Non-anthracite coal and petroleum gases: +224.29 percent

8. Medicinal and botanical drugs and vitamins: +104.35 percent

9. Cotton: +91.09 percent

10. Semiconductor manufacturing equipment: +64.82 percent

Both lists are pretty evenly split between higher value and lower value sectors, which looks like a wash for America’s global competitiveness.

The list of America’s fastest growing goods imports from China features mostly manufactured products as well, but few would be characterized as cutting edge:

1. Switchgear & switchboard apparatus: +278.27 percent

2. Printed circuit assemblies: +49.98 percent

3. Aluminum sheet, plates, and foils: +39.64 percent

4. Goods returned from Canada: +28.75 percent

5. Broadcast & wireless communications equipment: +26.74 percent

6. Miscellaneous basic organic chemicals: +23.42 percent

7. Miscellaneous special classification provisions: +22.62 percent

8. Lighting equipment: +18.83 percent

9. Telecomms equipment: +18.20 percent

10. Miscellaneous manufactures: +16.85 percent

And here’s the global counterpart of this list:

1. Switchgear and switchboard apparatus: +174.3 percent

2. Crude oil and natural gas: +53.7 percent

3. Printed circuit assemblies: +44.2 percent

4. Iron and steel: +41.3 percent

5. Primary aluminum: +38.6 percent

6. Non-diagnostic biological products: +29.4 percent

7. Petroleum refinery products: +22.2 percent

8. Miscellaneous non-citrus fruits: +20.8 percent

9. Motors and generators: +13.7 percent

10. Lighting equipment: +12.7 percent

10. Surgical appliances and supplies: +12.7 percent

According to my count, both lists are comprised mainly of high-value products (six for the China imports and seven for the global imports). More important, both import lists contain more high value products than the lists of fastest-growing American exports to China and worldwide.

Interestingly, the list of sectors where imports from China have fallen fastest contains lots of low-value goods, along with electronics ranging from consumer sectors to semiconductors. Moreover, in every one of the sectors, these imports from China have fallen faster than U.S. imports worldwide (indicated inside parentheses), strongly indicating that America-based businesses have been changing their sourcing practices.:

1. Miscellaneous women & girls’ outerwear: -56.72 percent (-51.5 percent)

2. Tires & tire parts: -30.04 percent (-0.9 percent)

3. Semiconductors & related devices: -29.28 percent (-6.4 percent)

4. Computer parts: -19.17 percent (-12.3 percent)

5. Women & girls blouses & shirts: -19.02 percent (-12.1 percent)

6. Audio & video equipment: -14.95 percent (-5.3 percent)

7. Computer storage devices: -12.31 percent (-3.1 percent)

8. Miscellaneous footwear: -8.24 percent (-4.9 percent)

9. Women & girls’ dresses: -6.71 percent (-1.9 percent)

10. Men’s footwear (non-athletic): -4.45 percent (-0.5 percent)

How does this list compare with that of those U.S. global goods imports with the slowest growth rates between the first six months of last year and the first six months of this year? Here’s that list:

1. Medicinal and botanical drugs and vitamins: -39.4 percent

2. Computer parts: -12.3 percent

3. Women’s and girls’ blouses/shirts: -12.1 percent

4. Primary smelted non-ferrous metals: -8.8 percent

5. Men’s and boys non-work shirt shirts: -8.3 percent

6. Non-costume jewelry: -6.7 percent

7. Semiconductors and related devices: -6.4 percent

8. Audio and video equipment: -5.3 percent

9. Jewelers materials/lapidary work: -4.1 percent

10. Aerospace products: -3.4 percent

Both lists look like oddly mixed bags. But whereas the China list contains just one industry widely considered to be crucial to America’s economic future, along with its national security (semiconductors), the global list includes aerospace along with semiconductors.

Finally, where have America’s fastest-growing merchandise trade deficits with China been? The list below shows a highly diverse mix of industries. The asterisked sectors are those in which trade surpluses have decreased:

1. Switchgear & switchboard apparatus: +365.30 percent

2. Malt & beer: +80.29 percent*

3. Electricity measuring & testing instruments: +71.39 percent*

4. Primary smelted & refined copper: +56.71 percent*

5. Printed circuit assemblies: +49.75 percent

6. Industrial valves: +43.72 percent

7. Plastic floor coverings: +42.55 percent

8. Miscellaneous grains: +30.82 percent

9. Broadcast & wireless communications equipment: +29.14 percent

10. Goods returned from Canada: +28.75 percent

In terms of manufacturing, and advanced manufacturing, sectors versus lower-value sectors, this China list looks slightly less worrisome in competitiveness terms than the global list below:

1. Non-diagnostic biological products: +856.00 percent.

2. Switchboard and switchgear apparatus: +437.35 percent

3. Oil and gas field machinery and equipment: +130.00 percent

4. Iron and steel: +76.25 percent

5. Surgical appliances and supplies: +71.55 percent

6. Printed circuit assemblies: +47.08 percent

7. Crude oil and natural gas: +45.30 percent

8. Primary aluminum: +42.73 percent

9. Turbines and turbine generator sets: +39.46 percent

10. Copper and nickel ores: +35.96 percent

Needless to say, over longer periods of time, China has significantly closed the competitiveness gap with the United States, and has done so faster than the rest of the world. Over the last year, however, these trade data indicate that China has gained little, if any, ground, by either measure. Holding the competitiveness line, vis-a-vis China or vis-a-vis other trade competitors, is certainly a better performance than the United States generally has registered recently. But it’s doubtful whether many Americans would agree that it’s good enough.    

(What’s Left of) Our Economy: Where Trump Deserves High, Low, and “Incomplete” Marks on Germany Trade

Tags

advanced manufacturing, automotive, commodities, comparative advantage, Financial Crisis, Germany, Global Imbalances, Great Recession, innovation, manufacturing, productivity, Trade, Trade Deficits, trade surpluses, Trump, {What's Left of) Our Economy

As I’ve suggested, President Trump has big, valid points to make about Germany’s auto trade with the United States. Not only does America run an enormous deficit with Germany in vehicles and parts, but claims that Germany deserves great praise from Washington because it makes so many vehicles in the United States are completely unjustified. For they overlook its companies’ very low levels of U.S. content and only very modest improvement on this score. That is, German vehicles are overwhelmingly screwed together in the United States, and therefore add much much less value to the American economy than autos made with domestic parts.

The trouble is that America’s troubles with German trade policies greatly transcend the automotive industry and, to a great extent, Germany. I’ve previously written that there’s a fundamental problem that both the administration and it’s critics are missing:  Germany’s economy, like China’s and many others around the world, is simply not structured in such a way as to make mutually beneficial trade with the United States possible.

But there’s another big U.S.-Germany trade issue that needs highlighting, along with a major danger that Bonn’s approach to trade is creating for the entire world – at least in the medium or long-term.

That other U.S. Germany trade problem has to do with the makeup of bilateral commerce. If you look at the nature of what the United States trades most successfully with Germany and vice versa, you find that the former category contains a mix of high value manufactures and commodities, while the latter is dominated by advanced industrial goods. Here are lists of the sectors in which America last year ran its biggest trade surpluses and deficits with Germany. (To the surplus list should be added – prominently – aircraft, which are not counted accurately in the U.S. International Trade Commission database I’m relying on.)

Top ten U.S. trade surpluses with Germany: 

glass products 

tree nuts 

soybeans 

computers 

non-costume jewelry 

non-anthracite coal & petroleum gases 

fin-fish products

computer parts 

surgical appliances and supplies 

pulp mill products 

 

Top ten US deficits with Germany

autos and light trucks 

pharmaceuticals

goods returned from Canada 

motor vehicle transmissions and transmission parts

aircraft engines and engine parts

construction machinery

miscellaneous general purpose machinery 

miscellaneous basic org chemicals 

miscellaneous engine equipment 

motor vehicle parts

These results are disturbing because, contrary to the superficial conventional wisdom, if you take seriously standard trade theory and its core concept of comparative advantage, sectoral trade balances matter tremendously. For the main idea behind the freest possible international trade is structuring the world economy so as to enable those countries most proficient at producing various goods and services to dominate their output. So surpluses and deficits in different industries show which countries are passing and failing this test – and thus which countries look likely eventually to control worldwide supplies of the sophisticated goods that create so many high wage jobs and foster so much innovation and productivity growth.

Since the U.S.-Germany data aren’t U.S.-global data, in theory they could be anomalies. In other words, Americans could be doing better with the world as a whole, and therefore, the nation’s prospects in high value industries could be a lot brighter. Unfortunately, that’s not the case at all. The makeup of U.S.-Germany trade isn’t terribly different from the makeup of U.S. global trade, in that America’s trade winners are, again, a mix of commodities and high value goods (again, including aircraft), and its losers are nearly all advanced sectors.

Top ten US surpluses globally

petroleum refinery prods

soybeans

special classification goods

plastics materials andcresins

waste and scrap

corn

liquid natural gas

semicaonductor manufacturing equipment

non-poultry meat products

turbines and turbine generator sets

 

Top ten US deficits globally

autos and light trucks

crude oil and natural gas

goods returned from Canada

broadcast and wireless communications equipment

computers

pharmaceutical products

telecommunications equipment

audio and video equipment

aircraft engines and engine parts

games, toys, and children’s vehicles

Yet Germany also is contributing significantly to a major trade-related threat that threatens the entire world, not just the United States. I’ve repeatedly spotlighted blue chip academic research concluding that unprecedented global imbalances centered on American trade shortfalls were instrumental in setting the stage for the last global financial crisis and the painful recession that followed. Worse, evidence keeps accumulating that international commerce is becoming worrisomely lopsided again, and that Germany’s overall international surpluses – currently the world’s largest – have generated much of the problem.

Indeed, a valuable reminder came in this morning’s Washington Post:

“[G]ermany is one of a number of countries, including China, Japan, and South Korea that are now saving far more than they are either consuming or investing….At some point, the world will be unable to absorb the capital surpluses of Germany, China and others, leading to another painful correction that might undermine the liberal order.”

Interestingly, Germany itself has indirectly acknowledged these risks, and hinted that it recognizes some responsibility to get the surpluses down. Unfortunately, Berlin has demonstrated few signs of following through. So although some of President Trump’s focus on the German trade issue seems off target, it’s also clear that the sense of urgency he’s brought to the issue, from both an American and global standpoint, is not only appropriate, but necessary.

Following Up: Where Trump on Trade Falls Short

Tags

2016 election, advanced manufacturing, apparel, Donald Trump, Follwing Up, Hillary Clinton, inflation-adjusted growth, Made in Washington trade deficit, multinational corporations, NAFTA, North American Free Trade Agreement, offshoring, offshoring lobby, recovery, regulation, Rust Belt, steel, subsidies, taxes, The Race to the Bottom, Trade, Trade Deficits, trade law, World Trade Organization, WTO

Donald Trump has just given a deadly serious, detailed, and common-sensical speech about the need for overhauling American trade policy, and the establishment media has decided to respond largely by dredging up the fatuous observation that the presumptive Republican presidential nominee himself produces his name-brand apparel overseas.

Before dealing with some of the genuine – though anything but fatal – shortcomings of Trump’s trade speech, let me (again) dispose of this ignorance-based cheap shot: The very trade policies that Trump has been attacking have practically destroyed the domestic U.S. apparel industry. When Trump claims that it’s nearly impossible to make garments in this country profitably anymore, he’s absolutely right. Indeed, the Federal Reserve’s industrial production data show that, since the North American Free Trade Agreement went into effect in January, 1994, and launched the current, offshoring-focused stage of U.S. trade policy, domestic garment output is down nearly 83 percent in real terms. That’s a bloodbath.

Yes, that means that some companies still produce clothing in the United States. But it also means that the biggest money in the industry has taken the hint that opening the American market to competition from penny-wage developing countries with no meaningful environmental or worker safety regulation has been an invitation to shut down or join the party and offshore. Any journalist who fails to mention these facts is either clueless or trying to sell you a bill of goods.

At the same time, since most of the public isn’t well informed about trade and manufacturing specifics, either. And since a torrent of such slanted coverage – which has been echoed by Trump’s presumptive November rival, Hillary Clinton – can definitely affect voter judgment, Trump needs to make it as difficult as possible for opponents to portray him as a know-nothing or a hypocrite on what he clearly sees as a core issue. This is where his Tuesday speech – which overall, I liked – fell somewhat short. Here are some important examples:

>Trump deserves a lot of credit for pointing out that misguided policies have killed not only employment – especially in trade-sensitive manufacturing – but growth throughout the economy. But he left off the table eye-opening figures on just how great the trade toll has been. As I’ve documented, during this feeble economic recovery alone, the growth of that portion of the trade deficit directly influenced by trade policy (what I call the Made in Washington trade deficit) has so far slowed this already feeble expansion by some 20 percent. That’s more than $400 billion after inflation, and he should have defied anyone to insist that huge numbers of jobs haven’t been destroyed as a result.

>The likely GOP standard bearer also rightly blasted American political and business elites for pushing these damaging policies. But explaining exactly why will not only educate the public – it will further infuriate voters. As I’ve written repeatedly, and most comprehensively in my book, The Race to the Bottom, the offshoring focus that has dominated U.S. trade policy since the early 1990s resulted from American multinational corporations realizing that expanding commerce with low-income countries would enable them to improve their own (though not the nation’s) competitiveness and boost profits by supplying the high-price American economy from super-low cost and largely unregulated production sites.

In other words, for all the talk about gigantic, rapidly growing third world markets, post-NAFTA trade deals weren’t mainly about expanding American exports – and therefore growth, employment, and wages. They were mainly about expanding U.S. imports from the multinationals’ new foreign production sites. That is, big American business wanted Americans to keep playing their roles as consumers of the products they made. They just didn’t want them to keep playing their roles as producers of these products. You don’t think a critical mass of voters would be outraged to hear this?

>Trump’s vow to file suits in the World Trade Organization to open foreign markets to U.S.-origin goods and services and halt predatory foreign trade practices is completely inadequate. As I’ve also written, the WTO is far from a U.S.-like trade court where objective magistrates render impartial justice. It’s an anti-American kangaroo court numerically dominated by foreign trade powers whose overwhelming interest lies in keeping the U.S. market much more open to their goods and services than their markets are to U.S. exports. That’s largely why even when the United States does win WTO cases, the process takes so long that American interests have been dealt decisive setbacks.

In fact, that’s also why the Offshoring Lobby pushed so hard back in the 1990s for U.S. Entry into the WTO. They knew that it would give predatory foreign trade powers substantial legal immunity from American efforts to deal with illegal subsidization, dumping, currency manipulation, and the like – and that the factories they moved and built abroad would benefit from these market-distorting practices at the expense of domestic American producers and their workers.

In other words, Trump shouldn’t be arguing for working through the WTO. He should be promising to seek an American withdrawal.

>Trump’s related promise to file more suits against predatory foreign traders in the U.S. trade law system is sorely inadequate for three main reasons. First, as suggested above, the WTO nullifies most of America’s legal authority to use such unilateral mechanisms. Second, the domestic trade law system is almost as slow-moving as the WTO. And third, this legalistic set of procedures is by definition piecemeal and reactive. If Trump thinks that American trade law can help make the U.S. economy great again in his lifetime, he’s dreaming.

>I recognize that the steel industry has acquired iconic status in American culture and politics. It also remains incredibly important economically. But Trump’s exclusive reliance on steel’s recent woes to illustrate what’s wrong with American trade policy unfortunately reinforces the wrongheaded conventional wisdom that trade policy critics are naively obsessed with reviving so-called Rust Belt industries.

What Trump should have added is that manufacturing sectors running sizable trade deficits also include semiconductors, electro-medical devices, all categories of machine tools, farm machinery, construction equipment, ball bearings, telecommunications equipment (not including smartphones), and pharmaceuticals. Believe me, I could go on. And that’s not your classic Rust Belt stuff. Are all these domestic producers hopelessly uncompetitive, Trump should ask? Or are global trade markets unmistakably rigged even against American-made products falling into any knowledgeable definition of advanced manufacturing?

>Trump clearly felt the need to throw some red meat to traditional Republicans and conservatives by also promising to boost the productive sectors of the American economy by getting rid of “wasteful rules and regulations” and cutting taxes in order to “make America the best place in the world to start a business, hire workers, and open a factory.”

Of course, there’s an important, legitimate debate about the proper scope of regulations and the proper level of taxation for both corporations and individuals. Think though, of the outreach potential to independent and even many Democratic voters had Trump added something along these lines:

“But we also have to remember that many of our regulations also serve the vital purpose of protecting us from dangers like polluted air, water, and land; and unsafe food and workplaces. By freeing America’s domestic companies of the need to compete against rivals free to ignore these goals, we preserve regulations reflecting values we should be proud of, and ensure that we remain a genuine first world country.”

And let’s not forget arguments made in Trump’s tax plan (though in a form that’s surely vastly overstated) but neglected in this speech: All else equal, the faster the economy’s real (as opposed to bubble-ized) growth, the stronger its ability to generate the tax revenues that are both politically acceptable and needed to finance true national needs and popular national desires in a responsible way.

Again, I really do believe that this Trump speech was the best Americans have heard on trade in decades. But that bar has been abysmally low. If Trump wants to make America “Greater Than Ever Before” ensuring that his trade positions fit this description will help a lot.

(What’s Left of) Our Economy: Brookings IDs Trade Deficits as Sign of U.S. Advanced Manufacturing Weakness

Tags

advanced manufacturing, Brookings Institution, manufacturing, manufacturing renaissance, Trade, Trade Deficits, {What's Left of) Our Economy

I gotta hand it to the Brookings Institution. It’s been putting out some genuinely valuable research on domestic manufacturing – and I’m not just saying that because Brookings scholars share my view that American industry remains in struggle, not renaissance mode. Two aspects of its newest manufacturing report are especially worth highlighting: the sectors it includes in its definition of “advanced industries,” and its recognition that industries running global trade deficits are industries in trouble.

Brookings isn’t the only outfit that tries to define advanced manufacturing. For example, the U.S. government has tracked trade in “advanced technology products” since 1989, and most analysts – and everyday Americans – would probably rattle off very similar lists of such sectors if asked. Nearly everyone would include information technology hardware, and the sharper you are, the likelier you’ll be to include industries like pharmaceuticals and aerospace and advanced materials.

But Brookings’ list is so broad and unconventional that it looks like those in my import penetration reports – including steel and autos and home appliances and chemicals and electrical equipment and industrial machinery. These and many others are typically and sneeringly dismissed by the economic conventional wisdom as “smokestack.” But they  require lots of capital as well as research and development, engineering, and product design in order to compete successfully. In fact, Brookings includes several sectors that I’ve left out, either because of small size or my sense that they simply were not capital- and technology-intensive enough – like consumer electronics and lighting equipment and shipbuilding and the big miscellaneous manufacturing category. I’ll need to reexamine them at some point.

Just as surprising is Brookings’ emphasis on trade balances as measures of an industry’s health. Most economists will tell you that economy-wide trade balances don’t really matter or, as is the case with the current U.S. administration and all of its recent predecessors, simply ignore any trade-related data except on exports. Worrying about trade balances on the industry level is considered a hallmark of neanderthalism.

But the Brookings study actually turns the conventional wisdom on its head, contending that the economic damage done by trade shortfalls in individual industries should be less controversial than the damage done by broader deficits. It specifies that these deficits “can symbolize lagging competitiveness or they can stem from the distortionary economic policies of competing nations.” And it warns:

“Regardless of their origins, advanced industry trade deficits pose a serious threat to the country’s long-term prosperity. Because most innovation builds on existing technologies and is evolutionary in nature, the concentration of advanced industrial activity and know-how outside of the United States puts the nation’s ability to own the next-generation of critical technologies into question. Reducing the trade deficit in advanced industries is essential to slow the erosion of U.S. innovative capacity.”

Moreover, some of the statistics it presented surprised even me – especially for those service sectors I don’t track closely. For example, did you know that in 2012, the United States ran only a modest trade surplus in telecommunications services, and deficits in R&D and computer services? And that American trade in software was only roughly balanced? I sure didn’t.

Most of the Brookings study’s recommendations for strengthening advanced U.S. industries center on domestic reforms. But the authors do insist that “The United States should seek not only multilateral trade agreements but also true market openings and regulatory harmonizations that reduce both tariff and nontariff barriers that advanced industry exporters face in foreign markets. Countries that engage in unfair trade practices should be held accountable.”

This description of the Brookings findings doesn’t begin to do them justice. Especially fascinating are the numbers on the geography of manufacturing activity in the United States down to the level of small and medium-sized cities. But with Congress debating the future of U.S. trade policy “even as we speak,” the study’s reminder that trade deficits matter and can threaten the nation’s industrial and technological leadership are the points that policymakers today most urgently need to hear.

 

(What’s Left of) Our Economy: A Flawed Basis for “Over-Priced” China Hopes

Tags

advanced manufacturing, Boston Consulting Group, China, developing countries, economic development, labor, labor-intensive manufacturing, Lewis Point, manufacturing, manufacturing renaissance, Obama, productivity, W. Arthur Lewis, wages, {What's Left of) Our Economy

Quick – how many of you have heard of the Lewis point? Not a clue? Don’t worry – you’re not alone. Even most supposedly serious economic analysts seem unacquainted with it. At the same time, it’s difficult to talk realistically about patterns of Chinese and U.S. industrial competitiveness without keeping it in mind, along with its significant weaknesses, and the release of a new report about China’s labor force is a great occasion to examine its significance.

The Lewis point – named after the prominent development economist Sir W. Arthur Lewis – is the hypothetical stage of a country’s economic evolution at which its supply of excess labor shrinks enough to start pushing wages up. As a result, it’s the dominant theory in economics explaining how low-income third world countries with major labor surpluses nowadays can plausibly hope to become much higher income countries.

I’ve always been somewhat skeptical of the Lewis notion, mainly because the labor surpluses in developing countries have been so vast, and incomes so incredibly low. Indeed, my book The Race to the Bottom cited third world labor gluts as features of the global economy with such staying power that they would be instrumental in ensuring that world trade flows would long remain lopsided to the detriment of workers in developed countries, and global financial stability.

More recently, the Lewis point has shaped much recent thinking about global manufacturing’s future, and especially about the outlook for the United States and China – even though few of these thinkers have mentioned Lewis’ ideas. In particular, U.S. manufacturing cheerleaders like President Obama and the Boston Consulting Group have predicted that lots of industrial activity will move from China to the United States largely because labor shortages there are already driving wages too high to justify its current levels of production. In other words, the Lewis theory looks like it’s playing out right now in the PRC.

As I’ve written exhaustively, these claims of rising Chinese wages are full of serious problems. (The new China labor report claims to have spotted another one.) One rising-China-wages problem I haven’t discussed, however, stems from a big flaw in the Lewis point theory that would weaken it even if one could document the kinds of Lewis-ian wage hikes that the cheerleaders claim to be seeing. Lewis’ ideas arguably make sense outside sectors of an economy exposed to international trade, like services. But since trade is crucial to developing countries’ growth – because, by definition their domestic markets lack the wealth needed to create anything like the employment opportunities they need – relevance to trade should make or break the Lewish theorem. And here’s why it doesn’t seem able to hold long enough to matter.

In developing countries making their way in a world with robust trade – and full of surplus labor – overly generous pay in the labor-intensive industries in which economic development naturally starts will indeed reduce the competitiveness of their manufacturing. But events don’t then simply come to a screeching halt. One of three manufacturing-related developments – or some combination of them – can be expected next, at least if the rest of economics has any validity. (Of course, as with all economics theorizing, these scenarios depend at least in part on other factors holding more or less constant.)

Possibility one is that so much competitiveness is lost that jobs in those globally exposed sectors dry up, surplus labor starts to emerge once more, and wages start sagging again. Possibility two is that employers do what they do everywhere else in the world to cope with scarce labor – they automate, or become more efficient in other ways, and either replace labor with capital and technology, or raise their productivity, or do both. And possibility three is that these countries use capital and technology to move into more advanced industries.

China specifically seems to be climbing the technology ladder quite rapidly, as evidenced by its production of ever more advanced manufactures. But the nation still hosts a large labor-intensive manufacturing sector, and its struggles appear to be in part behind China’s growth slowdown.

It’s true that, in principle, because low-income countries are poor, their businesses might lack the access to capital and technology to take these steps. In practice, though, many foreign investors have been happy to help out, and many third world governments (notably in Asia) access the capital from their own populations through economic policies that promote saving and discourage consumption. Intellectual property theft, or forced technology transfers, have aided many (mainly Asian) countries, too.

It’s also true that not all national business establishments in globally exposed sectors will be smart enough to make these adjustments, or fast enough to re-attract from more promising sectors whatever workers they need. But at least some will, and they’ll become the new manufacturing winners until others start coping as or more successfully, or come up with superior alternative approaches.

Incidentally, these Lewis point shortcomings also explain why hopes for significant wage increases in U.S.-based manufacturing (which, to their credit, the manufacturing cheerleaders like President Obama have not predicted) appear misplaced. Although it’s difficult to know the tipping points in various manufacturing sectors, no one can reasonably doubt that they exist. If they’re ever passed strongly enough and long enough (a development that looks pretty far-fetched for now), offshoring to much lower wage countries will start looking just as attractive as in the past. Moreover, as made clear by China’s inroads into advanced manufacturing, the productivity gains that will be needed to offset these wage increases will need to be genuinely historic – a sobering thought at a time when manufacturing’s productivity growth has been slowing.

(What’s Left of) Our Economy: The Year in Manufacturing Trade in Detail

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advanced manufacturing, manufacturing, Trade, Trade Deficits, trade surpluses, {What's Left of) Our Economy

Given my “look under the hood ethos,” like I was going to pass up the chance to do a deep dive into the full-year 2014 trade figures that were released last week? Not a chance!

The exercise is especially interesting this time because I looked at what I call the “deep deficit” in October, examining the year-on-year changes for that month. Now that we have the full-year figures, we can see what’s changed – and the results surprised even me.

First, let’s set the scene: Manufacturing overall ran up a $733.90 billion trade deficit in 2014. That’s 13.47 percent greater than the previous record deficit of $646.77 billion – set in 2013. This trend clearly is not domestic manufacturing’s friend.

At the same time, much of this deficit is in labor-intensive consumer goods sectors that were decimated long ago, and which can’t possibly be reshored to any meaningful degree. Moreover, although they provided good livings for millions of working class Americans – they’re not the type of production that’s central to America’s future as a high-wage, first-world society.

That’s why the deep dive is so important; it permits an examination of the high-value, capital- and technology-intensive industries that are the keys to continuing prosperity. And these data don’t make for a pretty picture, either.

Let’s start with those major manufacturing industries whose deficits grew between 2013 and 2014, with the January-October 2013-2014 percentage change figures I posted two months ago on the left, and the full year 2013-2014 numbers on the right. The sectors are listed in descending order of their trade deficits in absolute terms:

Pharmaceuticals:                                                                       +28.76%   + 31.90%

Telecommunications gear:                                                           +8.52%     +10.27%

Iron and steel:                                                                         +67.58%      +72.05%

Heavy duty trucks and chassis:                                               +151.85%    +111.02%

Metal-cutting machine tools:                                                       +2.32%       +1.43%

Search, detection, navigation, guidance instruments:                +144.50%     +94.90%

Industrial valves:                                                                       +27.84%    +29.64%

Cutting tools and machine tool accessories:                               +41.45%     +43.72%

Automatic environmental controls:                                            +21.22%     +17.60%

Ball and roller bearings:                                                           +25.69%      +20.45%

Metal-forming machine tools:                                                  +36.65%      +38.91%

What I hate about these data is that six of the eleven industries with worsening deficits saw their deficits continue to worsen. Only five made up competitive ground in the last two months of the year. As for the automotive numbers, they suggest that maybe it’s most accurate to speak of a boom in auto parts imports in addition to one in domestic vehicle production. (Where, as we’ll see, a deficit – the biggest in all manufacturing – slowed its decline.)

And don’t forget the supposedly booming automotive sector! All of these sectors suffered from worsening trade deficits on a January-October 2013-14 basis. Here’s how much their trade shortfalls widened on a full-year basis:

transmission and power train parts                             +10.45%

engines and engine parts                                            +22.06%

motor vehicle electronics:                                           +11.68%   

tires and tire parts:                                                       +3.28%

motor vehicle steering and suspension:                        +18.95%

motor vehicle seating and interior trim:                        +14.29%

vehicular lighting equipment:                                       +30.88%

motor vehicle brakes:                                                +22.75%

motor vehicle air conditioning:                                     +6.51%

Moreover, the huge miscellaneous auto parts sector saw a $1.61 billion deterioration in its trade balance, the motor vehicle stampings surplus fell by 3.26 percent, and the much smaller deficit in vehicle bodies fell by nearly a third.

Many other trade-deficit sectors saw these shortfalls shrink from the first ten months of 2013 through the first ten of 2014. How did they finish the year? Here are the results, again presented in descending order of surpluses in absolute terms with the January-October numbers on the left:

Autos and light trucks:                                                                  -4.49%       -3.52%

Broadcast and wireless communications equipment (a category that includes smart phones):                                                                                      -8.75%       +0.84%

Computers:                                                                                 -2.18%       -2.59%

Medicinal and botanical drugs and vitamins:                              -12.73%        -9.81%

Computer parts:                                                                      -20.75%      -12.81%

Computer storage devices:                                                        -8.53%        -7.55%

Relays and industrial controls:                                                   -6.67%        -9.97%

Speed changers, high-speed drives, and gears:                       -10.95%       -12.98%

Special dies, tools, and fixtures:                                                -7.03%      -18.66%

Motor vehicle bodies:                                                            -23.15%       -32.67%

Fluid power valves and hose fittings:                                        -9.76%         +4.44%

The bottom line? Six of these eleven saw their deficit shrinkage slow, and in two of those sectors, deficit shrinkage turned into deficit growth.

But there’s another category of recent trade losers – relatively speaking – that shouldn’t be overlooked – those industries that run trade surpluses, but whose surpluses have shrunk. Here’s how a representative sample of those has fared, presented in the same format as immediately above:

Plastics and resins:                                                                 -6.19%           -6.11%

Oil and gas field machinery and equipment:                          -10.14%            -7.31%

Turbines and turbine generator sets:                                      -3.83%            +0.74%

Miscellaneous basic organic chemicals:                                -67.17%          -56.49%

Laboratory instruments:                                                       -12.13%          -10.54%

Semiconductors and related devices:                                   -21.11%          -20.76%

Mining machinery and equipment:                                        -12.15%          -10.19%

Electricity measurement and test equipment:                         -16.73%          -11.59%

Farm machinery and equipment:                                          -44.76%          -55.82%

Pumps and pumping equipment:                                          -61.20%          -57.86%

Motor vehicle metal stampings:                                           -2.07%              -3.26%

Electro-medical devices (like CAT scan & MRI machines): -71.02%          -74.37%

Nonetheless, here there’s a silver lining to the story – nine of the twelve sectors listed had less annual surplus shrinkage at year-end than over the first ten months of 2014, and turned surplus shrinkage into surplus expansion.

Finally come the manufacturing sectors that are the biggest trade winners – those with surpluses that rose January-October, 2013 to the same period, 2014. Here are those previous results, plus the full-year 2013-14 changes, presented in the same format:

Aerospace products and parts:                                           +4.88%            +5.92%

(As is not the case with industries like autos, the data enabling a breakdown of aerospace trade balances into parts trade and finished aircraft trade are no longer available.)

Semiconductor manufacturing equipment:                         +44.30%           +33.80%

Pesticides and other agricultural chemicals:                          +4.51%            +2.41%

Miscellaneous general purpose machinery:                          +3.80%             -2.07%

Non-costume jewelry:                                                     +218.63%       +381.69%

Miscellaneous basic inorganic chemicals:                         +175.52%         +147.47%

Non-diagnostic biologic products (vaccines):                     +36.81%          +71.60%

Ships:                                                                          +1,438.81%        +611.76%

Optical instruments and lenses:                                        +268.00%          +51.76%

Power boilers and heat exchangers:                                   +93.18%         +23.78%

These ten industries clearly are in fine competitive shape. But seven of them arguably were in less fine shape in December than in October, and in one, trade surplus growth turned to trade surplus decline.

Finally, no review of manufacturing’s trade year would be complete without mentioning the jaw dropping worsening of the construction equipment trade balance – by $5.10 billion, into a $1.02 billion deficit – and the 10-fold surge in the trade surplus for ethyl alcohol – to $1.443 billion.

As noted in the previous deep dive post, economists tell us that trade is desirable in the first place mainly because it drives each trading country to focus on what it’s best at economically, with deficits, surpluses, and their changes providing compelling evidence of evolving patterns of competitiveness. It’s hard to look at either the 30,000-foot-level manufacturing data and these details and be optimistic about America’s future even in the most valuable industries – unless someone in charge in Washington starts wondering if there’s something fundamentally wrong with the global trade system that’s producing these results.