(What’s Left of) Our Economy: How Pre-Trump Trade Policies Devastated U.S. Protective Gear Capacity

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apparel, CCP Virus, China, coronavirus, COVID 19, Fed, Federal Reserve, free trade, garments, health security, manufacturing, manufacturing capacity, NAFTA, non-durable goods, North American Free Trade Agreement, offshoring, textiles, Trade, Trump, World Trade Organization, WTO, Wuhan virus, {What's Left of) Our Economy

Recently I put up a post expressing gratitude that, despite their best efforts, pre-Trump U.S. trade policies didn’t manage to send the entire U.S. textile and apparel industries offshore. After all, companies in these sectors are the companies with the greatest expertise and capabilities in making all the personal protective equipment (PPE) crucial in the anti-CCP Virus fight.

Of course, the nation is therefore reliant for these and other medical products on countries, like China, which have responded to the emergency at various times with export bans. And in the case of pandemic-prone China, much production of all kinds was shut down temporarily because of the original virus outbreak.

Thanks to the release of the latest Federal Reserve industrial production data, it’s possible to quantify the damage done to these vital industries in ways other than the output figures I presented in that previous offering. That’s because the Fed’s monthly releases report in detail not only on increases or decreases in after-inflation output for manufacturing (and related) sectors. They also report the monthly changes in industrial capacity – the resources and facilities available to turn out various goods.

The results through last month are below. They use as baselines the month the North American Free Trade Agreement (NAFTA – which has now been turned into the U.S.-Mexico-Canada Agreement) went into effect, and the month that China entered the World Trade Organization (WTO). NAFTA’s January, 1994 onset signaled to many the transformation of U.S. trade policy into U.S. offshoring policy (see my book, The Race to the Bottom, for this argument). The January, 2002 beginning of China’s WTO membership gave the People’s Republic  overall, and its even-then-immense textile and especially apparel sectors, invaluable protection against American responses to its various forms of trade predation. (Limited safeguards versus “market-disrupting” surges in imports from China were written into the WTO agreement.)

For comparison’s sake, the industrial capacity changes for non-durable goods manufacturing (the super-sector into which textiles and apparel are grouped), and total manufacturing are provided as well:

                                                       Since NAFTA onset    Since China WTO entry

Textiles:                                              -37.05 percent              -44.05 percent

Apparel & leather goods:                   -81.97 percent              -77.18 percent

Non-durables manufacturing:           +17.06 percent                -2.23 percent

Total manufacturing:                         +75.54 percent             +10.78 percent

Clearly, the decimation of apparel capacity sticks out prominently. But although the more capital-intensive textiles industry didn’t suffer nearly as much, it fared much worse than either manufacturing in toto or the non-durables sectors overall. That’s largely because as the apparel industry disappeared, so did a prime domestic customer for textiles producers.

It’s also obvious for all these categories that although NAFTA was, to say the least, hardly a bonanza, the big trade-related damage was done by China’s WTO entry. Afterward that event has been when the shrinkage of textiles capacity accelerated, when the vast majority of the post-NAFTA apparel damage was done, when non-durables capacity gains shifted into reverse, and when total manufacturing capacity growth slowed to a crawl.

Calls are now abounding for remedies to the resulting shortages – like greater stockpiling and various tax and subsidy incentives for reshoring at least some of this production. But material in stockpiles can decay if unused too long, and companies would be foolish to spend heavily on new U.S. factories if they still face the likelihood of being subsidized and dumped out of existence by predatory foreign trade policies. As a result, there’s no substitute for stiff tariffs, and a credible national resolve to keep them in place, for ensuring that America’s health security never becomes so degraded again.

(What’s Left of) Our Economy: When Industries Disappear

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apparel, big government, Breitbart.com, conservatves, embroidery, Frances Martel, Immigration, labor unions, manufacturing, New Jersey, skills, textiles, Union City, unions, {What's Left of) Our Economy

Until I read Frances Martel’s “Hanging by a Thread,” I used to think of Union City as little more than one of those bleak-looking smallish northern New Jersey municipalities the Amtrak trains pass through on their way between New York City and points south.  How wrong I was!  And for such wide-ranging policy and political reasons!  

Not that you can’t simply enjoy her long feature for Breitbart.com for the fascinating descriptions of what makes her hometown special geologically (e.g., it sits on lots of Manhattan bedrock-like granite, good for supporting factories with heavy machines and multistory housing) and demographically (because it developed fairly late in the 19^th century, its population was always dominated by immigrants).

Clearly important as well is Martel’s main theme – how manufacturing built solid prosperity for Union City from the get-go, and how its demise, due to developments like (but not restricted to) offshoring-obsessed U.S. trade policies helped bring punishingly hard times. (Full disclosure: Martel interviewed me for the article, and quoted me quite generously.)

But if you’re thinking this is only an article for trade and/or manufacturing mavens, or for New Jersey history aficionadoes, you’re sorely mistaken. For along the way, “Hanging by a Thread” offers important insights into how these closely related subjects profoundly affect many of the nation’s other major issues and challenges.

For example, Martel offers a novel twist on the notion that the United States welcomed so many immigrants so consistently (though not always) from the mid-19^th century onwards in particular because of its urgent need for unskilled labor. No doubt most of the newcomers were poorly educated. But as “Hanging” makes clear, industry during this period used lots of complicated machinery, including the embroidery sector that became concentrated in Union City.

As Union City’s official historian told Martel, many of its first immigrants came from Germany, Switzerland, Austria, and other parts of Europe with major textile industries, and brought with them extensive experience working with such devices that employers clearly found valuable.

Since skills (of different kinds, of course) remain so crucial to economic success today, Union City’s past raises the question of whether – as Open Borders advocates seem to believe – the United States today should indiscriminately welcome immigrants regardless of skill levels and gainful employability.

Two other messages coming through loud and clear from Martel’s research and analysis are especially important for conservatives to heed. The first has to do with unions. Martel’s parents were hard-line anti-communists who fled Castro’s Cuba, and her mother worked in apparel. The author explains that these arrangements were seen as “a critical part of the factory ecosystem.” The following exchange, with her mother speaking first, makes the point vividly:

“‘I have always had a good union. It works, I think. It works to have a union because without a union, in a private place, you’re screwed,’ she told me.

“‘You don’t feel that there is a conflict between that and being a capitalist?’” I asked…..

“‘No. What? Being a capitalist? No,’ she replied, with confusion. ‘No, that has nothing to do with socialism, it’s just so that the worker has someone to defend them. If you don’t have a job, they can fire you whenever. That’s not fair. To throw you out for no reason, it’s unfair ifyou are working well.’”

Martel’s second message for conservatives actually echoes a point I’ve made before (e.g., here): The more enthusiastically traditional free trade policies are pursued by American leaders, the bigger government’s going to get. But as Martel makes clear, these approaches to the global economy are bound to generate needs that far exceed the kinds of welfare state benefits (ranging from income support to heavily subsidized healthcare) used to keep living standards above third world levels (or at least try to do so).

As the Union City example shows, relentless globalization can also turbocharge government’s role in economic development itself. The author explains that, since 2000, Union City Mayor Bob Stack (a big-city machine politician if ever there was one)

“took the reins on the eve of the guillotine falling on embroidery and has taken to meticulously rebuilding the identity of the city. He tore down Roosevelt Stadium, the sports venue at the heart of the city, to build a new Union City High School – with a stadium on the roof. Union City previously boasted two high schools, one for Union Hill and one for West Hoboken, that Stack turned into middle schools. He built parks in honor of the city’s Cuban, Colombian, and Dominican populations, and an ‘International Park.’ Seemingly every other street has a water park open in the summer for children to play in – the biggest, Firefighters’ Memorial Park, boasts an Olympic-sized swimming pool. His administration also refurbished the downtown library into the Musto Cultural Center and built its replacement, the library at José Martí Middle School (which his administration also built), in the shadow of what was once St. Michael’s monastery, an imposing Catholic historic site that now houses a Korean Presbyterian congregation.”

In other words, Union City realistically recognized the choices before it, and rejected “the option much of the Rust Belt took: do nothing, abandon ship, hope the invisible hand swoops in before you hit the concrete.” As a result (and also because of its proximity to New York City), it’s more than avoided the ghost town fates of counterparts like Gary, Indiana, Youngstown, Ohio, and Detroit, Michigan.

(What’s Left of) Our Economy: Thank Goodness Free Trade Zealots Didn’t Completely Destroy the U.S. Textiles Industry

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apparel, Apple, health security, healthcare products, manufacturing, NAFTA, National Council of Textile Organizations, NCTO, North American Free Trade Agreement, offshoring, textile, The Race to the Bottom, Trade, Trump, {What's Left of) Our Economy

The news media have been filled lately with encouraging stories like this one from the Financial Times – reporting that “US factories that usually mass produce hoodies and T-shirts are being retooled to make face masks as chief executives in the clothing industry try to alleviate shortages of equipment to combat coronavirus. A group of nine American apparel companies began producing the masks on Monday….”

Moreover, according to their main industry organization, companies like these and their domestic manufacturing plants “make a broad range of inputs and finished products used in an array of personal protective equipment (PPE) and medical nonwoven/textile supplies, including surgical gowns, face masks, antibacterial wipes, lab coats, blood pressure cuffs, cotton swabs and hazmat suits. These items are vital to the government’s effort to ramp up emergency production of these critical supplies.”

These actions are not only commendable and critically important nowadays. They’re also a major reminder that it’s fortunate in the extreme that there are still domestic textile and apparel industries with production in the United States – and that this sector has survived despite every effort made by pre-Trump Presidents and Congresses either to put them out of business and send them offshore.

Washington’s motivation? Nothing personal or political – just blind adherence to the bedrock economic principle of comparative advantage, which simply put holds that if other countries make certain products more efficiently than the United States (with or without subsidies, by the way), U.S. policy should simply permit the those stateside industries to wither and die, in full confidence that Americans will always be able to import whatever they need whenever they need it.

Geopolitics was at work, too.  Garment-making in particular is the kind of “starter” sector needed by developing countries to start down the road toward industrialization and therefore the broader economic progress they understandably covet. As a result, foreign policy makers viewed chunks of the U.S. industry as an ideal offering for winning and keeping allies in the Cold War competition with the Soviet Union.    

A labor-intensive sector like apparel was consigned to this fate decades ago. But a sector like textiles was treated similarly – even though it’s the kind of capital- and technology-intensive industry in which high-income, advanced economies like America’s are supposed to excel. Moreover, as countless textile executives with whom I’ve spoken over the years have emphasized, even though they (who make the fabrics and similar materials) differ significantly from the clothing makers (who essentially cut and sew the stuff together), their fates have been closely connected. For the apparel companies are prime customers for the textile producers (though far from the only ones, as you’ll realize if you’ve ever owned, e.g., a carpet), and foreign governments could be counted on to give their own textile sectors a leg up in sales by throwing up all manner of obstacles to U.S.-owned firms supplying overseas garment makers.

In fact, pre-Trump administrations continued to dismiss the textile industry long after its potential became clear for creating all sorts of high tech fabrics with breakthrough qualities like temperature and odor control and bio-monitoring capabilities.

It’s true that the companies could always follow what you might call the “Apple model” – after the electronics giant’s strategy of researching, engineering, and designing its products domestically, and sending the manufacturing overseas. But as I documented nearly two decades ago in my globalization book, The Race to the Bottom, once industries offshore production, many of these so-called white collar activities tend to follow – since there’s nothing like physical proximity to generate the kind of intensive, interactive collaboration between labs and shop floors often needed to spark innovation.

Moreover, as Americans are learning today, you can be the world’s innovation leader by leaps and bounds, but if you lack the domestic production facilities when emergencies arise, you may be standing at the end of the line for supplies of vital products.  In fact, as of late last week, no fewer than 38 countries had limited exports of healthcare-related goods.

So it’s pretty appalling to see how successful pre-Trump U.S. leaders were in stripping the nation of these capabilities. Federal Reserve statistics tell us that inflation-adjusted production of textiles in the United States has sunk by just over half since January, 1994 – when the North American Free Trade Agreement (NAFTA) went into effect and officially ushered in a long offshoring-happy phase of U.S. trade policy. And if you think that’s terrible (which it is), it’s a performance that positively shines when compared to apparel (and leather goods) production. That’s down more than 86 percent during this period.

Interestingly, just two years before NAFTA’s advent, a pair of vocalists, Fontella Bass and Bobby McLure, released a song titled “You’ll Miss Me (When I’m Gone).” What a near-tragedy that shortsighted American trade policymakers didn’t realize how thoroughly this message can apply to major industries. What a blessing that the nation’s remaining textile and apparel makers chose to hang on. And thank goodness that the nation has a President today who clearly recognizes the imperative of Making it in America not only in textiles and apparel, but across the manufacturing spectrum. 

P.S. Full disclosure: For nearly two decades, funders of my work at the U.S. Business and Industry Council included a major domestic textile company. At the same time, the firm suddenly and unceremoniously dumped the organization in 2009 (and not for lack of resources). So my warm and fuzzy feelings toward the sector are limited.

 

(What’s Left of) Our Economy: U.S. Trade Policy Deserves Blame for the Caravans

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apparel, asylum seekers, Bangladesh, CAFTA, caravan, Caribbean Basin Initiative, Central America, Central America Free Trade Agreement, China, economic development, El Salvador, globalization, Guatemala, Honduras, immigrants, Immigration, manufacturing, migrants, Multi-Fibre Arrangement, NAFTA, North American Free Trade Agreement, Northern Triangle, Trade, Uruguay Round, Vietnam, World Trade Organization, WTO, {What's Left of) Our Economy

Hot on the heels of the current caravan of Central Americans heading through Mexico to the U.S. border, another such procession is gathering in Guatemala. And these two have followed the flood of unaccompanied migrant children from the area that reached the United States in 2014.

I wish I could tell you that there’s a silver bullet for solving the problem – though nothing could be clearer than that these human tides will keep organizing in even greater numbers if Washington follows the general advice of the Open Borders lobby to view all of the caravan-ers as legitimate asylum-seekers entitled to full due process once they reach the border and request this status. Upon which time current procedures call for recording their claims and then releasing them based on the ludicrous assumption that they’ll report back to immigration court on the appointed date and risk being rejected and thus deported.

What I can tell you is that this crisis has been greatly aggravated by an unforgivably short-sighted U.S. trade policy strategy that emerged in the 1990s. It consisted of indiscriminately liberalizing trade with developing countries, and thereby ignoring the case for targeting trade diplomacy to ensure that countries and regions of greatest importance to the United States receive the lion’s share of the benefits. And the prime victims of this strategic failure – which mainly reflected the determination of offshoring multinational manufacturers and Big Box retailers to gain maximum flexibility to source imported inputs and final products – were the poorer countries of the Western Hemisphere. That group of course includes Mexico and the Central American countries that have sent so many migrants northward.

Interestingly, Central America and the Caribbean countries were placed prominently in line to receive significant shares of the vast U.S. market by a Reagan-era initiative aimed mainly at stemming the spread of left-wing revolutionary forces in the region. But scant years later, any hopes generated by this strategy for fostering more prosperity in these impoverished regions and strengthening the appeal of pro-Western leaders were kneecapped by two big decisions.

The first was the negotiation of the North American Free Trade Agreement (NAFTA) in 1993. The second was the phase out of U.S. and other developed countries’ quotas on apparel imports that was approved the following year as part of the Uruguay Round global agreement that reduced various trade barriers worldwide and created the World Trade Organization (WTO). And the third was the Clinton administration’s subsequent rush to liberalize trade with a host of low-income countries outside the Western Hemisphere.

In principle NAFTA’s tight focus on Mexico was justifiable given Mexico’s size, position as a U.S. neighbor, and history of political, economic, and social policy failure that seemed to be reaching a crisis point. But economic growth and employment could still have been greatly lifted in Mexico and Central American (along with the Caribbean countries) had American trade liberalization stopped or at least paused there.

Yet the quota phaseout forbade Washington from incorporating any strategic or non-economic considerations into apparel trade policy, whether conditions urgently required them or not.  As a result, it ensured that the benefits of freer trade would be greatly watered down (and many garnered by China and the rest of developing Asia in particular), and insult was added to injury by new liberalization deals reached or renewed, or decisions made, regarding Vietnam, sub-Saharan Africa, Jordan, most of developing Asia (in the form of a deal on information technology products, including labor-intensive consumer electronics), and China. Largely as a result, the poorer countries of the Western Hemisphere were left in the dust in the business models of the multinationals and the big retailers.

Nowhere does the opportunity lost by Mexico and Central America come through more clearly than in the apparel trade figures. This sector is almost always the first utilized by developing countries to begin their industrialization and modernization drives mainly because its own labor intensivity means that capital and technology requirements are pretty modest, the relevant skills can be taught fairly easily, and its job-creation promise is substantial.

Here are the figures for apparel imports from Mexico, the three “Northern Triangle” Central American countries, China, and two other current Asian textile giants (Bangladesh and Vietnam) for four key years. Next to them will be the figure for the share of American apparel consumption (market share) won at that point by each. We start with 1997 because that’s the year when the U.S. government began adopting its current dominant system for slicing and dicing trade and manufacturing data – which enables us to see statistics that are apples-to-apples. The second year is 2001 – the year China’s was admitted into the WTO – and thus gained substantial immunity from American laws aimed at curbing predatory trade practices. The third year is 2006 – when Congress approved a Central America Free Trade Agreement (CAFTA) negotiate by George W. Bush’s administration. And the fourth year is last year – the latest for which we have full-year numbers.

1997

Mexico:                       $5.317b                    11.29 percent 

El Salvador:                 $1.052b                     2.18 percent

Guatemala:                  $0.973b                     2.07 percent

Honduras:                    $1.689b                     3.59 percent

China:                          $7.279b                   15.46 percent

Bangladesh:                 $1.442b                      3.06 percent

Vietnam:                      $0.026b                      0.06 percent

2001:

Mexico:                       $8.112b                     12.99 percent 

El Salvador:                 $1.634b                      2.62 percent

Guatemala:                  $1.630b                       2.61 percent

Honduras:                    $2.438b                       3.91 percent

China:                          $8.597b                     13.47 percent

Bangladesh:                 $2.101b                      3.37 percent

Vietnam:                      $0.048b                       0.08 percent

2006:

Mexico:                       $5.514b                       7.16 percent 

El Salvador:                 $1.408b                      1.83 percent

Guatemala:                  $1.685b                      2.19 percent

Honduras:                    $2.519b                      3.27 percent

China:                        $22.405b                    22.09 percent

Bangladesh:                 $2.915b                       3.79 percent

Vietnam:                      $3.226b                       4.19 percent

2017:

Mexico:                       $3.806b                       4.52 percent 

El Salvador:                 $1.920b                       2.28 percent

Guatemala:                  $1.371b                       1.63 percent

Honduras:                    $2.522b                       3.00 percent

China:                        $29.322b                     34.85 percent

Bangladesh:                $5.046b                       6.00 percent

Vietnam:                    $11.613b                     13.80 percent

The big takeaway? Even during the decade after the Central America free trade deal was signed, the three Northern Triangle countries actually saw their share of the U.S. apparel market stagnate or actually shrink. Mexico’s share has been cut by about almost 60 percent. And the business won by China, Bangladesh, and Vietnam has exploded – since 2001 for China, and since 2006 for the two other Asians. Again, the year that the free trade deal that was supposed to benefit El Salvador, Guatemala, and Honduras was inked.

With Mexico, there are of course mitigating factors. Chiefly, although its apparel competitiveness in the U.S. market is way down, its competitiveness in higher value automotive manufacturing in particular is way up. But millions of poor Mexicans still could have benefited from apparel employment, and no such progress has been made in Central America – which is partly understandable since incomes are even lower, and governments and other institutions needed for economic development are so much weaker.

Apparel should have been the great hope for these populations, but that sector’s potential for expanding production (which of course needs to be export-oriented since these countries’ domestic markets are tiny) and employment has been virtually choked off. Just as important, the prospect that apparel wages in the Northern Triangle might rise adequately has been limited, too – since pay throughout developing East and South Asia (even in China, according to the chart below) remains so much lower.

American trade policy could have lent a big helping hand to Central America had it adopted a strategically sensible set of priorities. But it failed to learn a fundamental lesson of strategy: When everything is a priority, then nothing is a priority. You can see the victims of this failure in the flow of human misery heading up from the Northern Triangle.

(What’s Left of) Our Economy: Another U.S. Trade Deal that Puts America Last

Tags

apparel, CAFTA, Central America, Central Anerica Free Trade Agreement, dispute resolution, Dominican Republic, DR-CAFTA, free trade agreements, Guatemala, labor rights, legalism, offshoring, Trade, trade law, {What's Left of) Our Economy

To get a good idea of one of the biggest, and most neglected, failings of U.S. trade policy, look no farther than America’s near-neighbors in Central America. For earlier this month, a development on the labor rights front made clear the America Last approach Washington has taken toward the ways that disputes are handled under various trade agreements the United States has signed – in this case, the deal with six Central American countries plus the Dominican Republic (DR-CAFTA).

On June 14, an arbitration panel established by the dispute resolution chapter of the DR-CAFTA treaty ruled against the United States and for Guatemala in a long-running quarrel between the two signatories over labor rights practices in the latter. On the face of it, it’s hard to take seriously the arbiters’ conclusion that Guatemala indeed is not enforcing its own labor laws ostensibly aimed at safeguarding workers’ rights, but that this failure hasn’t affected bilateral trade flows. After all, in a world where its major industrial export industry – apparel – has to compete on price with super-low wage garment giants like China, Vietnam, and Bangladesh, keeping wages down is essential to the Guatemalan apparel sector’s very survival.

But the fundamental problem with this situation has nothing to do with the merits of the case. It has to do with the structure of the dispute-resolution process set up by the DR-CAFTA treaty, which is basically the same as that set up by all U.S. bilateral and regional free trade deals. Simply put, it bears absolutely no resemblance to economic or policy realities.

Two especially important and related points to keep in mind: First, when the DR-CAFTA deal was ratified by Congress, in 2005, the combined economies of all six Central American countries proper only equaled the output of New Haven, Connecticut. Adding the Dominican Republican barely moved this needle. Because of this gargantuan size disparity, access to the American economy was clearly the paramount prize in this arrangement, and the non-U.S. signatories needed the deal much more than did the United States.

Second, largely as a result, the DR-CAFTA deal was less an example of trade policy than of economic development policy. Yes, cheerleaders for the agreement talked of opening exciting new markets for American domestic producers – talk belied by the micro nature of Central American and Dominican markets). And yes, they spoke of enhancing the competitiveness of the American textile industry – claims belied by the impossibility that the pact could overcome the advantages of the Asian apparel giants). But at bottom, the deal was a foreign aid program for the region.

Leave aside its clear failure to achieve meaningful “democracy, economic reform, and regional integration” – at least if you believe even a fraction of countless news reports of out-of-control lawlessness and violence in Central America. Given the non-U.S. signatories’ desperate need for any American help they could get, why on earth would Washington permit the treaty to create a system for choosing arbitration panels – which have the last say in determining a dispute’s winner and loser – that treats the United States and the other DR-CAFTA countries as legal equals?

One answer is that the agreement – like many other U.S. trade deals – was actually intended to foster offshoring, not open foreign markets. So the multinational companies that have dominated the American trade policymaking process for so long made sure that dispute resolution aimed first and foremost to prevent the United States from limiting its imports from their Central American and Dominican factories for any reason. And given the absence of significant consumption markets in the region, that observation seems compelling.

But the so-far-standard U.S. approach to dispute-resolution in trade also typifies a legalistic worldview that contrasts sharply with global realities even in an economic sphere where, for numerous reasons, it’s still completely inappropriate. In fact, this legalism is likelier to undermine American interests than serve them.

Principally, the prevalence tariff and non-tariff barriers to both trade and investment, along with various other predatory practices, shows that the consensus on acceptable economic behavior needed for a genuine legal system to function adequately simply does not exist in fact. Ditto for the great majority of economies that rely heavily on amassing net exports to generate growth. As a result, international commerce is anything but the positive-sum arena portrayed by politicians and academics. So any arrangements meant to negate national power are bound to handcuff the United States. Worse, they handcuff America needlessly.

Perhaps one day, the worldwide consensus needed for a genuine, legitimate system of trade law will emerge. Until it does, however, the United States should capitalize on the leverage it enjoys as the world’s most open major trading power and market of last resort, and sign trade agreements that establish it as judge, jury, and court of appeals for whatever disputes arise. There’s no better place to start than scrapping the artificial – and indeed forced – egalitarianism of the DR-CAFTA trade agreement.

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: Why Obama-nomics Looks Like Importing the Workers and Exporting the Jobs

Tags

2016 elections, Africa, apparel, California, Congress, Democrats, garments, Immigration, imports, income inequality, Los Angeles, manufacturing, minimum wage, Obama, offshoring, Republicans, TPP, Trade, Trans-Pacific Partnership, Vietnam, Wall Street Journal, {What's Left of) Our Economy

This one is so easy that it feels like piling on to write it. But if you need any further evidence that President Obama’s approach to economic policy has dissolved into complete incoherence, look no further than the Wall Street Journal‘s new article on Los Angeles’ garment industry. And it offers some vital lessons for many of his fellow Democrats, too.

As the Journal has reported, Los Angeles will be raising its minimum wage to $15 per hour in phases over five years. In response, the city’s still considerable garment manufacturing industry, which employs huge numbers of the working poor, including many legal and illegal immigrants, is threatening to leave.

It’s certainly reasonable to counter that business owners will always squawk about any cost increases, and that Los Angeles’ proximity to a fashion market that requires lots of very quick order filling will remain a big competitive advantage for a sector that needs to keep up with rapidly changing fads. It’s also reasonable to challenge Los Angeles garment makers to preserve their profitability by increasing productivity – though if they achieve this goal with more automation, employment levels could suffer at least in the short run.

But let’s look at how Obama-nomics is affecting the situation. The president has been a leading champion for those minimum wage hikes. (Most other Democrats agree.) At the same time, he’s seeking a Trans-Pacific Partnership (TPP) trade agreement that will open the American apparel market even wider to exports from Vietnam in particular, where average hourly wages in the industry as of 2013 reportedly were 53 cents per hour, and where employers – including the government – don’t have to worry about workers’ rights. Mr. Obama also favors trade deals that will boost apparel imports from other very low-wage, regulation-free regions like sub-Saharan Africa. And even though most Congressional Democrats oppose the TPP, they’ve strongly supported the Africa deal.

From the broader standpoint of Los Angeles’ entire economy and its prospects, virtually the entire Democratic party favors enormously increased immigration (and eventual citizenship for most of the current illegal population). So the city faces the prospect of a big new influx of new low-wage, low-skill foreign arrivals on top of the influx it’s already experienced, and a big exodus of the best kinds of jobs such newcomers can reasonably hope to hold.  Further, given the president’s support for this import-the-workers-export-the-jobs combination, plus the strong possibility that Democrats will retain the White House in 2016, the same fate appears in store for much of the rest of the country, too.   

And here’s the icing on this cake – as Democrats seek to focus America’s attention on wide and rising income inequality, Los Angeles already stands as one of the most unequal cities in the country, and California as the most unequal state (indicating that it’s more than a Los Angeles issue).

Not that Republicans are significantly better on trade and immigration issues – especially their Washington and Congressional leaders. But at least they’re not also peddling the false hope of big minimum wage hikes on top of their offshoring-and cheap labor-friendly immigration stances.  BTW, back in the late-1990s, I put out a short item on this very problem emerging in California (but can’t find it anywhere on line).  Plus ca change, as they say. 

 

 

 

Im-Politic: The Media’s Anti-Trump Trade and Immigration Canards

Tags

2016 elections, apparel, China, CNN, Donald Trump, E-Verify, illegal immigrants, Im-Politic, Immigration, imports, Jake Tapper, Jeb Bush, Mainstream Media, manufacturing, Marco Rubio, Milliken & Co., North American Free Trade Agreement, offshoring, textile machinery, textiles, Trade, Washington Post

I don’t want RealityChek to turn into Donald Trump Defense HQ, but media coverage of the tycoon-turned-GOP-presidential-candidate remains such a transparent exercise in (ignorant) sliming, and so much of the mudslinging focuses on his trade and immigration policy positions, that I’ve got to return to the subject yet again.

This past week, countless pundits and reporters (and their editors) clearly have decided that they can at least slow Trump’s surge in the polls by portraying him as an economic hypocrite. Hence the burst of columns and stories slamming the candidate as a trade protectionist whose signature apparel products are made in China, and as an immigration xenophobe and racist whose construction projects employ illegal aliens. What they really show are classic examples of, in effect, blaming the victim. Here’s what I mean.

I first ran into this tactic in the early 1990s, shortly after starting to concentrate on trade policy issues upon being hired by the Economic Strategy Institute. One of ESI’s original corporate donors was Milliken & Co., a huge textiles manufacturer. And as its activities in supporting organizations critical of U.S. trade policy started to attract coverage, news articles and material from various hired guns of the nation’s offshoring lobby invariably mentioned that, although Milliken enthusiastically backed restrictions on imports that competed with its own products, it had no qualms using foreign-made textile production machinery in its factories. Obvious hypocrisy, right?

When I checked with the firm’s Washington, D.C. staff, though, I got an answer that somehow the critics never mentioned: The same American approach to trade that was threatening the textile industry had also destroyed domestic textile production machinery making. The main reason? These U.S. policies failed to recognize that foreign rivals were just as determined to monopolize global textile machinery manufacturing at America’s expense – through subsidies, dumping, and other forms of economic predation – as they were to monopolize the production of fabric itself via the same tactics. As a result, any U.S. company that wanted to continue turning out textiles and related products had little choice but to use imported production equipment.  I’m still waiting for the Mainstream Media to acknowledge its oversight.

Donald Trump faces the same kind of problem. At some point recently, he decided that selling men’s business clothing and accessories could be a good money-maker. But when he looked for manufacturers, he discovered that most of the American apparel business had been displaced by imports. Just to give an idea of how great the damage has been, since the current phase of American trade policy began at the start of 1994 with the implementation of the North American Free Trade Agreement, U.S. garment production is down by nearly 78 percent in real terms. In many individual segments of this industry, losses have been much greater. For example, from 2005 through 2013 alone, American men’s neckwear output sank from a paltry $362.39 million to $127.38 million – a nosedive of nearly 55 percent.  (These figures are calculated from the databases of the Federal Reserve’s industrial production reports and the Census Bureau’s Annual Survey of Manufactures, respectively.)  

But none of this was apparently known to CNN’s Jake Tapper, to cite just one example. He plainly thought he had engineered a Pulitzer-worthy “gotcha” moment when, during an interview with Trump, he revealed that he was wearing a Trump brand tie that was made in China. Responding to the anchor’s accusation of hypocrisy, the candidate responded, “I say my ties, many times, are made in China, not all of them by the way, but a lot of them are made in China, because they’ve manipulated their currency to such a point that it’s impossible for our companies to compete with them. When it comes to outsourcing jobs, which is what this tie would be a representative issue of, one of the issues is that the people in China, the laborers, are paid a lot less, and the standards are worse when it comes to the environment and healthcare, and worker safety.”

And Tapper’s comeback after being schooled in the unmistakable macro-realities of doing business globally? An anecdote: “American Apparel makes stuff here–.”

But what about Trump’s use of illegal immigrant laborers to build his fancy apartment towers and resorts? The Washington Post clearly thought it had spotted another example of Trump fakery when it reported that “a Trump company may be relying on some undocumented workers to finish” a big D.C. hotel project. To his credit, correspondent Antonio Olivo gave Trump’s spokespeople ample opportunity to make the point that, as has become the norm in the construction business, big firms use independent contractors to supply laborers, and that it’s these companies’ responsibility to ensure that they’re properly documented. What was less clear – and this is the fault of Trump’s staff – is that very effective counterfeiting of the needed documents is commonplace, and that even the largest contractors aren’t able to verify them adequately, especially when labor needs to be supplied ASAP.

What the Post should have added, however, is that for more than a decade, the nation has had available a highly effective system for fighting phony residence papers – E-Verify. The good news: Even detractors admit that the internet-based system “catches 4.5 undocumented workers for every one U.S. worker wrongly identified.” The bad news: its use is still largely voluntary.

I haven’t been able to find a Trump statement of support for mandating E-Verify’s use, but is it remotely plausible that he’d oppose it? Doubtful, especially since such immigration enthusiasts like his rivals Jeb Bush and Marco Rubio have praised the program – despite failing to say explicitly that they’d expand it to cover all employers.

Unquestionably, Trump’s campaign can be legitimately criticized on any number of grounds, and his trade and immigration positions are eminently debatable, too. But in almost entirely concentrating their attacks on Trump in uninformed trade and immigration-related cheap shots, the Mainstream Media is revealing much more about its own pro-establishment, anti-Main Street biases than about its target.