(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: Trade Derangement Syndrome, Libertarian Style

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Apple, Cato Institute, China, Colin Grabow, corporate cash, corporate debt, India, liberatarians, manufacturing, reshoring, supply chains, tariffs, Trade, Trump, {What's Left of) Our Economy

Not that libertarians are wielding much influence over U.S. trade policy these days, or are likely to in the foreseeable future. After all, how many politicians in either party, much less voters, have much interest in analysts that urge the United States to practice one-way free trade – dropping its trade barriers even though competitor economies keep theirs towering?

But it’s always useful to be reminded about the lengths to which these trade extremists will go to make their case, and a great example of such “trade derangement syndrome” has just been provided by Colin Grabow of the Cato Institute.

In a recent op-ed, Grabow asked “what would happen if, due to rising tariffs, Apple decided to end the production of iPhones in China and move production in the United States.” His answer?

“True enough, jobs would be created, but at substantial cost. Before a single iPhone could be made, billions would have to be devoted to building new factories. Further billions would have to be spent attracting workers in a low-unemployment economy with much higher wages than those found in China. Time would be needed to train these workers as well as develop the associated ecosystem of suppliers.”

In other words, lots of new jobs and factories in the United States. The horror! And – even worse? – major efforts would be needed to teach valuable new skills to many American workers.

Since free lunches are indeed difficult to find in economic theory and reality, Grabow then rightly proceeds to ask how the necessary expenses could be financed. All the answers he provides make a reasonable case that, at least in the short term, the costs would exceed the benefits. But his list of Apple’s funding options – which features raising prices, which would decrease sales and productivity for an entire economy deprived of many of the company’s miraculous devices; cutting R&D spending, which would threaten the firm’s competitiveness and ultimately its ability to generate any of its high-pay American jobs; and absorbing the costs of the tariffs, which would lower investable profits and dividends, and hurt shareholders by cutting the stock price – is missing one stratagem that should be glaringly obvious today.

That funding option? Borrow the money. And P.S. – it’s an approach that Apple (and many other businesses) have been using a lot lately because interest rates have been so low for so long. According to this recent report, the company has “become one of the largest bond issuers in the market, with dozens of bond offerings. These large bond issues and other short-term debt offerings have brought Apple’s total debt to almost $100 billion as of the end of 2017.”

And although no outsiders should pretend that they know exactly how much cash a company should hold at any given time, it’s noteworthy that Apple’s current stash isn’t exactly negligible. As of mid-year, it topped $240 billion.

Grabow is correct in pointing to the difficulties of moving big supply chains in the first place. But the challenge is hardly impossible, especially when important national governments say “Jump!” In fact, in response to India’s demands, Apple itself has promised to start helping the country set up just an iPhone manufacturing complex in return for permission to establish Apple retail stores in the country and access its (potentially) huge market in the most profitable way. The United States, of course, has a large market, too, and the skill levels and other pieces of industrial infrastructure are much greater than those current in India.

In fact, this Cato analyst’s arguments against tariffs on Apple are so transparently flimsy that they indicate that he and his Institute aren’t mainly concerned that such trade curbs won’t help strengthen the American economy. They’re mainly concerned that they will.

(What’s Left of) Our Economy: More Evidence that Trade Wars are Absolutely Winnable for America

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Apple, China, Financial Times, global supply chains, globalization, manufacturing, Paul Krugman, Rana Foroohar, tariffs, Trade, trade wars, {What's Left of) Our Economy

Throwaway lines are among my favorite aspects of opinion writing, largely because in a simple, usually brief, and almost by definition understated sentence or two they can thoroughly debunk or at least gravely weaken shibboleths that have reigned virtually unchallenged for decades. And Financial Times columnist Rana Foroohar had a doozy yesterday.

As is well known by anyone who’s been closely following the development of President Trump’s trade policies and the uproar they’ve triggered, some of the biggest fears surrounding the prospect of the “trade wars” they’re deemed all too likely to ignite concern the impact on global supply chains. As explained this morning by Nobel Prize-winning economist and New York Times columnist Paul Krugman;

“[C]orporations have invested trillions based on the assumption that an open world trading system, permitting value-added chains that sprawl across national borders, was going to be a permanent fixture of the environment. A trade war would disrupt all these investments, stranding a lot of capital.”

And since lots of capital would be stranded, lots of employment patterns worldwide would be disrupted, too – including in the numerous American manufacturing industries that have been thoroughly globalized and whose ability to assemble, further process, or produce goods in their U.S. facilities therefore depends on the smooth operations of these corporate networks.

Further, tariffs on imports from China allegedly would be especially damaging, since Chinese factories play such key roles in so many manufacturing supply chains, and since China’s prominence in globalized manufacturing in large part stems from so many special manufacturing strengths that the Chinese have developed – often by hook or by crook – in recent decades. If you need a compelling example, check out this early 2012 article on why Apple, among many others, has concentrated its industrial operations in the PRC.

At the same time, since Mr. Trump won the White House, not a few companies have either started relocated some production in the United States in response to actual or threatened tariffs, or made public remarks indicating that supplying the U.S. market from abroad would make no sense if trade barriers impeded their access. Other corporate leaders were saying even before Mr. Trump’s election that mounting protectionism and populism worldwide were bound to result in more localized manufacturing.   

So it’s become clear in recent years that however much they’ll complain about moving supply chains, business leaders scarcely view the challenge as impossible. Still skeptical? Recall how easy it’s been for them to send even the largest supply chains from inside the United States to outside American borders, or capitalize on the existence of overseas networks. And recall how quickly many of these transfers happened.

Just how fast they took place, and can still take place, is where Foroohar’s column comes in. In yesterday’s column, she echoed my point about supply chain movements that are either already underway or being contemplated:
“Over the long term, China and the US are headed towards regional supply chains for high-growth technologies of the future.” She continued – consistent with the conventional wisdom, “But in the short term, the interdependencies will be difficult to untangle.”

Then, however, came the kicker – which received no special emphasis from the author at all:

“Several executives who supply Fortune 500 companies have told me it would take months if not years for the biggest US companies to break completely free of Chinese components.”

To repeat: Months – and at the outside years – for many companies to marginalize China’s role in particular in global supply chains. And then remember the reward: Greatly diminishing China’s still-burgeoning influence over the American economy and over the broader global economy, and in the process blunting the growing threat it poses to U.S. security interests both in the Asia-Pacific region and around the world.

That sounds like an appealing – indeed, no-brainer trade-off – to me. For an American leader hoping to disrupt U.S. trade and globalization policy for long-term gain, and facing numerous raucous short-term complaints, it should be an especially effective pitch to make, and an urgent policy target to prioritize explicitly and pursue systematically. Anyone seen any politicians like that lately?

Making News: New Marketwatch Column on the Trump Solar Tariffs — & More!

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alliances, Apple, Brendan Kirby, burden sharing, Joe Guzzardi, Lifezette.com, Making News, Marketwatch.com, Progressives for Immigration Reform, solar panels, tariffs, Ted Galen Carpenter, The American Conservative, Trade, Trump, wages

I’m pleased to announce the publication of my latest op-ed piece – a column for Marketwatch.com explaining why President Trump was right in slapping tariffs on imported solar energy panels.  Here’s the link.

In addition, Joe Guzzardi of Progressives for Immigration Reform, recently wrote a column based on some of my findings on wage stagnation in the United States.  Through the Cagle Syndicate, it ran in several smaller newspapers around the country – e.g., here and here.

In the January-February issue of The American Conservative, Ted Galen Carpenter of the Cato Institute quoted my views on defense burden-sharing in America’s security alliances in a piece he did on the threats created by these arrangements.  The article, alas, is behind a pay wall.

Finally, in a January 19 post, Brendan Kirby of Lifezette.com featured my views on Apple’s announcement of new investments in U.S. domestic manufacturing.  Here’s the link.

And be sure to keep checking in with RealityChek for news of upcoming media appearances and other developments.

Making News: Podcast of Wednesday’s John Batchelor Show Interview – & More!

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Apple, China, global economy, Making News, manufacturing, The John Batchelor Show, TPP, Trade, Trans-Pacific Partnership, Trump

I’m pleased to report that the podcast of my interview Wednesday night on John Batchelor’s nationally syndicated radio show is on-line.  To hear this great discussion of the future of U.S. trade policy and the global economy, click onto this link.  Then go the “Podcasts” section on the right, scroll down the list of segments, and choose the one whose title begins with “End of TPP.”  Since my appearance lasted for two segments, the session with John and co-host Gordon Chang was particularly detailed and informative.

In addition, it was great to be quoted in IndustryWeek’s big article yesterday on how Apple Computer may or may not fit into the future of U.S. domestic manufacturing – and what impact we can expect from the Trump administration. Here’s the link.

(What’s Left of) Our Economy: Foxconn’s U.S. Plans Debunk China-Related Manufacturing Defeatism

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Apple, China, electronics, flat panels, Foxconn, General Electric, Jeffrey Immelt, Jobs, manufacturing, Obama, supply chains, tariffs, Terry Gou, Trade, transportation, Trump, {What's Left of) Our Economy

Another day, another big corporate announcement about job-creation in the United States in the wake of Donald Trump’s election as president – this time from Taiwanese electronics giant Foxconn, which makes so many iPhones and other products in China.

All the usual skeptical responses have been marshaled – or will be. Some of these have already been made by Foxconn’s chairman, like “We were already thinking of this” and “Trump’s tariff threats had nothing to do with these plans.” (Those aren’t direct quotes – just paraphrases.) An unusual skeptical response is out there, too – that the very large (and growing) flat panel displays Foxconn is thinking of producing in America are inevitable candidates for relocation because they’re too fragile to keep shipping half way around the world to customers.

But here’s what’s especially fascinating about Foxconn even considering this move: It demolishes or at least severely undercuts many of the most powerful explanations for why huge chunks of manufacturing will never return to the United States.

First, although Foxconn chief Terry Gou brushed off Trump’s trade stance, he has also stated that because of surging populism in the United States and globally, the rise of protectionism is “inevitable.” In this way, he’s just acknowledged the same trends that recently prompted his General Electric counterpart Jeffrey Immelt to declare that his huge multinational manufacturer will start making more goods where those goods are sold. So there’s little doubt that, precise timing aside, Gou has had his finger up to the prevailing political winds – which got a lot stronger on November 8.

Second, it may be true that very large flat panels for the highest tech TVs etc aren’t suitable for ocean voyages. But the United States, you may remember, is an awfully big country. And at least some of its roads aren’t in such hot shape. So since these panels will still have to travel by truck thousands of miles inside America to get from factories to warehouses and then to retail outlets (or directly to customers), it’s hard to imagine that transportation technicalities have been the main drivers of Foxconn’s decision.

Third, the kinds of electronics products made en masse by Foxconn in China have long been seen as especially farfetched candidates for domestic American production because the PRC is thought to have created such utterly matchless competitive advantage in this field. As Apple executives apparently told the (credulous) Obama administration five years ago, China’s manufacturing edge goes way beyond labor costs.  The U.S. company, of course, is one of Foxconn’s leading customers.  

Instead, “the vast scale of overseas [especially Chinese] factories as well as the flexibility, diligence and industrial skills of foreign [especially Chinese] workers have so outpaced their American counterparts that ‘Made in the U.S.A.’ is no longer a viable option for most Apple products.” In other words, the electronics sector’s main supply chains are now located in China, and changing this immense fait accompli is impossible.

Yet Foxconn’s Gou is talking about doing just that. For example, he’s talking about a 30,000-50,000 job gain from the investment. Moreover, he already employs 400 in Virginia in a packaging and engineering, and has announced his intention to build a Pennsylvania facility to “build precision tools and develop a robotics programme.” That sure sounds like supply chain stuff to me.

Ever since his first run for the White House, former President Obama has used the phrase “Yes, we can” to inspire his countrymen. His successor seems to recognize that the phrase applies to reviving American manufacturing, too.

Those Stubborn Facts: If Apple Worshippers Were a Real Religion

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Apple, China, religions, Steve Jobs, Those Stubborn Facts, Tim Cook, workers

All the recent buzz about high tech giant Apple – its blockbuster recent quarterly results, its new record market capitalization, its solar energy plans – got me to thinking:  Apple users often are compared to followers of religions.  If these devotees comprised an actual religion, how would they stack up to the believers in the world’s other major faiths?

The answer – as best as can be determined – incredibly well.  In fact, if Apple was a religion, it would be the world’s third largest faith.  Counting unaffiliated people, it would rank fourth.

My source for the religious breakdown of the world’s population and that world population itself is the respected Pew Research Center.  My source for the number of Apple “worshippers” worldwide is the also-respected tech website cnet.com.  The data come from slightly different years (2010 for the religious populations and a 2013 projection for Apple users), but that’s unlikely to affect the broad conclusions.  If anything, Apple’s latest financials indicate its recent growth has beaten that forecast.  Do some simple division, and here’s what you get:

Christianity:       2.174 billion (of the world’s 6.900 billion total population)

Islam:                1.601 billion

Unaffiliated:        1.125 billion

Apple-ism:            600 million

Buddhism:            490 million

Continuing along these lines, would Apple co-founder Steve Jobs be The Prophet?  Would current CEO Tim Cook be the Pope?

But before we get too carried away, let’s remember that reports of a dark side to Apple continue coming out – regarding the exploitative pay and related labor practices of its subcontractors, mainly in China, which the company has promised to monitor and eliminate.

Standard disclaimer:  I am neither long nor short Apple investment-wise, and have no plan to start a position.

 

 

(What’s Left of) Our Economy: Another Comforting China Trade Myth Looks More Mythical

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Apple, China, domestic content, Germany, investment, Japan, Jobs, Korea, manufacturing, multinationals, supply chains, Trade, Trade Deficits, value added, {What's Left of) Our Economy

If the United States could produce real goods and services as abundantly as it produces outright falsehoods and hopelessly obsolete arguments about its trade with China, today’s recovery wouldn’t be so feeble and debt-led. One of the biggest such urban trade legends took a major hit yesterday. Let’s see if other Mainstream Media other than the Financial Times report these new findings – much less if American leaders will permit them to intrude on the China trade fantasies in which they keep floating.

Since bilateral trade between the two countries began exploding in the 1990s (mostly on U.S. imports), apologists for the policies responsible have insisted that the U.S. economy as a whole, including its workers, would ultimately benefit because freed up commerce would generate all the benefits that trade expansion is in theory supposed to create. (My book, The Race to the Bottom, documents many examples.)  Principally, China would concentrate on turning out low-value, labor-intensive goods, and enable American companies and their employees to produce much more advanced, and lucrative, goods as well as services.

Abundant evidence of rapid changes in these patterns of specialization has evoked an equally confident reply: Data indicating that China’s exports of higher value goods are surging – mainly because U.S. and other foreign multinational companies keep investing more in higher value China production – has been seriously misleading.

The reason? Those exports overwhelmingly consisted of U.S.- and other foreign-produced parts and components that the Chinese simply assembled. Thus the overwhelming share of the value of Chinese exports, including Chinese exports to the United States, was Made in America – or Germany or Japan or Korea. And therefore these Americans and other foreigners reaped the lion’s share of the benefits of these items’ manufacture and sale.

I wrote last year that the main specific form these arguments were taking were of scant comfort to Americans, because in the main examples used (various Apple products), most of the manufacturing content that was not Chinese wasn’t American, but Asian or German.

I’ve also noted there’s a more fundamental point that the panda-huggers were missing. They seemed to assume that Chinese exports would always contain very low levels of Chinese content. In fact, they ignored abundant direct evidence that China was moving rapidly up the value and technology chain – mainly in the form of China’s exports (including all those outside electronics) consisting of ever higher shares of advanced manufactures.

Here’s where that Financial Times piece comes in. It reports on new World Bank and IMF research contending that Chinese content levels of Chinese exports was in fact rising robustly – from less than 40 percent on average in 1993 (not so coincidentally, just as the United States was deciding to grant China normal trade status each year despite its systemic human rights violations) to 65 percent nowadays.

I’m not saying that these findings are dispositive. In the first place, they rely largely on always-questionable Chinese government data. But even if Beijing could always be trusted, its ability to track independently the humongous flows of various levels of intermediate inputs of final products will always be limited – just like the ability of any government to meet this challenge, which has grown exponentially as the output of manufactured goods has become fragmented and internationalized.

So even though these reports of rising Chinese content levels track well with everything else of value known about manufacturing in China and its evolution, they underscore the urgent need for better data. And the main problem here, especially regarding the China and other foreign operations of U.S.-owned multinational companies, is not lack of wallet (to borrow a well-worn cliché) but lack of will.

These companies have a very precise handle on the content levels of their products – they couldn’t be so successful without this supply chain knowledge. But they keep it very closely held, and indeed only release it selectively and self-servingly. It’s high time to end their monopoly on such knowledge, meaning that Washington should require any company above a certain size doing business in the United States to report regularly on the foreign and U.S. content levels of its output.

Even better, the U.S. government has already set a terrific precedent with the content stickers that foreign and domestic auto companies are obliged to slap on the vehicles they sell. These stickers aren’t perfect; their main problem is their failure to distinguish between U.S. and Canadian content. But they go a long way toward telling consumers where their purchases come from.  Even more important, they go a long way toward telling citizens and their elected leaders who the winners and losers from international trade in this key industry, at least, really are, and the requirement should be expanded to cover other crucial manufacturing sectors as well.

Those Stubborn Facts: The Apple-izing of Economics Reporting

Tags

Apple, economy, journalism, Mainstream Media, Those Stubborn Facts

Google News mentions of “Apple Watch,” September 16, 2013: 10.9 million

Google News mentions of “iPhone6,” September 16, 2014: 294,000

Google News mentions of “U.S. economy,” September 16, 2014: 42,900

(Sources: Google News searches 9:15 AM EST, September 16,2014)