(What’s Left of) Our Economy: The Multinationals Debunk a Major Free Trade Claim

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2016 election, BAT, border adjustment tax, Congress, exports, free trade, GE, General Electric, House of Representatives, imports, Jeffrey Immelt, Kevin Brady, multinational companies, Paul Ryan, Republicans, retailers, tariffs, tax reform, Trade, Trump, value-added tax, VAT, {What's Left of) Our Economy

President Trump has been slow so far to launch the major trade policy transformation he promised during his campaign – in part because most of his trade policy team has taken so long to be confirmed by Congress, and in part because (especially in the case of Japan), he seems so far to be listening too closely to national security advisers who clearly prioritize alliance relationships over economics. But his election has already triggered major upheaval in America’s trade politics, and in the process fatally weakened one of the leading arguments advanced against curbing imports.

The trade politics earthquake has three major related sources. First, Republican Congressional leaders like House Speaker Paul Ryan and especially Ways and Means Committee Chair Kevin Brady, who have long strongly supported jobs-killing trade deals and related policies, have become major champions of a measure that would create one of the biggest trade barriers in American history – the so-called Border Adjustment Tax (BAT). Their proposal, which is part of the House Republicans’ larger tax reform package, would offset the discriminatory effects of foreign value-added taxes (VATs) by imposing levies on imports – as well as by supporting exports by exempting them from taxes.

Their change of heart in turn surely stems at least partly from the second big change in trade politics – a major shift among Republican voters on trade policy. As I’ve reported previously, whereas for decades, they tended to support freer trade, and the policies that have ostensibly sought to further liberalize global commerce, more recent polls show that the GOP base has turned against the idea. (Democrats, however, have become much more positive on trade’s impact on the American economy.) And the evidence goes far beyond polls – as made clear by Mr. Trump’s capture of the GOP presidential nomination over numerous free-trading rivals and his November triumph.

But it’s the final trade politics shift that has really floored me. Many of the big multinational manufacturing companies that have also strongly pushed for those same deficit-boosting trade deals – because they made it easier to source products from abroad and supply the U.S. market from foreign production sites – support the BAT, too. In fact, they’ve created a lobbying coalition to turn the idea into law.

And it’s their BAT stance that has weakened a longstanding pillar of free-trade thinking: the insistence that any sweeping tariff measures (like the BAT) would actually backfire on domestic U.S. manufacturers and other producers by raising the cost of imported inputs they use – like parts, components, and materials. Here’s the latest example of this claim – from a former bigwig at the World Bank and International Monetary Fund, no less.

I’ve presented the evidence revealing that this argument completely ignores the immense existing scale of American inputs manufacturing – and the huge markets, new growth, and jobs gains that would result by replacing foreign-made goods with these U.S.-made products. But at least as important is how the multinational practitioners themselves are refuting the theorists by endorsing the BAT.

Incidentally, the multinationals’ BAT position could indicate that I’ve been wrong about their trade performance and about the principal rationale for their backing of offshoring-friendly trade agreements – data I’ve seen showing that they import much more than they export. For if they were indeed big contributors to America’s trade deficits (that is, big net importers), then you’d think they’d be much more concerned about potentially more expensive imports than about any export boost possible from the BAT. The companies themselves, as I’ve repeatedly stated, know the definitive answer – at least regarding their own trade performance. But as long as they’re not required to disclose their import and export figures – as opposed to releasing cherry-picked numbers – we can’t be sure.

But this business enthusiasm for the BAT could also stem from an “if you can’t beat ’em, join ’em” mentality – as General Electric chief Jeffrey Immelt has signaled. In other words, perhaps they’ve decided that more localized production everywhere is an irresistible wave of the future – at least for the time being. Alternatively, the multinationals could believe that they themselves could enter the aforementioned new BAT-created domestic input manufacturing markets. If these businesses believe that the rest of that tax reform package along with the regulatory relief President Trump has promised will lower domestic American business costs further, domestic sourcing could become all the more attractive. Another possibility – precisely because America’s and their own export performance has been so relatively weak, they view foreign markets as an especially exciting growth opportunity that the BAT tax breaks could open wide. And the likeliest possibility? The answer for most of these companies is a mix of some or all of the above.

What is certain, however, is that we’re now hearing, “No thanks” from the companies that economists keep telling us are among the biggest beneficiaries of cheap imports furnished by wide open trade policies. Of course, the retailers – which relay so heavily for their profits on cheap consumer goods imports – are campaigning just as hard against the BAT. The plan’s verdict will speak volumes about whether Americans, and their political system, assign more value to making stuff or to buying it.

(What’s Left of) Our Economy: Why Tariffs Can Reverse Offshoring’s Damage

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China, emerging markets, export platforms, foreign investment, free trade agreements, GE, globalization, intermediate goods, Jeffrey Immelt, manufacturing, manufacturing jobs, manufacturing output, Mexico, multinational companies, offshoring, product life cycle theory, reshoring, Richard Baldwin, tariffs, The Great Convergence, The Race to the Bottom, Trade, trade law, World Trade Organization, {What's Left of) Our Economy

It’s definitely weird to be writing a post in response to a recent tweet-storm. But this was no ordinary tweeter. This was someone who’s getting attention from the Washington economic policy establishment as a new oracle on trade and globalization. That’s evidently because his work conveniently sums up many of the leading myths about the world economy and America’s approach to it that have been propagated by this group of interests. So his burst of social media activism provides a valuable opportunity to set the record straight.

The tweeter extraordinaire was Richard Baldwin. He’s not only an international economics professor at the University of Geneva in Switzerland, but the founder of the informative Voxeu.org economics research portal and president of the Centre for Economic Policy Research in London (not to be confused with the Center for Economic Policy and Research in Washington, D.C.). And he’s just come out with a book titled The Great Convergence: Information Technology and the New Globalization.

According to Baldwin, I have been guilty of a “Classic misthinking of globalisation” by supporting an overhauled U.S. trade policy featuring much more aggressive use of tariffs and other protectionist measures. But from the rest of his tweet-storm, a summary presentation he’s touting, and some other statements, it’s should be obvious that his own description of recent international economic trends and their main causes is way wide of the mark.

His fundamental mistake lies in neglecting the crucial role played in fostering today’s flows of goods, services, and capital by trade agreements and by the dramatically differing reductions in trade barriers from both a quantitative and, more important, a qualitative, standpoint. In particular, Baldwin ignores how various bilateral trade deals and decisions, and the multilateral pact that created the World Trade Organization gave multinational companies the essential condition they needed to justify the increasingly sophisticated production and job offshoring that has characterized globalization – guaranteed access to developed country, and especially the U.S. – market.

For the record, here’s the full string of tweets. (Some repeat previous tweets in the sequence.)

Classic misthinking of globalisation by @AlanTonelson

Recent globalisation driven by knowledge offshoring not freer trade

Tariffs don’t address the driving force

Could foster reshoring of some production but also more offshoring

The main problem is domestic: Protect workers, not jobs.

Jobs for U.S.-based robots

Trump tariffs raise cost of industrial import only in US (not Germany, Japan, China, Mexico, Canada)

Knowledge offshore drove 21^st century globalisation

Tariffs don’t address globalisation’s driving force

US tariffs foster some reshoring and some more offshoring

So what is the right way to deal with angry middle class?

Protect individual workers, not individual jobs.

So what is the right way to deal with angry middle class?

Are you familiar with the concept of factor substitutability ? Changing relative prices changes decisions.

But think of it this way. Offshoring, especially the kind focused on by Baldwin, to developing countries, can serve 3 main purposes. It can help companies better supply overseas markets. It can help them better supply their home country market. Or it can seek both objectives.

The great expansion of U.S. trade, primarily with developing countries, that Baldwin rightly notes began around 1990 (with the end of the Cold War and the great strengthening of free market reforms in gigantic developing countries), was justified with many and varied arguments. The paramount rationale, however, was serving the huge, ballooning populations of the world’s Chinas, Indias, Mexicos, and Brazils.

Yet as documented exhaustively in my 2002 book, The Race to the Bottom (and of course many other studies), incomes in these so-called Big Emerging Markets were simply too low to enable their final consumption to rise much – at least compared with their production and productive capacity. No one was more aware of this situation than the emerging market countries themselves – unless it was the global corporations considering pouring investment into them.

That’s why the smartest of these countries understood that they could not possibly grow and develop adequately by supplying their own populations alone, however rapid their income gains. Their only real hope for satisfactory progress was serving markets “where the money is.” America’s relatively open market and consumption-led national economic structure was their best bet by far.

And that’s why the multinationals as well were so determined for Washington to negotiate free trade agreements with these countries. – not to lower foreign trade barriers and permit American businesses their workers to reach the third world’s billions of new actual and potential consumers, but to lock in lower or eliminated barriers to the U.S. market. See the end notes to this recent study for references to just some of the scholarly evidence.

Accomplishing this aim would ensure that their plan to supply well heeled American customers from super low-cost and virtually unregulated third world supply bases would actually make money. Alternatively put, if Washington were legally able to curb or cut off access to the United States for Corporate America’s third world factories, these new facilities would lose much of their value.

Bringing the United States into the World Trade Organization (WTO) was also instrumental in this scheme. Its new rules and especially its unprecedented enforcement authority have greatly weakened America’s legal scope to use its trade law system to turn back goods (including those from the multinationals’ factories) that have been dumped, illegally subsidized, or benefited from other predatory trade policies – including currency undervaluation. In this vein, securing Chinese membership was vital, too. It secured near-invulnerability to U.S. trade law for the multinationals’ favorite export platform.

So the crucial importance of tariffs should be obvious to all. Yes, the technological advances cited by Baldwin (and so many others) have facilitated offshoring – and made the offshoring of even sophisticated production possible from the standpoint of logistics and administration and quality control and numerous similar considerations. But much and possibly most of it couldn’t pass the bottom-line test without the U.S. market access that can be made or broken by tariffs. That is, technology was a necessary condition of offshoring. But it was hardly sufficient.

Consistent with the product life cycle model, it’s unmistakably true that a growing share of multinational investment in developing countries is serving those markets. But compelling evidence abounds that the export platform strategy remains crucial – both to the countries and to the companies. Among the strongest, as I’ve recently written: the howls of protest from the corporate Offshoring Lobby and from export platform countries sparked by President-elect Trump’s talk of tariffs on the output they plan to sell to the United States. If America wasn’t such an important destination, and if so much of the offshored production was sold locally, why would they be so concerned?

Two other key items of evidence for the importance of tariffs:

a. The recent acknowledgment by GE CEO Jeffrey Immelt that trade barriers and other localization moves were mushrooming around the world, and that his company would have no choice but to say “How high” when ever more protectionist governments say “Jump!” Immelt’s statement makes clear that economies much smaller and weaker than America’s will be able to lure his company’s production and jobs either through relatively simple restrictions of access to their market, or through various performance standards imposed on inbound foreign investment that will be enforced through tariffs.

b. The prevalence of these practices and their success in influencing corporate location decisions. Indeed, the only major power that abjures these measures is the United States. Obviously, if smaller and weaker economies can wield tariffs and other trade restrictions successfully, America’s inaction stems from inadequate will, not inadequate wallet.

Yet as Baldwin’s tweet-storm shows, he is also offering three related objections to tariffs that have nothing intrinsically to do with the advent and growth of what he calls “knowledge offshoring.” He argues that tariffs would disastrously raise the cost to domestic U.S. manufacturers of all the imported inputs they use in their final products. As a result, he adds, these American manufacturers would lose competitiveness to any number of foreign rivals. Finally, he repeats the widespread argument that even if significant production was reshored with tariffs, the job impact would be minimal because of soaring, labor-saving productivity advances in manufacturing.

But Baldwin seems unaware that intermediate goods, including of course capital equipment, make up a huge share of domestic U.S. manufacturing. Because output data is too general (in particular lumping together such intermediates with finished goods in many super-categories), the exact figure is difficult to calculate. But other statistics leave no doubt as to the scale.

As I’ve previously shown, what the Census Bureau calls “industrial supplies” and “capital goods” have comprised fully 62.5 percent of America’s total merchandise exports for the first ten months of this year. And as with the output figures, these statistics leave out products such as auto parts (which are included, but not broken out, under a separate heading).

These industries are also gigantic employers. My own tally of Bureau of Labor Statistics data reveals that their workers number 5.764 million. That’s slightly over 47 percent of all manufacturing employees. Moreover, just over 28 percent of the workers in these sectors are white-collar workers – meaning in turn that many of them are in research, engineering, and other STEM fields. These numbers, moreover, indicate that even if I’m whoppingly wrong, we’re still talking about lots of valuable production and workers. 

So tariffs would create enormous new opportunities for this immense sector of manufacturing – and comparable new demand for the kinds of folks nearly everyone wants to become bigger and bigger percentages of the American labor market.

In addition, Baldwin’s case against tariffs seems to assume that they’ll be geographically circumscribed – hence his claim about the competitiveness-harming impact of barriers against these intermediate goods. But this assumption is puzzling, to say the least. Of course tariffs limited to, say, China or Mexico would open new opportunities in the U.S. market or third country markets for other manufacturing powers. Yet this is precisely why the trade proposals being floated by the administration-in-waiting increasingly include world-wide restrictions.

Finally, although labor-saving productivity gains are surely responsible for much manufacturing job loss in recent decades, the benefits of reshoring manufacturing output shouldn’t be underestimated. Industry’s very productivity performance is clearly one big reason – how can a national economy not profit from regaining many of its most productive sectors?

The importance of existing industry for fostering new industries and related economic benefits and opportunities is another big reason. This new paper from the National Bureau of Economic Research presents findings indicating just how much technological advance is generated by incumbent companies (and presumably industries) rather than through the “creative destruction” emphasized by much of the economics profession. So a focus on manufacturing output means a focus on much of the economy’s capacity to continue creating genuine wealth – and sustainable prosperity.

Further, for all of its competitiveness issues, manufacturing still dominates American export flows. If free-trade-oriented analysts are right, and main purpose of exporting is earning the income to buy imports, how can sufficient income keep getting created if domestic manufacturing production keeps stagnating or shrinking – which has clearly been the case in real terms since the last recession began?

As indicated by some of the preceding paragraphs, however, much uncertainty – in my view, way too much – is still left by the official data analysts are forced to use to study the vital Who, What, Where, When, Why, and How Much issues raised by globalization. Nor does the information reported sporadically in the business press or reported (often partially and self-servingly) by the companies themselves add more than fragments to the existing picture.

Many of these uncertainties could be cleared up if offshoring companies were required by Washington to disclose much more information than at present about how their domestic and foreign operations compare, and how these comparisons have changed over time. After all, knowing the crucial details is critical to their success. And if the disclosure mandate was universal, no individual firm would gain competitive advantage from this new flood of proprietary facts and figures.

So I hope Baldwin – and others sharing his views – will join me in demanding such disclosure. We have nothing to lose but our (relative) ignorance.

Im-Politic: GE’s New Gift to the Trade Populists

Tags

2016 election, Bernie Sanders, Canada, China, Donald Trump, GE, General Electric, Im-Politic, India, investment, Jeffrey Immelt, Jobs, manufacturing, multinational companies, NAFTA, North American Free Trade Agreement, protectionism, reshoring, Saudi Arabia, scale, Trade

The maverick presidential campaigns of Donald Trump and Senator Bernie Sanders just got a major boost from an unexpected source: General Electric CEO Jeffrey Immelt.

Throughout this political year, the presumptive Republican nominee and the Democratic challenger have drawn scorn from the nation’s intertwined political class and business establishment for promising voters that their administrations will bring back to America significant numbers of manufacturing jobs that have been lost to foreign competition. But in a speech last Friday, Immelt (unwittingly, to be sure) made clear both that their ambitions are eminently realistic, and that his own giant company plans to adjust its production and employment policies in response to just these “protectionist,” “populist” pressures – which he noted are appearing all over the world.

Immelt’s apparent tone and much of his phrasing indicates that he intended his remarks – to the graduating class at New York University’s business school – as a ringing defense of GE’s contributions to both the U.S. and world economies so far; as a grim warning that shortsighted, misguided fears about the costs of trade liberalization and global integration were about to endanger the much greater good done by these developments; and as a defiant declaration that his company was positioned to thrive come what may from the world’s cowardly politicians.

Let’s leave aside for now his claims about the net effects of GE’s operations and about today’s version of globalization – although once more he provided a specific number for GE’s annual exports without revealing how much the company imports into the U.S. market. What was actually most remarkable about Immelt’s speech was how strikingly it contrasted with the picture of U.S. multinational companies that’s emerged and prevailed especially since the debate over the North American Free Trade Agreement (NAFTA) more than 20 years ago ushered in the current era of American trade policy.

As Americans and their leaders have constantly heard throughout this period, corporations – especially gigantic ones like GE – had become completely liberated from specific locations and their political authorities. Thanks to dramatic breakthroughs in transportation and communications, these firms could establish any kind of operation anywhere in the world that created a favorable business climate. And if any retrograde national governments tried to interfere, executives could flip them the bird, pick up stakes, and condemn their unfortunate citizens populations to isolation and impoverishment.

The resulting policy conclusion that the multinationals and their mouthpieces in politics and the media obviously have tried to reinforce is that the form of globalization that was emerging is inevitable – a product of progress itself – and that nothing would be more foolish and futile than for the public sector to get in the private sector’s way.

My book on globalization exposed these claims as nonsensical. My research – conducted back in the late-1990s – showed that even the leaders of smallish countries, notably in prospering East Asia, routinely established conditions on in-bound foreign investment from the multinationals as a matter of course. And when faced with requirements to share technology with local partners or use certain levels of domestic content or export specific percentages of their output, the companies routinely complied. And as has just been reported today, these practices are still standard operating procedure the world over.  

The only important economic power that has failed to use its leverage has been the United States, which is why its approach to globalization was forcing its citizens into a “race to the bottom.”

So it’s crucial to understand that what Immelt was telegraphing to his Friday audience was not only that the American political system seemed likely to present the multinationals with comparable requirements, but that GE, for one, had no choice to comply. In his words:

“[T]he globalization I grew up with – based on trade and global integration – is changing.

“As a business leader, it is difficult to decide when to defend the old way (what you were taught) or when to change based on what you see.

“With globalization, it is time for a bold pivot….In the face of a protectionist global environment, companies must navigate the world on their own.

“We must level the playing field, without government engagement. This requires dramatic transformation. Going forward:

“We will localize. In the future, sustainable growth will require a local capability inside a global footprint. GE has 420 factories around the world giving us tremendous flexibility. We used to have one site to make locomotives; now we have multiple global sites that give us market access. A localization strategy can’t be shut down by protectionist politics. …

“We will produce for the U.S. in the U.S., but our exports may decline. At the same time, we will localize production in big end-use markets like Saudi Arabia. And countries with effective export banks, like Canada, will be more attractive for investment. ”

And if GE perceives no choice but to reply “How high?” when governments say “Jump!” it’s likely that similar firms will respond similarly to more demanding American trade policies.

With his suggestion of fewer GE exports, Immelt clearly hopes to convey the idea that although GE may weather this policy storm just fine, Americans as a whole won’t – and that therefore the populist candidates’ promises about returning jobs and achieving other economic gains will backfire big time if they’re kept.

But iron global economic realities have always meant that the main beneficiary of less globalized, more localized production patterns will be the United States. For how many other economies have the scale to support the manufacture of hi value industrial products – like those in which GE specializes – without needing major access to export markets? Obviously, the answer is “Not many.”  The number of economies with the scale to support such production without exporting to the United States is even smaller.

That’s why Immelt’s vow to “localize production in big end-use markets like Saudi Arabia” is so manifestly un-serious. Saudi Arabia isn’t nearly big enough for GE to profit by producing, say, jet engines or turbines for power plants in the kingdom solely for the kingdom. Canada, which his speech also mentioned as an attractive future location for investment, doesn’t qualify, either – despite its “effective” export financing bank. After all, as Immelt has explained, in a world of increasingly localized production, export possibilities by definition shrink substantially.

As for India and China, also touted as ever more important centers of future GE output, the still super-low incomes of their populations will prevent companies like GE from enjoying the kinds of pricing power and margins that remain essential for justifying servicing only those national markets with domestic factories.  To be sure, individual companies might figure out the necessary formula. But even after several decades of record-setting growth, China still needs to export desperately – which explains why such success won’t be possible for most firms.

So whenever you hear or read some self-appointed expert insist that job reshoring promises are simply cynical political pandering exercises, keep in mind that not only do Trump and Sanders disagree. So does one of America’s biggest industrialists.

(What’s Left of) Our Economy: How the Offshoring Lobby Dupes Americans on Trade

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Bernie Sanders, exports, GE, General Electric, imports, Jeffrey Immelt, Jobs, media, multinational companies, offshoring, Trade, Washington Post, {What's Left of) Our Economy

What a shame that the Washington Post generally does not run letters to the editor commenting on articles not appearing in the paper’s print edition. So I was unable to share directly with Post readers my views on General Electric CEO Jeffrey R. Immelt’s web-only op-ed slamming Bernie Sanders’ portrayal of his company as an archetype of corporate greed.

How fortunate, though, that I’m able to share with you the draft I sent to the Post before learning of this policy. It’s especially important since it spotlights a ploy used commonly – and successfully – by businesses and their hired guns to fool politicians and journalists on trade: exploiting the paucity of publicly available data and using only the most carefully cherry-picked facts and figures to plug their agendas. Moreover, the letter notes how easily Washington could level the information playing field.

Here’s what I sent to the Post:

“To the Editor:

“GE CEO Jeffrey Immelt wants to convince readers in his April 6 article that his company creates “real growth for a nation that needs it now more than ever.” But to accomplish his goal, he’ll have to do more than cherry pick data that portrays the firm in a flattering light.

“For example, Immelt boasts that GE lately has been exporting about $20 billion worth of American-made goods annually. But he fails to disclose how much GE has been importing each year – a figure needed to evaluate the company’s full trade, and thus growth, impact. Nor does he mention how GE’s trade balance has changed over time – information that’s much more valuable than a snapshot.

“Immelt states that GE maintains 200 US factories and has built 15 in the last five years. But he says nothing about GE’s foreign factories, and how their numbers have changed recently. Similarly, if Immelt wanted to present the whole picture, he’d reveal how much GE produces in the United States, how it produces abroad, and which of these manufacturing bases has been growing fastest lately.

“Of course, if Washington required full corporate disclosure of such information, Immelt and other multinational CEOs wouldn’t be able to use facts and figures so selectively and tendentiously to support current U.S. trade and other international economic policies. But American leaders keep permitting much of this material to be released at the companies’ discretion, ensuring that they, and the public, continue flying largely blind on crucial globalization-related issues.”

In sum, here’s an open invitation to America’s leaders and media to hold Immelt and the rest of the Offshoring Lobby to account. Let’s see if either one pursues the opportunity.

 

(What’s Left of) Our Economy: More Manufacturing Fairy Tales from The Atlantic

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exports, GE, manufacturing, manufacturing renaissance, productivity, Trade, Trade Deficits, wages, {What's Left of) Our Economy

There he goes again. At the end of 2012, James Fallows contributed one of two Atlantic cover stories claiming that America is on the verge of spurring a renaissance in its manufacturing sector or actually starting to enjoy one. Since then, we’ve discovered:

>that it took domestic industry more than six years to return to its pre-recession output levels (adjusted for inflation), and that as of August, it’s now a grand total of 0.99 percent bigger than it was when the last recession began at the end of 2007;

>that manufacturing’s trade deficit with the world as a whole has set new all-time records every year since 2011, and this year is running 11.30 percent ahead of last year’s record $647.77 billion pace;

>that its multi-factor productivity rate, although still a good deal higher than that of the private sector as a whole, stands at historically low levels for an economic expansion; and

>that its wages have been fared much worse than private sector wages during the current recovery – among other problems.

But Fallows has just come out with another boosterish Atlantic article, describing “three big trends” that could boost the fortunes both of high-value manufacturing in the nation, and its middle class.

I can’t comment knowledgeably about the third trend Fallows discusses – the supposed possibilities of innovation in logistics and related fields for revolutionizing small-scale manufacturing (on a large scale). But as was the case with the two year-end 2012 manufacturing renaissance articles, his optimistic treatment of the two other trends seems oblivious to the most important data available.

For example, Fallows claims that “U.S. companies large and small are expanding their export ambitions.” That’s nice to hear. But what’s actually happening? According to the most accurate Census Bureau measure of American manufacturing’s overseas sales, the annual growth of these domestic plummeted from 18.76 percent in 2010 (as the sector snapped back from a deep recession) to 1.73 percent in 2013. So far this year, the slowdown in export growth has reached 1.30 percent.

The author also cites a McKinsey & Co. report predicting that, going forward, high-value manufacturing is increasingly likely to stay in the United States because global supply chains are becoming more vulnerable to disruption, because too many quality problems are emerging at offshored and other foreign factories, because by definition driving labor costs down in these sophisticated industries is less important all the time, and because international transportation is getting more expensive.

Encouraging? Sure. Reflected in the data yet? Not even close. For example, here’s a – partial – list of manufacturing parts and components industries that have seen double-digit import growth so far this year (through July): motor vehicle engines and engine parts; motor vehicle steering and suspension equipment; motor vehicle seating and interior trim; motor vehicle brakes; vehicular lighting equipment; aircraft parts and equipment; printed circuit assemblies; non-automotive miscellaneous engine equipment; speed changer, high speed drives, and gears; air and gas compressors; heavy-gauge springs; and electronic capacitors and parts .

Right behind them, with high single-digit annual growth so far this year, are miscellaneous auto parts; motor vehicle electric equipment; plastics materials and resins; relays and industrial controls; ball and roller bearings; motors and generators; power boiler and heat exchangers; and many others.

The clear conclusion: Despite McKinsey’s forecasts, domestic manufacturers are displaying no reluctance whatever to use worldwide supply chains and massive amounts of imported inputs rather than procure these products domestically.

The second major positive development Fallows anticipates is a mini-(but presumably significant) rebound in manufacturing jobs that pay a middle class wage. Again, he cites McKinsey:

“[M]anufacturing and service-sector roles increasingly overlap. Big industrial firms hire lots of designers, software engineers, accountants, and other service professionals. Architecture firms and design companies need their own 3 D printers (and people to maintain them) and advanced-materials workshops. Across the board, McKinsey concludes, we should expect to see more of the kind of jobs that could help offset the winner-take-all pressures that have distorted America’s income distribution.” Among the sectors where such jobs will be in high demand: automotive.

Everyone should cheer this type of development. But why didn’t Fallows mention that so far during the recovery, inflation adjusted wages for manufacturing workers have fallen by more than two percent? Real wages for all private sector workers, by contrast, have actually risen by 0.19 percent. And that automotive sector? Real wages there are down by nearly six percent during the recovery. Moreover, these wage figures cover all employees – including professionals – not simply blue collar production workers.

And there’s a final problem with Fallows’ article: It’s apparently based in part on interviews with General Electric’s head of aviation, David Joyce. Joyce has proudly shared with the author facts and predictions such as “GE’s U.S.-based engine factories already send 55 percent of their output abroad and expect to send 75 percent within five years.” The company’s goal, Joyce told Fallows is “make it here, sell it there, and service it everywhere.”

But GE, like most other multinationals, is notorious for disclosing only those international trade, investment, and sourcing facts that portray it in the most favorable light. As I’ve written, I’ve asked the company to reveal its global trade balance – not just its exports. GE refused. In Fallows’ case, he should have asked Joyce about some other key data – the foreign versus U.S. content of its jet engines and related products, and how this ratio has changed in recent years. Instead, he’s let the company continue to spread propaganda.

It’s true that, if enough anecdotes like those in Fallows’ piece are strung together, they become data. But when the data still massively override and strongly clash with the anecdotes, reporting a handful of feel-good stories can only mislead, however unintentionally – and possibly add complacency to the list of obstacles facing domestic manufacturing.

Following Up: GE’s Dubious Made in America Claims

Tags

assembly, domestic content, Following Up, GE, Immelt, manufacturing, manufacturing renaissance, reshoring

Thanks to the Pittsburgh Post-Gazette’s Len Boselovic for writing about General Electric’s decision to put its appliance and lighting division up for sale, and for asking me to comment. He also deserves credit for being the only reporter I could find (through a Google search, anyway) to place the GE move in the context of the ongoing debate about whether American manufacturing is enjoying an historic renaissance. As I’ve posted, the issue is critical since GE’s previous commitment to reinvigorate its domestic appliance manufacturing was famously portrayed as the poster-child for the manufacturing renaissance in a humongous 2012 Atlantic cover story.

Possibly at my instigation, Len also touched on the critical question of whether GE had been truly manufacturing dishwashers and dryers and refrigerators in its U.S. factories or simply assembling them from foreign-made parts – though he didn’t make the point in his discussion of GE as such.

I and others have long suspected that most of the reshored GE appliance work is really assembly, which adds much less value to the U.S. economy. The low wages paid at GE’s facilities in Louisville, Kentucky seemed to be pretty conclusive evidence.

Imagine my surprise, therefore, when I started examining the question yesterday and found on GE’s website highly specific claims that its American-made appliances contain very high levels of U.S. content. According to the company, they start at 70 percent for the company’s ranges and go up to 90 percent for its dryers.

These figures were not only unexpected because they’re so lofty, but because they’re being made public at all. Typically, manufacturers keep such data very close to their vests – ostensibly because they represent very valuable commercial but also undoubtedly because the public would be furious to find out the extent to which so many Made in America products really aren’t. Therefore, the GE statistics show that the company was shooting straight all along with its reshoring claims, right?

Not so fast. First, I’d like to see some independent confirmation of the figures. Like many offshoring-happy multinationals in particular, GE isn’t above cherry-picking data even when it is presented accurately.

For example, in December, 2012 (not so coincidentally, the same month as that Atlantic cover story), GE Chairman Jeffrey Immelt told TV’s Charlie Rose that the company is a net exporter globally – meaning both that it ran a trade surplus and that its overseas sourcing of parts, components, and materials for its U.S. operations was relatively modest. This statement surprised me as much as the appliance content figures because although GE used to present its global trade balance figures in its annual reports, this practice stopped in the mid-1990s, and only exports have been specified since.

When I contacted GE’s press relations office by email, here’s the reply I got from Director of Financial Communications Seth Martin: “[U]fortunately we do not have public data on historical imports vs exports. I can tell you that as a multi-national company, GE has a supply chain that includes many American and global suppliers who support our domestic manufacturing facilities in the US. As a manufacturer of technologically advanced machinery our exports tend to be high value products. As you can imagine, there are many products we make for industrial use that contain parts made in many locations around the world. That makes it challenging to determine the $ amount of imports and exports from any one country.”

I responded that the company apparently had no trouble reporting on its exports, and that if import figures were not available, it was difficult to understand how Immelt could have come up with a trade balance figure. Martin’s response?

“In certain cases, such as the Annual Report, we have highlighted our commitment to making products in the U.S. by disclosing the international sales of American-made products. However, we typically do not provide these figures in our financial reporting, as it is not an SEC requirement to disclose, nor is it a metric that is used in managing our businesses, which are global in nature. That said, we can confirm that we are consistently a net U.S. exporter based on the value of our exports versus the value of our imports.”

In other words, “Trust us.”

There are some other important reasons for not taking GE’s word at face value. The definition of U.S. content provided on the GE appliance website refers to “funds used to make” a particular product being “spent in the United States.” Included are “U.S. parts, factory operations and wages.” But “parts” can be a tricky term at best. For example, an electric motor for an appliance can be a “part.” But in turn it’s made up of many other parts. How far down the supply chain do GE’s statistics go? Similarly, countless domestically sold products are imports. Is GE assuming that any money it’s spent on purchases from a U.S.-located retailer or wholesaler is being spent on a U.S.-produced good ?

As for that term “factory operations” – it could mean just about anything having to do with running a plant, including equipment depreciation costs, janitorial or grounds-keeping services or cafeteria services and the like, that have nothing to do with appliance manufacturing proper. Honda of America ran into trouble with the U.S. government in the early 1990s for inflating the U.S. content of its domestically produced vehicles to gain public relations and NAFTA-related tariff advantages. Are GE’s U.S. content figures similarly bogus?

With enough political will, nothing would be easier than requiring all manufactures doing business in the United States to make public domestic and foreign content levels. This information is essential for making sound trade and other international economic policies, and actually is already required for passenger motor vehicles, which must display a content sticker containing such information. The system isn’t perfect – it lumps Canadian and U.S. content together. But there’s no inherent reason that a fix couldn’t be made, and the policy extended to other manufacturing sectors.

Unfortunately, American trade and manufacturing policymaking is dominated by offshoring-happy multinationals like GE, which are determined to keep their monopoly over the most detailed and crucial information about changing production and sourcing patterns, and release it only in the most selective and self-serving ways. So they never tell, Washington never asks, and U.S. leaders and the public are forced to keep flying blind when it comes to globalization.

Following Up: Still-Empty Dollar-Dumping Threats and a Manufacturing Renaissance Poster Child Up for Sale

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appliances, BRICS, China, debt, dollar, Following Up, foreign dollar holders, GE, manufacturing, manufacturing renaissance, reserve currency, Treasuries

Two items worth noting today:

First, last month, I wrote a piece for Marketwatch.com noting that, despite the strengthening chorus of international criticism protesting the dollar’s domination of the global financial system, even the countries protesting loudest keep buying dollars.

That article was based on Treasury Department data that brought the story up until May. Yesterday, the June data were published – and the trend I described is still firmly in place.

Total foreign holdings of long-term U.S. Treasury securities rose 0.61 percent over their May levels. In May, they were only 0.26 percent higher than in April. Foreign government holdings of this U.S. debt most directly reflect official foreign views of the dollar’s role, and represent about two-thirds of all foreign dollar holdings. These increased by 0.39 percent on month in June – slower than their 0.61 percent May monthly increase, but hardly a sign of significant dissatisfaction.

As for the countries complaining most vociferously, France did sell off 3.52 percent of its Treasury holdings in June. But they’re still up 9.74 percent since January. The BRICS countries (Brazil, Russia, India, China, and South Africa) say they’re so unhappy with the dollar’s “hegemony” that they’ve created their own development bank. But three of the five bought dollars on net in June – even Russia. China, by the far the largest BRICS dollar holder, appears to have sold off 0.20 percent of its holdings.

As is so often the case, however, appearances may be deceiving when it comes to China. Benn Steil of the Council on Foreign Relations has recently presented compelling evidence that Beijing’s avid dollar buying – which importantly helps keep down the yuan’s value versus the dollar and in turn China’s export prices – remains strong. But according to Steil, the data indicate that, to avoid undue U.S. criticism of this protectionist currency manipulation, the Chinese are disguising their dollar buying by sending its new holdings to Belgium.

Our second follow up item: On July 21, I published an item on the news that GE was reported to be exploring the sale of its appliances division. This divestiture would matter big time because, as I noted, GE appliance-making was portrayed in a recent Atlantic cover story as the poster-child for the renaissance allegedly being enjoyed by U.S. domestic manufacturing. Indeed, one of President Obama’s leading manufacturing policy aides made a high profile visit to the company’s main appliance production complex in Louisville, Kentucky in February, 2011.

On Thursday, GE confirmed reports of its desire to unload appliances, listing Swedish white goods powerhouse Electrolux as one possible buyer. Especially significant for manufacturing renaissance claims – a Washington Post reporter’s observation that “The appliances division in particular has grown less profitable as foreign appliance makers command a growing share of the U.S. market .” With renaissances like this, who needs industrial decline?

(What’s Left of) Our Economy: Major Pillar of Manufacturing Renaissance Claims Crumbles

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appliances, GE, Immelt, manufacturing, manufacturing renaissance, {What's Left of) Our Economy

The list of cheerleaders who have touted a phony U.S. manufacturing renaissance ranges from President Obama to the Boston Consulting Group to countless reporters who have parroted their largely fact-free claims. High on this list from nearly the start has been freelance journalist Charles Fishman, who published a lengthy cover story in The Atlantic’s December, 2012 issue boldly proclaiming the start of an “Insourcing Boom.”

Fishman’s distinctive contribution to Manufacturing Mania was his exhaustive look at General Electric’s decision to revitalize its Home Appliances and Lighting division, and in particular, the enormous appliance production complex the company had long maintained in “Appliance Park” in Louisville, Kentucky.

GE had tried to sell the unit in 2008 but found no takers (at an acceptable price, of course). So according to Fishman, the company decided to make chicken salad out of – well, you know – and within years, the results were nothing less than miraculous. In GE’s investment in the first new Louisville assembly lines in decades – including for products whose production was brought back from China – in ingenious process improvements he exhaustively described, and in favorable overseas trends like rising labor costs in China, Fishman saw evidence that much broader, long-time economy-wide trends encouraging manufacturing offshoring were coming to an end. Replacing them was nothing less than an historic industrial “renaissance” that was already “under way.”

The Atlantic was nice enough to run on its website a response of mine, documenting the abundance of statistics making clear that domestic industry was experiencing nothing more than a nice cyclical rebound from an horrific recession. But the renaissance claims have continued almost unabated.

How surprised its readers must have been, then, to see last week’s news that GE was again moving (quietly) to sell Appliances and Lighting. Although GE CEO Geoffrey Immelt invested $1 billion in reviving the division, Bloomberg News pegged the likely selling price at $1.5 to $2.5 billion. Of course, appliance production is likely to continue, at least for a while, in Appliance Park no matter who buys it. But the Bloomberg piece reminded that the sale was “part of a greater strategy to exit businesses where the company is not a leader or poised for growth.” In other words, GE’s new, supposedly revolutionary white goods factories weren’t meeting that standard, and indeed Bloomberg cited industry data showing that the conglomerate trailed Whirlpool and Electrolux in U.S. market share.

Fishman deserves credit for being smart enough to write near the end of his piece that “It’s possible that five years from now, everything will have unraveled—that the return of factory jobs will have been a temporary blip, that Appliance Park will be closed. (Business practices, after all, are prone to fads.)” The company’s reported decision to bring its Louisville experiment to an end – barely two years after Fishman’s breathless account of “a wave of fresh innovation…inspiring further, faster advances—shows that his qualifier was the only reality-grounded point Fishman made.