Our So-Called Foreign Policy: America’s Latest China Spy Conviction Might Not Even Be Tokenism

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aircraft, Aviation Industry Corporation of China, AVIC, avionics, China, Clyde V. Prestowitz, FBI, Gary Locke, GE, General Electric, Justice Department, manufacturing, Obama administration, Our So-Called Foreign Policy, spying, tech transfer, technology

Sorry, but I only gave a cheer or a cheer-and-a-half upon learning on Friday that a Chinese national was convicted in a federal court of trying to steal “trade secrets” relating to a key aviation technology from General Electric (GE).

Don’t get me wrong – it’s great that this spy was caught. But anyone knowing anything about the relationship between way too many other U.S.-owned advanced manufacturing and information technology companies and China would surely be asking why Beijing even bothered to send him into the field. Because the amount of sophisticated technology – and even clearly defense-related knowhow – that such companies have transferred to China voluntarily has clearly been more than enough to help the People’s Republic narrow the military gap with the United States substantially. (See, e.g., this piece I wrote for Bloomberg.com from 2013.) 

And even though the Justice Department says GE was working with the FBI to catch Yanjun Xu, it’s been a prime culprit. Notably, as recounted by long-time U.S. trade official and Asia watcher Clyde Prestowitz in his outstanding recent study of Sino-American relations The World Turned Upside Down, in November, 2009, the company announced the merger of its avionics division with China’s Aviationcons Industry Corporation (AVIC) and headquartering the new entity in Shanghai.

As Prestowitz explained, the deal was bad enough from a U.S. economic standpoint because standard commercial considerations had nothing to do with the resulting offshoring of high value manufacturing and employment. Instead, GE recognized that it wouldn’t be selling much in the way of avionics to China unless it made lots of them in China. In other words, it was victimized by extortion.

But the national security implications were even worse. For avionics are the electronics systems used in aircraft and missiles, and AVIC isn’t just another aerospace company, but an organization owned and controlled lock, stock, and barrel by the Chinese state, and one that has a “monopoly on military aircraft manufacturing and maintenance.” So it had to be clear from the get-go that any breakthroughs in avionics generated by GE would ultimately be available to AVIC and deployed in weapons that could well be used against American soldiers, sailors, and pilots in a future conflict between the two countries. Yet good luck trying to find any federal government opposition to the transaction. You won’t.

Indeed, when the new arrangement was formalized in 2011, the signing ceremony was attended by Gary Locke, former President Obama’s Commerce Secretary – who apparently didn’t even blink an eye when GE proudly declared that the new venture “will develop and market integrated, open architecture avionics systems to the global commercial aerospace industry for new aircraft platforms. This system will be the central information system and backbone of the airplane’s networks and electronics and will host the airplane’s avionics, maintenance and utility functions.”

And apparently Locke – and Obama – were just fine with GE’s avowed aim of developing with AVIC “a world-class engineering organization” with “the JV itself…creating new IP [intellectual property] and new technology.”

I guess they thought that the technology for developing civilian avionics and military avionics are fundamentally different, and that AVIC’s interests are purely commercial.

The technology that Yanjun Xu was seeking isn’t avionics-related. It has to do with engine parts made from composite materials – which the Justice Department says “no other company in the world has been able to duplicate.” And GE’s cooperation obviously means that the company wants to maintain ths monopoly over all actual and potential competitors, including from China.

But since it succumbed to blackmail over avionics, it’s far from a sure bet that it will keep drawing a line in the sand on composites – or anything else. Indeed, as the company boasts, its cooperation with AVIC on “technical training, manufacturing, spare parts distribution, and…maintenance and overhaul” for engines is already substantial. As a result, it’s equally unlikely that American regulators will be able to keep this knowhow in American hands.

The American journalist Michael Kinsley once famously wrote that “the scandal isn’t what’s illegal, the scandal is what’s legal.” You don’t need to look much further than GE’s deep, longstanding, and officially sanctioned ties with China’s state-run aerospace industry to see how right he was.

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(What’s Left of) Our Economy: Are Businesses Closet Techno-Nationalists?

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CCP Virus, China, coronavirus, COVID 19, decoupling, General Electric, globalization, innovation, nationalism, tech, technology, Wuhan virus, {What's Left of) Our Economy

Even if these poll findings are as off as many of the surveys of the 2020 election vote were, they’d still be pretty astounding. After years of multinational companies all over the world (including and perhaps especially in the United States), proclaiming that promoting innovation requires ever greater cooperation with partners across borders, General Electric’s (GE) latest annual survey of business views on the subject turned up strong support for what it calls a protectionist perspective.

It’s definitely something to keep in mind the next time you hear the China-coddling corporate Offshoring Lobby insist that a major U.S. economic decoupling from the People’s Republic would cut America off from an increasingly important source of technological progress, or the Open Borders-friendly Cheap Labor Lobby claim that restricting the inflow of foreign technology workers would deny them and the national economy as a whole access to many of the world’s best talent.

GE has been conducting these studies since 2011, and this year has looked at the subject twice – in January and September. In toto, the views of corporate innovation executives from 22 countries ranging from Kenya to the United States were sampled. (The January poll reported results from 22 countries and the September follow up from ten.)

Among the most startling results:

>This past January, fully 66 percent of the U.S. executives who responded considered that the country is “self-sufficient, and does not need to rely on other countries to innovate.” By September, this figure had climbed to 78 percent.

>In China, the comparable figures were 56 percent and 52 percent, respectively – meaning that, at least according to this GE study, China’s confidence in its technological autonomy has declined.

>Going global, in September, 69 percent of respondents reporting that their national governments had become more techno-protectionist in the last six months said that these policies had “a positive impact on innovation.” Viewed from the opposite end of the policy spectrum, only 41 percent of respondents reporting that their national governments had become less protectionist during this period considered this shift to have benefited innovation.

>In September, nearly all (94 percent) of the respondents from that month’s smaller sample agreed that “a protectionist stance is important to help address the major economic problems in this country created by the pandemic” and an equal percentage believed that such policies are “important to help the domestic economy recover.”

One reason for this support of techno-protectionism might be the widespread belief that it’s increasingly become the way of the world. Fully half of the September respondents told GE that “their government has taken a more protectionist stance during the COVID-19 pandemic” with only 13 percent reporting movement in the opposite direction and 34 percent perceiving no change.

At the same time, the GE poll revealed a deep ambivalence in business ranks about the virtues of tech self-sufficiency. Notably, 86 percent of the September respondents agreed that “More partnerships across countries will help drive progress on innovation.” And half worried that “Restrictions on movement of people/goods/services” were “a major cause for concern regarding innovation progress.”

One possible reason for the continued belief in the value of international collaboration: seemingly strong confidence that techno-nationalism (at least in their home market) will be a flash in the pan. Only 22 percent believed that such protectionism would last more than three years.

These results hardly exhaust the list of unexpected findings from the GE report. In fact, you’ll be seeing some more of them on RealityChek this week. But the discrepancy between them and the almost unamimous endorsement for the free movement of technological knowledge across borders from the corporate community deserves much more attention, and represents evidence that many of the globalist public positions taken by these executives’ companies and businesses stem from concern not for for the national interest, but for their own already healthy bottom lines.

(What’s Left of) Our Economy: Were the US Washing Machine Tariffs Really Failures?

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consumers, Federal Reserve, General Electric, imports, jobs multiplier, large residential washers, LRWs, manufacturing jobs, metals tariffs, safeguard tariffs, South Korea, tariff-rate quota, tariffs, U.S. International Trade Commission, University of Chicago, USITC, washing machines, Whirlpool, {What's Left of) Our Economy

It’s as close to a slam dunk conclusion as can be – at least according to economists, think tank hacks, and Mainstream Media journalists: The early 2018 U.S. tariffs on large household laundry machines have been a dismal failure.

Or have they been?

The levies belong in a category different from those of the main Trump administration trade-limiting measures because they were first mandated by an independent federal agency (the U.S. International Trade Commission, or USITC) via a long-standing legal process.  And they’ve been panned for supercharging costs for consumers, and padding the profits of the domestic industry to extents that dwarfed the new production and jobs they fostered. (Here’s a typical example of the press’ evaluation, drawing on equally typical research from the venerable University of Chicago and the even venerable-er Federal Reserve.)

What has gone oddly unreported has been the verdict rendered by the USITC – which came out in August. Sure, the agency is grading itself. At the same time, it’s privy to the most authoritative data (taken from the domestic and foreign companies involved themselves), and it’s surely worth noting that the Commission paints a significantly different , and brighter, picture.

The tariffs, put in place in February, 2018, affected the nation’s total global imports of these products, but mainly impacted such “large residential washers” (LRWs) from China, Mexico, South Korea, Thailand, and Vietnam – the biggest foreign suppliers to the U.S. market. The duties’ aim: stemming a sudden surge of LRWs that injure U.S.-based manufacturers. But they don’t shelter the domestic industry forever.

After three years – the amount of time the Commission has determined these domestic manufacturers need to adjust – they’re phased out for both the final products and many of the parts covered in the “safeguard order.” In addition, consistent with their surge focus, they only apply to imports above a certain level of units – a trade curb known as a “tariff-rate quota.” In all, moreover, the ultimate objective is to give victim industries time to adjust and then stand on their own two feet. That’s why detailed adjustment plans are a condition of receiving tariff relief.

To some extent, the USITC’s judgment doesn’t contrast dramatically different from that of the tariffs’ critics. Both noted (in the Commission’s words) “generally increased prices” and “decreased imports.” The Commission, though reported some developments generally missed by the critics (especially “some improvement in the financial performance of continuously operating [domestic] producers,” and market share gains for these companies) and some given decidedly short shrift (“increased production by two new U.S. producers” – both of whose owners come from South Korea, undoubtedly because the option of supplying the American market through exports was sharply limited).

The Commission didn’t address one of the critics’ most compelling points – that the new U.S. jobs were created at a cost to consumers (via the higher prices they’ve paid) of a whopping $817,000 per job. But the University of Chicago/Federal Reserve study actually conceded that this number might be an exaggeration, since manufacturing jobs (like all jobs) create a “multiplier effect” – that is, they foster additional employment in related industries ranging from suppliers of inputs to transportation, packaging, and warehousing services. What these researchers didn’t mention is that manufacturing’s jobs multiplier is unusually high.

Moreover, like virtually all scholars of trade, tariffs, and employment, the Chicago/Fed team neglected other benefits of manufacturing job creation (and prevention of further manufacturing job loss). These include:

>avoiding the wage losses suffered by displaced manufacturing workers who find work in lower-paid industries (an especially important consideration given today’s very low overall unemployment rates)

>avoiding the revenue losses incurred by these workers’ communities and the economy as a whole due to reductions in their taxable income;

>avoiding the increased pressure on social programs required to serve employees who can’t find new jobs – which encompass not only unemployment compensation but spending that seeks to address the pathologies that often follow working class Americans’ deteriorating personal finances, like divorce, delinquency, alcoholism, and opioid and other drug use, not to mention higher mortality;

>and the costs incurred by local businesses because of worker-customers who can no longer afford as many of their products and services, which of course reduces business’ own taxable income and additionally crimps public finance at all levels. (See, e.g., this highly cited study.)

The USITC report, moreover, shed light on another big reason that the costs-per-manufacturing-job-saved might be exaggerated: Not all of the increased costs of the tariff-ed products are due to the tariffs. In particular, the Commission listed no less than 14 factors other than import competition (and the tariffs placed on these goods) that affect the prices of LRWs. They range from raw materials, transportation, and energy costs to competition levels from substitute and between domestic producers, U.S.-based production capacity, productivity changes, labor contracts, and state and local government incentives, and demand levels at home and abroad (because all the U.S.- and foreign-owned manufacturers sell all over the world). The USITC then proceeded to ask producers, importers, and purchasers (retailers) to rate the importance of these factors on prices since the tariffs’ imposition in February, 2018.

The answers were reported in table III-26, and import competition levels were anything but dominant. Indeed, their importance consistently was rated by all three stakeholder as lower or no greater than that not only of raw materials costs (higher due to entirely separate tariffs on metals that were imposed by the Trump administration) but of energy costs, domestic production capacity (surely limited over time by the previous import flood), the allocation of this production capacity to other products, productivity levels, labor agreements, transportation and delivery costs, and domestic demand levels.

And adding to the case for reducing the costs per job figure: According to the official U.S. Bureau of Labor Statistics figures, after jumping by 16.31 percent from the February, 2018 onset of the tariffs through that November, they’ve since fallen by 9.73 percent (through September).

In fact, this development leads to a major point completely missed by the tariffs’ critics. As also indicated by the phaseout schedule and the linkage of the tariffs to the submission of adjustment blueprints, the levies were never intended to produce instant results, or to furnish crutches forever. The USITC describes the implementation of these plans starting on p. IV-5 and, more revealing, presents the evaluations of the retailers – who are bound to be the most demanding judges.

The reviews are mixed, but varying numbers of these companies stated that the two domestic recipients of the tariff relief – Whirlpool and General Electric – introduced new products (the most commonly cited improvement), upgraded product quality, expanded marketing campaigns, bettered their customer service, and taken other positive steps (Table IV-2).

Will these measures prove sufficient? Even after the tariffs come off, definitive answers will prove elusive, because as made clear, the LRW trade policy picture contains so many moving parts. What does look definitive, however, is that so far, the critics have engaged in a flawed rush to judgment.

 

 

(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: 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.

(What’s Left of) Our Economy: Can the U.S. Chamber Put One & One Together on Trade?

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Cheap Labor Lobby, Donald Trump, free trade agreements, General Electric, Information Technology Agreement, ITA, Jobs, multinational corporations, national security, non-tariff barriers, offshoring, Ooffshoring Lobby, protectionism, tariffs, U.S. Chamber of Commerce, {What's Left of) Our Economy

I’ve long urged trade policy critics (including Republican presidential candidate Donald Trump) to stop questioning the intelligence of globalization cheerleaders. Especially, when we’re talking about offshoring-happy multinational corporations and their hired guns in Washington, I’ve insisted, they’ve known exactly what they’ve been doing – pushing the trade and other international economic policies likeliest to reward the companies with the biggest profits in the shortest time-frame.

True, the longer-term effects have produced losses for many of them – especially since the immense imbalances resulting from these policies helped trigger the financial crisis and ensuing Great Recession, which at least initially hit earnings and stock prices. But charges of stupidity don’t seem valid even in this regard, since most of the American economic system’s incentives discourage long-term thinking.

A new U.S. Chamber of Commerce report, however, could justify a rethink. For it’s a great example of an organization ignoring evidence that’s been staring it in the face for literally decades – and that’s become especially glaring recently. Moreover, it inadvertently validates the claim made by American politicians like Trump that major numbers of manufacturing jobs could be returned to the United States if Washington only mustered the will to do so.

The Chamber, of course, has been one of the most powerful mainstays of the overlapping corporate offshoring and cheap labor lobbies, and this morning released a study bemoaning the worldwide growth of what’s often called “techno-protectionism.” That is, more and more countries have been working harder and harder to promote their own domestic information technology industries through a variety of new regulations that the Chamber rightly notes have cloaked simple beggar-thy-neighbor aims in national security rationales.

In the Chamber’s words, “some national governments, by intentionally or unintentionally defining security concerns in an overly broad manner, are applying intense pressure on the [tech] sector to localize rather than globalize.” And the group has echoed numerous charges that China is a prime culprit.

The Chamber’s long list of these practices underscores points that I and many others have been making since even before trade and offshoring became hot-button issues. The first is that such non-tariff barriers, which are excruciatingly difficult for trade agreements to deal with meaningfully, have become much more important obstacles to international commerce than more easily identifiable and therefore vulnerable tariffs and quotas. The second is that, since foreign governments with secretive bureaucracies can erect and maintain these barriers much more effectively than the more transparent United States, trade agreements with these governments usually shaft America.

Yet groups like the Chamber have typically ignored or dismissed these concerns – largely because they produce so much overseas, and care so little about whether their products are Made in America or not. Indeed, their foreign factories and other facilities actually often benefit from the host countries’ subsidies and various forms of protection.

That’s why the Chamber so enthusiastically greeted the announcement late last year that Washington had negotiated a new global agreement to free up further trade in technology products. This broadening of a 1997 pact – the Information Technology Agreement, or ITA – was hailed by the Chamber as “welcome news for American companies and the workers they employ” because it would “end tariffs on approximately $1 trillion worth of high-tech products….” Consistent with my above analysis, none of the dozens of non-tariff barriers that distorted this tech trade was even mentioned.

Less than a year later, we see the Chamber complaining that these largely hidden trade barriers have not only remained so influential, but are spreading so rapidly that they “are now threatening to slow or even reverse” the “globalization of the [tech] sector.” Translation: Despite supposed landmark achievements like the ITA (and the long string of similar deals that preceded it starting with the North American Free Trade Agreement) protectionism worldwide has both remained in place and become so widespread that it’s now handcuffing self-styled global businesses that had hitherto boasted of their power to ignore borders.

In this respect, the Chamber is echoing a recent lament of General Electric’s CEO, who complained that localization pressures have become so pervasive and intense that his giant firm has no choice but to bow before them.

As I pointed out in covering this corporate confession, the global economy features one immense exception to this spreading protectionism – the United States. And ironically, it’s America that has the world’s greatest store of the kind of leverage needed to pursue this strategy successfully. Trump-ian politicians have been saying nothing more remarkable than that this leverage should be used. Reports like the Chamber’s today can only make it that much more difficult for Trump-ian opponents to dismiss this idea as delusional.

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

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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: Don’t Forget America’s Non-China Trade Problems!

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Bill Clinton, Boeing, Chad Broughton, China, Export-Import Bank, General Electric, Jeffrey Immelt, Jobs, manufacturing, Mexico, NAFTA, North American Free Trade Agreement, Ross Perot, subsidies, tariffs, The Atlantic, Trade, trade finance, {What's Left of) Our Economy

Hats off to the unlikely duo of General Electric and The Atlantic magazine for recent reminders that, for all their importance, China-related trade issues aren’t the only important trade issues facing the U.S. economy – and requiring outside-the-box thinking.

General Electric’s contribution owes to its heavy-handed response to Congress’ decision to shut down the Export-Import Bank. Like most U.S.-owned multinational manufacturers, GE claims that the Bank has been crucial to its hopes for overseas sales – and for the whole country’s. I recently showed that the share of U.S. exports aided by Exim financing has been trivial (in the context of depicting its closure as a minor Washington mistake), but GE CEO Jeffrey Immelt seems determined to make American lawmakers and the country at large pay the piper.

On September 15, the company announced that it would create 400 manufacturing jobs in France rather than in the United States to enable it to benefit from France’s version of Exim support, and that it would move 100 such existing American positions to China and Hungary for similar reasons. Just today, the company reported that it had secured access to export financing of up to $12 billion from Britain, and would create up to 1,000 jobs in the UK if this credit led to contracts.

Lots of the conservatives who favored Exim’s demise have responded by fulminating about GE “bullying.” (Boeing, the biggest recipient of Exim financing, has played this game, too, but more subtly.) They also, however, insist that these corporate arguments are phony, and that the threatened and actual job moves either would have been made anyway, or represent shifty numbers-shuffling – which logically weakens the basis of their ire. But these avowed corporate welfare foes can hit back at corporate blackmail, and support valuable domestic jobs and production if the companies aren’t bluffing or fudging, by intelligently using trade policy.

For example, they could support tariffs on any GE or Boeing products built overseas thanks to foreign government financial subsidies to ensure that those products can’t be imported back into the United States – the world’s most important single national market. They could also back tariffs on many or all foreign-made goods by these companies if the foreign government subsidies enable the blackmail-happy firms beat out domestic goods for sales in third countries. Alternatively (or in addition to these measures), Exim opponents could tell the world’s GE’s and Boeing’s that their possibilities for selling to the U.S. government – a huge customer – will look pretty dim unless their behavior improves.

As must be clear to anyone following business and economic new these days, foreign governments like China’s discipline other countries’ businesses like this as a matter of course. It seems high time for Washington to get a clue.

The Atlantic magazine spotlighted non-China trade issues less directly. It’s just published a long article about an American manufacturing company moving high-value jobs to Mexico without once mentioning the North American Free Trade Agreement (NAFTA), or even trade policy. (“Globalization” was referred to once.) This is like publishing a long article about the civil rights movement without mentioning segregation. Here’s why.

NAFTA’s creation (which technically resulted from Mexico being added to an existing U.S.-Canada free trade agreement) created decisive incentives for American manufacturers to shift factories and employment across the Rio Grande. Mexico’s workers had always been very cheap compared with their U.S. counterparts. Moreover, Mexico’s environmental and worker safety regulations had always been lightly enforced – when they were enforced at all – which further reduced production costs. So in principle, boosting profits while supplying the high price U.S. market from Mexico was long an appealing option for American industry.

But NAFTA made such arrangements an out-and-out no-brainer by offering U.S.-based companies a guarantee that neither American presidents nor Congresses could slap tariffs on Mexico-origin imports in the future, and thereby reduce and even destroy all the benefits of Mexico offshoring. This guarantee in turn was the product of NAFTA’s dispute-resolution mechanism, which gave Mexico an equal say with the United States (and Canada) in dealing with charges of treaty violations and authorized retaliation, even though the U.S. economy represents some 90 percent of the newly integrated North American economy.

This Atlantic article makes some valuable points – noting, for example, that the offshored product it examined wasn’t the kind of labor-intensive good that NAFTA’s supporters promised would dominate any job and production losses resulting from the agreement. Author Chad Broughton also usefully highlights how lax and often indulgent U.S. regulation of private equity firms – one of which owned the factory in question – can create its own significant spurs to offshoring. But that financial issue would have meant little had American trade policy decisions not made such employment and output shifts a practically irresistible option for so much of U.S.-based industry.

But if NAFTA did indeed generate such a “giant sucking sound” (as Ross Perot so memorably predicted during his 1992 independent presidential campaign) of jobs moving south, why hasn’t Mexico become an even more important manufacturing power and exporter to the United States? Actually, trade policy provides the main answer to that question, too. Almost immediately after practically inviting domestic manufacturers to move to Mexico, the U.S. government decided to make many other third world offshoring opportunities available as well, via trade deals with Central America, South America’s Andean countries, and sub-Saharan Africa. Most important, Bill Clinton and his successors have worked overtime to expand U.S. trade with China dramatically.

The offshoring companies have thus been able to play different low-income countries off against each other in a worldwide investment competition that’s been great for business (although it also contributed to the global imbalances that helped set off the financial crisis from which even many of them didn’t escape). But the losers – which have included much of Mexico – have hardly been confined to America.