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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Glad I Didn’t Say That! What Could Have Gone Wrong with Offshoring?

Tags

Clinton administration, coronarivus #CCP Virus, COVID 19, Glad I Didn't Say That!, globalization, health security, Larry Summers, manufacturing, Obama administration, offshoring, supply chain, Trade, Wuhan virus

“Why can’t the greatest economy in the history of the world produce swabs, face masks and ventilators in adequate supply?”

–Former Clinton administration Treasury Secretary and Obama administration top White House economic adviser Larry Summers, March 21, 2020

“There are those today who would resist the process of international integration; that is a prescription for a more contentious and less prosperous world. We should not oppose offshoring or outsourcing.”

–Former Clinton administration Treasury Secretary and Obama administration top White House economic adviser Larry Summers, June, 2011

(Sources: Summers Twitter feed, https://twitter.com/LHSummers/status/1241329121768230912 and “At World BPO/ITO Forum 2011, iRise CEO Stresses Need for Transformational Thinking Among CIOs,” Business Wire, August 25, 2011, https://www.businesswire.com/news/home/20110825006115/en/World-BPOITO-Forum-2011-iRise-CEO-Stresses. Specia acknowledgements: John Greener and Mike Cernovich)

Making News: Back on National Radio Tonight Talking China, the U.S., & the Wuhan Virus…& More!

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Breitbart News Tonight, China, conservatives, coronavirus, COVID 19, globalization, Gordon G. Chang, health security, Making News, manufacturing, medical devices, offshoring, pandemics, pharmaceuticals, Republicans, The Epoch Times, The John Batchelor Show, Wuhan virus

I’m pleased to announce that I’m scheduled to return to John Batchelor’s nationally syndicated radio show tonight to talk about U.S.-China relations “in a time of Wuhan Virus.”  (Spoiler alert:  They’re not good.  And barring a sea change in China’s behavior, they shouldn’t be.)

The segment, which will also feature co-host Gordon G. Chang, is slated to start at 10:15 PM EST and you can listen live here.  Can’t tune in tonight?  I’ll be posting a link to the podcast as soon as one’s available.

Speaking of podcasts, here’s one of a “Breitbart News Tonight” interview from last Friday night on the economics and politics of this coronavirus era, with a special focus on the implications for small-government Republicans and conservatives.  Click here and scroll down till you see my name.  Moreover, if you’re not into podcasts, you can read a fine summary at this link.  FYI, I don’t use the phrase “extinction event” often.

Finally, my views were covered recently in two Epoch Times articles.  In the first, from March 3, I emphasized the importance of trade and related economic policies needed to ensure that the United States regains its ability to supply its own pharmaceutical and medical device needs.  In the second, I similarly observed that the very idea of globalizing and offshoring the domestic manufacturing base has become more urgent than ever to challenge given emerging threats like pandemics.

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

(What’s Left of) Our Economy: When Washington Slept on America’s Dangerous Dependency on Foreign Healthcare Products

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active pharmaceutical ingredients, Bureau of Industry and Security, China, China virus, Commerce Department, coronavirus, COVID 19, globalization, health security, healthcare, India, medical devices, national security, Office of Technology Evaluation, offshoring, pharmaceuticals, supply chains, surgical equipment, Trade, {What's Left of) Our Economy

Last week I wrote that no one in American politics, in either party, deserves blame for failing to anticipate the China Virus outbreak (in the sense of being ready for a genuine pandemic), and especially the Trump administration’s flawed response to its spread within the United States (as opposed to its timely decision on January 31 to start curbing inbound travel from overseas – initially from China). 

But there’s one big aspect of coronavirus-related public policy where potentially calamitous and avoidable mistakes have been made, and where identifying responsibility is essential (largely to prevent repetition). That’s the growth of America’s dependence on pharmaceuticals, their active ingredients, and other healthcare-related goods from foreign sources, especially from China.

It should have been obvious long before the virus broke out in Wuhan (at least as far as we know) that health security is national security, and that the blithe approval of trade and related policies that encouraged the offshoring of production in this crucial sector was as dangerous as the offshoring of crucial defense and defense-related (because so many inputs to weapons and platforms aren’t weapons themselves) products. Even louder alarm bells should have sounded once it became clear that a leading offshoring destination was China – a dictatorship that has challenged U.S. national security interests long before the rise of current leader Xi Jinping, and whose role in medical supply chains inevitably created the threat of supply cutoffs (as has recently been threatened in the Chinese government-controlled press).

And indeed American policymakers had all the evidence they needed as early as 2011. That’s when a small office at the Commerce Department called the Bureau of Industry and Security (BIS) issued a report called – yup – “Reliance on Foreign Sourcing in the Healthcare and Pubic Health (HPH) Sector: Pharmaceuticals, Medical Devices, and Surgical Equipment.”

For many years, BIS’ Office of Technology Evaluation (OTE) has been issuing reports on sectors of the U.S. defense industry and other portions of the economy critical to the nation’s security and their use of foreign parts, components, materials, and other inputs whose availability shouldn’t be taken for granted. And fortunately, the Office and the various acts of Congress that have defined its mission have long understood that, as suggested above, national security-related industries are by no means restricted to those that turn out products that go bang and boom.

Notably, the study was requested by the Obama administration’s Department of Homeland Security (DHS), which shows commendable foresight. And the main results make jaw-dropping reading today:

>“There is a significant amount of U.S.-based manufacturing for critical healthcare-related commodities.” At the same time, “There is…a very high degree of foreign sourcing and dependency for components, materials, and finished products.”

>“Exposure to supply disruptions is widespread, but many respondents consider it a cost of doing business in the healthcare industry.”

>As a result, “Only 34 percent of respondents are taking steps to reduce their exposure to foreign sourcing and dependency issues.”

>When it comes to the chemical ingredients for drugs, where heavy China dependency has attracted so much attention today, in 2011, pharmaceutical companies reported “difficulty limiting their exposure to foreign dependencies primarily because most of the APIs [active pharmaceutical ingredients] are produced outside the United States.”

>Medical device producers stated that they were “vulnerable primarily due to their reliance on other countries for electronic parts.” Japan was the main concern, due at least in part to the earthquake that year that disrupted many industries’ supply chains. But China has become an even more important supplier since then.

Sadly, however, the record also demonstrates that once the findings came in, no serious follow-through was undertaken.

OTE surveyed 161 companies – 70 pharmaceutical producers, 75 manufacturers of medical devices and surgical equipment, and 16 companies that turned out both kinds of products. Roughly three fourths of these companies were headquartered in the United States and roughly one-fourth were foreign owned.

All told, these firms produced 868 individual pharmaceuticals and 833 kinds of medical devices or surgical equipment. Of these, in turn, 290 pharmaceuticals and 128 types of devices and equipment were deemed by OTE “critical to effective healthcare services in the United States,” meaning “needed in various emergency scenarios.” The bureau also looked into the chemical ingredients and parts and components comprising these products.

As for the specific information sought, here it is:

“Survey respondents were asked to identify the pharmaceuticals and medical devices/surgical equipment they manufactured, integrated/assembled, and/or sold for use in the United States. For each product area selected, companies were then asked to provide the top three company proprietary products they make and the location of manufacture. Finally, companies identified, to the best of their knowledge, whether they were the sole U.S.-based manufacturer, sole global manufacturer, or not the sole manufacturer of each product.”

Some of the above results in greater detail:

More than 73 percent of the total surveyed companies depended on suppliers located abroad for at least one critical component, manufacturing material, or actual finished good. And the average number of such foreign-sourced goods per company surveyed was 11.4. Seventy-nine percent of pharmaceutical firms surveyed reported themselves in this situation versus 63.7 percent of the device and equipment manufacturers, and the average number of foreign-sourced products was 11.4 for the drug companies versus 9.8 for their device and equipment manufacturers.

Interestingly, even at this point, China loomed pretty large large in the picture at that time – especially for medical devices and surgical equipment. Its entities represented 13.8 percent of the total number of foreign suppliers to U.S.-based producers. For pharmaceutical companies, they accounted for 9.1 percent – less than leader Italy (15.7 percent), India (12.8 percent), and Germany (10.6 percent). Not that this result should be especially comforting, as India – a major global producer of generic drugs – has recently announced to restrict exports because it’s experiencing difficulty getting chemicals from China and (surprise?) wants to make sure it can provide for its own population.

The OTE survey, in other words, found that, in 2011, healthcare products companies operating in the United States relied on a diverse global supply chain. But significant vulnerabilities were reported, too. Principally, for pharmaceuticals, “there was no U.S.-based source for at least 65.5 percent of [total goods] identified by survey respondents.” And for medical devices and surgical equipment, the figure was at least 60.5 percent. More troublingly, in the device and equipment sectors, the greatest dependencies tended to be in complex products.

Moreover, when thinking about the safety of imported healthcare goods, keep in mind BIS’ finding that only 60.3 percent of the companies in total could identify the suppliers of their suppliers.

Nor were significant supply disruptions unknown by healthcare products companies. Thirty percent of these businesses reported experiencing at least one of these events between 2007 and 2010, 40 percent of these came from foreign suppliers, and 17.5 percent came from China – the biggest share for any single country. Both domestic- and foreign-origin disruptions lasted an average of 155 days. Nonetheless, these figures are surely way too low, as only 18.3 percent of responding companies said they tracked foreign supply disruptions.

Even so, the study oddly found that “Only 16.6 percent of companies foresee a risk of supply disruptions from outside of the United States” but that 29 percent “believed their company was vulnerable to serious and/or prolonged supply chain disruptions from events or dependencies outside the United States.” For pharmaceuticals, the top concern again was lack of API availability domestically.”

OTE made several policy recommendations to strengthen America’s health security. For example, various major relevant federal agencies should “further examine [the] survey data to prioritize the foreign sourcing and dependencies that could have the greatest impact on the healthcare supply chain in an emergency situation.”

In addition, these agencies, “in coordination with DHS and the Department of Commerce, should assess whether the use of Defense Production Act authorities, such as the Defense Priorities and Allocations System (DPAS), could provide the ability to rapidly expand or surge capacity of U.S.-based pharmaceutical and medical device/surgical equipment facilities to meet demand in an emergency situation.” As made clear, however, by the continued sky-high levels of the healthcare industry’s China and other foreign dependencies, the problem was promptly ignored.  

Such measures, along with many others in the trade, tax, and regulatory fields will no doubt be crucial to rebuilding the kind of domestic healthcare industry so many Americans and even their leaders finally recognize is essential. But if the nation really is seriously behind the idea that health security is national security, it’s going to need updated detailed information on foreign dependencies. In other words, time to put the OTE to work again.

(What’s Left of) Our Economy: How a U.S.-China Huawei Tech Disaster Unfolded

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5G, antitrust, AT&T, Bell Labs, China, espionage, Huawei, Lucent, national security, networking, offshoring, privacy, semiconductors, surveillance, tech transfer, technology, telecommunications, {What's Left of) Our Economy

It’s hard to think of a worse mess that Washington has gotten the country into than the loss of global leadership in advanced telecommunications knowhow to China. With the world on the cusp of a transition into the so-called 5G standard, the United States boasts exactly zero companies capable of creating complete networks based on this technology, which will increase by orders of magnitude the speed with which individuals, organizations of all kinds, and governments can send and receive digital information, and thereby bring much closer all kinds of game-changing breakthroughs. In particular, 5G can enable the creation of truly “smart” electronic networks that will greatly boost the efficiency of public transportation and energy infrastructure, healthcare, manufacturing, and so much more. (Here’s a good primer.)

Even worse, the world’s pace-setter in terms of both quality and price is Huawei, and Chinese entity with unusually close ties with China’s dictatorial and belligerent government.  Moreover, its lead over its other two 5G competitors (Finland’s Nokia and Sweden’s Ericsson) is enormous. Huawei’s dominance matters a lot because the advent of an effectively networked world also means the advent of a world in which hacking becomes much more dangerous – and the power to hack will translate into decisive strategic and economic leverage. Just think of the possibilities of national security and economic spying alone, let alone the implications for everyone’s privacy. And because of Huawei’s 5G leadership, Beijing holds entirely too many of these cards.

All is by no means lost yet. In particular, Huawei and other Chinese technology entities still rely heavily on U.S.-based companies for state-of-the-art parts and components – especially semiconductors – along with software. But thanks to 5G’s vast potential alone, Americans can’t assume that, before too long, China won’t be able to use it to cut into their lead in these information technology manufacturing and services sectors.

So how did this dangerous U.S. failure come about? When I first briefly answered this question posed by a Twitter follower, I emphasized the U.S.’ reckless pre-Trump administration China policies. These both greatly incentivized Americans businesses to offshore production and jobs to the People’s Republic even in the advanced manufacturing sectors in the public was assured the United States would always maintain matchless superiority, and turned a blind eye to China’s practice of extorting cutting edge knowhow from these U.S.-based firms in exchange for access to China’s huge and potentially huge-er market.

But as the author of an article last year focusing on the weird – and arguably perverse – relationship between recent American trade policies like these, and recent American antitrust policies, I was especially grateful to this Financial Times article for reminding me that the latter helped create this disaster as well.

Here are the key passages explaining the lack of a US telecom equipment manufacturer capable of producing the full-range of 5G kit:

“To understand how this came about, it is necessary to go back to the mid-1990s when the US passed a Telecommunications Act that weakened US champions such as Lucent Technologies by enticing a flurry of new entrants into the market. With its profit margins under pressure at home, Lucent targeted sales in a fast-growing Chinese market to prop up a flagging share price.

“But Chinese authorities insisted that all foreign equipment makers would — as the price of admission — be obliged to hand over technology and knowhow to state research labs and business partners. One by one, the chief executives of the largest telecoms equipment companies trooped through Beijing in the early 2000s pledging to localise their technologies and production bases.”

Neither American Presidents nor Congresses displayed any serious interest in the consequences. Yet submitting to China’s blackmail failed even to save Lucent. In 2006, it found itself in desperate straits, “and was sold to a French rival, leaving North America without a heavyweight telecoms equipment player. The company that was once the technology champion behind Bell Labs is now part of Finland’s Nokia.”

My trade/antitrust article focused on the bizarre situation that had prevailed in the pre-Trump decades, during which the U.S. leaders from both major parties seemed hell-bent on maximizing the competition faced by U.S.-based businesses from foreign economies (via offshoring-friendly and similar one-way trade deals and policies) even as they seemed equally determined to reduce the domestic competition faced by U.S.-based businesses by greatly weakening antitrust enforcement.

The Financial Times article shows that exceptions periodically appeared to this indulgent antitrust policy. But more troubling, it indicates that no national security or even global economic competitiveness considerations (and of course the two are closely related) ever significantly affected antitrust policy. That’s an indictment just as serious as simple neglect or actual encouragement of ever greater levels of corporate concentration.

It’s important to point out, moreover, that this telecommunications disaster’s roots run much deeper. Specifically, the federal government began back in 1949 to pressure AT&T’s ancestor Bell Telephone, which had dominated American telecommunications from its 19th century beginnings, to divest it manufacturing and research and development activities on the one hand from its services activities. And this even though that research arm, Bell Labs, invented the world’s first semiconductor device – the transistor.

First AT&T and then Lucent made plenty of their own mistakes, too. It’s a really complicated story, though, and two good short accounts can be found here and here. Nonetheless, clearly the voices in Washington during these decades that might have been encouraging a more comprehensive strategy to preserve U.S. dominance – or even competitiveness – in this crucial technology were way too weak. And now, for the near-term future in any event, the nation is dependent for this knowhow on a distant regime whose benign intentions can by no means be assumed.

(What’s Left of) Our Economy: How Many Strikes Does Paul Krugman Get on Trade?

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automation, China, China shock, globalization, hyperglobalization, Jobs, manufacturing, manufacturing employment, offshoring, Paul M. Krugman, protectionism, tariffs, The New York Times, Trade, Trade Deficits, World Trade Organization, WTO, {What's Left of) Our Economy

Contrary to what many trade mavens must think, Paul Krugman’s recent confession that he (and nearly all of his economics colleagues) have seriously misjudged the impact of international trade on America’s manufacturing workers isn’t his first. At least twice before (see here and here), this Nobel Prize-winning economist and New York Times columnist has admitted in print that the economics profession’s consensus was wrong to brush off (and often scorn) claims that post-Cold War trade agreements and similar trade policy decisions would foster a combination of wholly new and unbeatable (but economically unsustainable) forms of import competition for domestic industry, and related job and production offshoring. (I’m among those he’s mauled in print.) And he’s granted that trade policy critics who predicted these consequences and kept pointing to evidence of their emergence were right. (See here and here.)

Still, Krugman’s latest mea culpa is noteworthy for two reasons. First, it undercuts another tenet of trade economics dogma held almost as strongly believed as the belief that trade expansion in all circumstances is a net contributor to human welfare – the related conviction that imbalances like trade deficits don’t matter (at worst).

In particular, the author acknowledges that the rapid and massive increase in America’s manufacturing-dominated goods trade deficit – especially from super-low cost economies (and offshoring destinations) like Mexico and especially China – occurred at exactly the same time that U.S. industrial employment cratered. And not coincidentally, the destruction began right about when China was admitted into the World Trade Organization (WTO). That mattered greatly because the Beijing subsidies and other predatory trade practices that benefited both foreign- and Chinese-owned producers in the PRC gained invaluable protection from unilateral U.S. responses.

How greatly? According to Krugman, the worsening of the trade deficit “reduced the share of manufacturing in GDP by around 1.5 percentage points, or more than 10%, which means that it explains more than half the roughly 20% decline in manufacturing employment between 1997 and 2005.” In other words, most of the manufacturing job loss during this crucial period – which is a particularly important one because that’s when critical masses of recently offshored factories got up and running and began exporting to the American market – should be blamed not on supposedly impersonal and clearly positive forces of progress like containerization in global shipping, and automation generally, but on actions by American leaders.

Not that Krugman abandons conventional trade economics completely. Specifically, he contends that trade deficits generally speaking are still ultimately unimportant, partly because countries can’t grow indefinitely indebted to the rest of the world and “must pay their way eventually.” The post mid-nineties surge in the manufacturing trade shortfall hammered domestic American manufacturing, he explains, only because it skyrocketed so suddenly.

Readers, however, will ask themselves how the United States can pay its way in the foreseeable future when manufacturing still dominates its lopsided goods trade flows. And they should note that although the damage to manufacturing could still prove temporary, it’s already lasted nearly twenty years, with no imminent end in sight until the past year. (See this post for one of my recent claims that President Trump’s trade policies are starting to bend the curve.)

Second, and following logically from the first point, Krugman continues to insist that protective tariffs should be avoided. Now his opposition focuses on his contention that the trade-related danger to U.S. manufacturing is coming to an end. The China shock in particular, which spearheaded the recent period of “hyperglobalization,” was “a one-time event” that’s already showing signs of ebbing.

But if Krugman was so offbase in evaluating trade’s economic effects, why should such predictions deserve any credibility? Off the top of my head, I can think of several reasons for ongoing concern. For example, China still has massive reserves of super cheap, U.S. wage-depressing labor in its interior and, counter-intuitively, in its national student body. In addition, the progress Beijing has fostered in capital- and technology-intensive industries means that these sectors of American manufacturing will keep facing the same kinds of low-wage (but high productivity) challenges that decimated less advanced, more labor-intensive U.S.-based sectors in previous decades. Moreover, if China does lose competitiveness even in these portions of manufacturing, there’s no shortage of bargain basement third world population giants – like India, Indonesia, and Brazil – that would be more than happy to receive more manufacturing investment from the United States and other high-income countries.

Everyone’s entitled to make mistakes – even know-it-alls like Krugman, who’s known for torching those disagreeing with him as know-nothings and liars. And Krugman deserves praise for owning up to his own mistakes. But it’s also appropriate to ask this question: Since Krugman first established his economic chops as a trade expert, and since he’s clearly been proven wrong about the leading trade-related controversy of our time, how many more strikes does he get?

(What’s Left of) Our Economy: Why the Multinationals Still Should be Ignored on China

Tags

Bloomberg.com, China, multinational companies, multinationals, offshoring, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Is China mainly valued by American multinational businesses as a super-cheap production site for serving U.S. customers, or as a huge and potentially huge-er consumer market? The question has mattered decisively since the beginning of the nation’s controversial and dramatic trade expansion with China because of the impact on domestic U.S. jobs and production.

So it’s important to report that a new poll of the multinationals that operate in the People’s Republic strongly supports the views of trade policy critics (like me) who have charged that the nation’s pre-Trump approach to China’s economic rise has produced America Last results for the United States, and have urged a fundamentally new strategy.

If the multinationals were using China mainly to supply the U.S. market, as the critics have long insisted, then the trade and investment patterns that have emerged with China would inevitably be undercutting America’s economy. For their investment in the People’s Republic would be mainly replacing factories and similar facilities in the United States, and even exports to China would mainly be replacing shipments between plants within the United States.

If, however, these global giants (and the economists they employ to make their case to politicians, the press, and the public) were right in claiming that their activities were mainly focused on satisfying demand in China, and especially final demand, then the U.S. domestic economy would benefit. For their new Chinese customers would be supplementing their existing American customers, and overall markets for products Made in the USA would grow. (See here and here for arguments from multinationals-funded think tanks studies purporting to document that this win-win scenario has been the case for years.)

But a survey conducted by no less than the American Chamber of Commerce in China and by its Shanghai branch makes clear the great extent to which U.S.-owned businesses operating in China are oriented towards customers back home. One of the biggest hints? More (40 percent) of the 239 firms contacted said that (in the words of a Bloomberg.com summary) “the hike of U.S. tariffs announced on May 10 would have a strong negative impact on their business” than said that they would be hurt by a retaliatory Chinese increase in its duties (33 percent). Clearly, the American levies’ increase would damage those companies because of all that they produce in China for export to the United States. And this despite the robust growth of a Chinese consuming class that is said to be the main reason for concentrating on Chinese customer.

Two other big clues: Fully 35 percent of the companies responding said that “their main strategy for dealing with the tension was to restructure so their operations were more heavily ‘in China for China.’” In other words, many of their China operations are still structured to be “in China for somewhere else.” And 53 percent of the businesses reported that they faced no non-tariff retaliatory measures from Beijing since July, 2018 – when the first Trump China tariffs were announced. Why would they if much of their focus was exporting, and thereby helping China earn valuable foreign exchange revenue?

Nonetheless, the American Chamber survey did turn up two semi-surprises. First, only one of the companies responding complained that a curb on China’s forced technology transfer practices “was the most important outcome” for President Trump to achieve in any trade agreement. For decades, reports of this practice have been too numerous to list.

Second, 42 percent of the companies stated that “a return to the status quo before the tariffs was most important for them” – even though mounting corporate complaints about harassment from and discrimination by the Chinese government and its agents in the Chinese “business” sector are mains reason for strong (stated, anyway) bipartisan American support for ramping up the pressure on China. At the same time, this result could be yet another sign of how much U.S. corporate activity in China continues using the country mainly as an export platform.

Even the most charitable interpretation of this survey would conclude that American businesses simply have no coherent idea of what they want U.S. China trade diplomacy to produce. On the one hand, many of them plainly remain unhappy with the Chinese environment in which they operate. On the other, many plainly oppose the only American measures – tariffs – with any hope of improving this environment.

All of which tells me that, although there may be many grounds for criticizing President Trump’s trade war with China, opposition from an American business community that is at best utterly clueless and at worst hopelessly conflicted on the issues isn’t one of them.

Making News: Two National Radio China Trade Podcasts — & More!

Tags

Breitbart News Tonight, China, Gordon G. Chang, i24News, Making News, manufacturing, offshoring, The John Batchelor Show, Trade, trade war

I’m pleased to announce some new broadcast appearances.

Last night, I returned to John Batchelor’s nationally syndicated radio show to provide an update on the U.S.-China trade talks that are taking place in Washington, D.C. right now.  Click here for a timely discussion involving John, me, and co-host Gordon G. Chang.

Incidentally, you might notice that John was not sounding like his usual chipper self.  He’s in the middle of some radiation treatment, and although he’s obviously a strong believer that “the show must go on,” he’ll be taking a break for several weeks to complete the regimen.  He says his prognosis is bright, but I’m sure you’ll all join me in wishing him a speedy and complete recovery.

Also, on Monday, I got a last-minute invitation to appear on Breitbart News Tonight to discuss the China trade talks as well as a bizarre New York Times article pretending to explain why more manufacturing can’t be returned from China to the United States.  Here’s the link to this radio interview.

Finally, tonight I’m scheduled to appear on Israel’s i24News tonight to analyze the China talks.  This television network offers only paid content on-line – including streaming videos of previous segments. But if you’re a subscriber, I hope you’ll be able to tune in live at 7:30 PM EST.

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

 

(What’s Left of) Our Economy: Mainstream U.S. Trade Policy’s Main Rationale Has Just Been Blown Up

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Bill Clinton, BRICS, China, emerging markets, EMs, Financial Times, globalization, Jim O'Neill, multinational companies, offshoring, Project-Syndicate.org, Sherrod Brown, The Race to the Bottom, Trade, trade agreements, {What's Left of) Our Economy

I’m always struck by how often in the news media or policy writing (e.g., in journals like Foreign Affairs), genuinely game-changing points are made in passing, and for folks with any interest in the trade and globalization issues raised to such prominence by President Trump. And two such instances dealing with this subject just came in the Financial Times newspaper and the website Project-Syndicate.org.

The observation they both made with mind-boggling offhandedness – economic growth in countries dubbed “emerging markets” (EMs) is slowing to rates no faster than those of the rest of the world, and thus rendering them incapable as far as the eye can see of replacing the United States as a global growth engine.

This claim matters decisively for trade policy because these EMs have dominated America’s approach in this field for more than two decades. First identified in the early 1990s, they consist of economies in the developing world that not only boasted enormous populations. But largely because communism and a heavy state role in economic policy had been so thoroughly discredited due to the end of the Cold War, they were steadily transitioning to more free market approaches, and thus were seen to have huge growth potential. China and Mexico were the leading examples, but various definitions of the main emerging markets also included India, Brazil, Russia, Turkey, South Africa, and others.

According to trade enthusiasts, this combination of characteristics was going to make the EMs so important that accessing their vast current consumer markets and even greater consuming and importing potential needed to be Washington’s top trade priority. Their significance was portrayed as all the more important given America’s status as a “maturing” economy whose growth was bound to continue slowing. (Former President Bill Clinton used exactly this term while advocating for an emerging markets push in a document that’s not on-line but that’s cited in my book on globalization, The Race to the Bottom. The document was the 1995 Report of the President of the United States on the Trade Agreements Program and it was published by the Office of the U.S. Trade Representative at the start of 1996.)    

Yet however impressive and promising they seemed, the idea was a crock from the beginning – at least in terms of its importance in driving American trade policy for the foreseeable future. EM cheerleading suffered two fatal flaws. First, despite rapid growth and immense growth potential, the emerging markets were starting from such low bases – especially in terms of their populations’ consuming power – that they wouldn’t become significant markets in absolute terms for many years at best. Second, precisely because they remained so poor and under-developed, their governments invariably realized that their own best growth opportunities came from exporting to much wealthier countries like the United States – where the needed consumption power already existed.

So why the EMs euphoria? As documented exhaustively in The Race to the Bottom, the multinational corporations that dominated American trade policy-making never saw the emerging markets as final consumption markets. They viewed them as super low-cost production bases from which they could supply the U.S. market much more profitably than possible from their domestic factories. Which is exactly why, starting with the pursuit of trade expansion with Mexico at the onset of the 1990s, American trade policy almost exclusively targeted the emerging markets and other very low-income countries (like Vietnam and the countries of Central America) for negotiating new trade deals.

Ohio Democratic Senator Sherrod Brown (a possible 2020 Democratic presidential contender) described the multinationals sales pitch to leading EM China somewhat too charitably when he said in 2015, “while walking the halls of Congress, [lobbyists for the multinationals] talked about they wanted access to 1 billion Chinese customers. What they didn’t say is they also wanted access to 1 billion potential Chinese workers.”

As The Race to the Bottom also made clear, EM touting was star-crossed from the start – even embarrassingly so. As it peaked, in the mid-1990s, many of these same countries started experiencing problems that led to major financial crises even before the decade ended. That is, their markets became evaporating, not emerging, and in numerous cases they kept afloat only by cheapening their currencies, limiting their own consumption and importing still further, and making them more powerful exporters than ever.

Yet the multinationals’ power and influence remained so decisive throughout America’s political (and media) establishment that emerging markets hucksterism continued to justify trade agreements with such countries. Hence the continued repetition of wholly misleading contentions like “95 percent of the world’s consumers live outside the United States” (which I debunked here).

So that’s why I was so interested to see the following in a Financial Times blog post – and by no less than a former senior official at the International Monetary Fund and another leading international economic institution:  

“EM growth has slowed to about 4.5 per cent at present….In the long run, according to the OECD, the potential growth rate of the Briics (Brazil, Russia, India, Indonesia, China and South Africa — accounting for most of EM GDP) is expected to slow further, converging to mature market trend growth of 2 per cent. In other words, the growth advantage of more than 4 percentage points that EMs enjoyed over mature markets in the 2000-2010 period has narrowed to about 2 percentage points and will probably disappear in the long run.”

And guess what? Unlike in the United States, in particular, even much of this EM growth will rely on maximizing exports and minimizing imports. So their importance as markets for American-made goods and services will be even less impressive than this impeccably mainstream analyst suggests.

Equally startling: This Project-Syndicate column by Jim O’Neill. O’Neill, for the unitiated, was perhaps the highest profile EM cheerleader, and coined a popular acronym for those economies that described those he believed most promising: BRICS (Brazil, Russia, India, China, South Africa).

The former Goldman Sachs banker has remained a believer in China, and has actually added some countries to his list of economies he believes will loom much larger in this century. But in the column, he also argued that, if China falters in what he (wrongly, in my view) considers its role as a global growth engine, and the American consumer gets tapped out, none of the other emerging economies “is in a position to match the growth of Chinese consumption today, or even over the course of the next decade.” And by extension, the likelihood of these countries replacing the United States is even more infinitesimal.

Former French leader Charles de Gaulle once famously said that “Brazil is the country of the future…and always will be.” The two examples above show that the same solidly grounded skepticism is also finally seeping into the ranks of globalization cheerleaders. How long will it take before the American political, business, academic, and media establishments finally start paying attention?

Following Up: Lousy U.S. Auto-Making Productivity and Those GM Layoffs

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automotive, Bureau of Labor Statistics, Detroit automakers, General Motors, GM, Jobs, layoffs, motor vehicles, NAFTA, North American Free Trade Agreement, offshoring, productivity, total factor productivity, Trade, Trump, yoFollowing Up

Yesterday, I posted some data – with a special focus on major victim state Ohio and major victim region Youngstown – providing some badly needed perspective on General Motors newly announced manufacturing jobs layoffs in the United States (along with Canada and other unspecified locations). Today I’d like to follow up with some statistics that shed more light on GM’s decision – and the strengths and weaknesses of the American domestic automobile industry.

There’s no doubt that, as widely noted, many trends and developments are responsible for the new job cuts – which are highly unlikely to be restricted to GM alone. Some of the biggest include changing product mixes (away from smaller vehicles and toward larger vehicles), new technologies (for electric vehicles and self-driving vehicles), and the inevitable waning of the latest “automotive cycle” – that is, a slowdown in auto sales that has been entirely predictable following the sector’s strong recovery from a terrifying downturn during the last recession.

But one industry trend that’s been sorely neglected – and that surely bears heavily on the “Detroit 3” auto companies’ failure to continue producing smaller vehicles profitably at their domestic factories (the plants targeted for closure) – concerns its productivity performance. In a word, it’s been lousy – which supports last week’s post presenting evidence that U.S. metals-using industries like automotive have been using crutches like (foreign government-subsidized and therefore artificially) cheap raw materials, along with massive job and production offshoring, to juice their profits rather than efficiency-enhancing improvements resulting from creating new technologies, investing in new machinery, devising better management techniques, or some combination of these measures.

That post last week featured data showing that the American transportation equipment sector (which of course includes auto manufacturing) has performed relatively well during the current U.S. economic recovery and the previous expansion – though the rate of growth decelerated over that time span. These periods were examined because they were marked by a tremendous increase in American imports of steel over-produced and dumped into the United States by foreign producers, which pushed steel prices way down for reasons having nothing to do with free trade or free markets.

But more detailed statistics make clear that the automotive sector per se lately has fared worse when it comes to total factor productivity – the broadest of two measures of productivity tracked by the Bureau of Labor Statistics, and the productivity measure I examined last week.

During the 2001-2007 American expansion, total factor productivity in the motor vehicles sector actually grew faster than that for transportation equipment overall – 22.70 percent versus 13.38 percent. But from the 2009 start of the current recovery through 2016 (the latest available data), vehicle makers’ total factor productivity advanced by only 2.53 percent – that is, much more slowly than the 9.67 percent improvement registered by transportation equipment overall.

In fact, since achieving a huge (15 percent) snapback in total factor productivity during the recovery’s first year following a deep (12.29 percent) nosedive during the recession, vehicle-makers’ total factor productivity fell by 10.94 percent through 2016. As a result, its total factor productivity hasn’t improved on net since 1989.

Also interesting: Since the U.S. ratification of the North American Free Trade Agreement (NAFTA) in 1993 created a bright green light for automotive production and job offshoring, total factor productivity in American motor vehicle-making is up by only 9.20 percent. That’s a considerably slower rate of progress than for manufacturing overall (20.13 percent), even though automotive trade has figured so heavily in U.S. trade flows with fellow NAFTA signatories Mexico and Canada so far.

I don’t mean to minimize the challenges all automotive manufacturers face given the multi-dimensional crossroads that seems to be arriving rapidly for the sector. What should be glaringly obvious, though, is that they’re unlikely to be met adequately – including producing smaller vehicles profitably, especially if and when oil prices start rising again – with a productivity performance that barely qualifies as second-rate.