(What’s Left of) Our Economy: Good News About Manufacturing Reshoring to the U.S.

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(What's Left of) Our Economy, automotive, Canada, China, domestic content, Foley & Lardner, manufacturing, Mexico, quotas, reshoring, rules of origin, tariffs, Trade, trade war, Trump, U.S.-Mexico-Canada Agreement, USMCA

President Trump’s critics have often complained that even if his trade war with and tariffs on China have prompted many U.S.-owned and other companies to move production out of the People’s Republic, relatively few are relocating back to the United States. (See, e.g., here.) So it was especially interesting to come across a survey of mainly America-headquartered firms indicating that the Trump policies actually deserve pretty high marks for benefiting domestic industry.

The study was conducted by the legal and business advisory firm Foley & Lardner, and involved 143 executives (presumably from 143 companies). Fully 78 percent were “primarily based in the U.S.” and most of the rest were from Mexico. And their businesses ranged throughout the manufacturing sector, with the two biggest industries represented being automotive and general manufacturing (22 percent each). These companies’ sizes and places in global supply chains varied significantly, too.

When it comes to China production and sourcing strategies, Foley found that 21 percent of these respondents “have already” moved “some” of their facilities out of the People’s Republic, 22 percent were “currently in the process of doing so,” and 16 percent are “considering” this option. Of the remaining 39 percent of respondents, 16 percent have rejected leaving China, and 23 percent say they haven’t considered such a move to date.

These numbers roughly correspond with the results of other, similar surveys and reports. (E.g., this one.) But the real eye opener came from answers to the question “To what other countries are you moving, or considering moving, production or sourcing of goods and/or services?” Of the companies that said they’re moving production or sourcing from China, 74 percent mentioned the United States. The next most popular option was Mexico (47 percent), followed by Canada (24 percent), and Vietnam (12 percent).

These percentages (and others) add up to more than 100 because, as the question implied, firms can be leaving China for more than one country, in order to hedge their bets against dangers like tariffs, pandemics, and the like. But they make clear that the United States has been prominently in the mix, and so has the Western Hemisphere – which helps U.S.-based manufacturing because goods made in Mexico and Canada tend to have relatively high levels of American-made parts and components and other industrial inputs.

To be sure, there’s some evidence that these levels have been falling in recent years. But there’s also reason to expect that the Trump administration’s U.S.-Mexico-Canada Agreement (USMCA – its rewrite of the North American Free Trade Agreement), will reverse these trends at least in part because its provisions require that goods receiving tariff-free treatment in the tri-national trade zone contain higher levels of North American content overall, and because of quotas on U.S. automotive imports from Mexico (which haven’t kicked in yet but which seem likely to in the not-too-distant future).

I’d be the last one to claim that the Foley report settles the argument over how effective the Trump trade policies have been in encouraging manufacturing reshoring. But when all the hard data showing U.S. domestic manufacturing’s resilience both during the current pandemic (in terms of both jobs and output), and during a disruptive event like a trade war, are considered, the Foley findings look anything but fanciful.

(What’s Left of) Our Economy: Productivity-Challenged U.S. Manufacturers Want Their Cheap Foreign Metals Crutch Back

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aluminum, Canada, China, consumer prices, inflation, manufacturing, metals tariffs, Mexico, overcapacity, producer prices, productivity, quotas, steel, tariffs, total factor productivity, Trade, Trump, {What's Left of) Our Economy

Anyone genuinely concerned with the long-term health of the American economy and its manufacturing sector in particular should be thankful for the letter sent Monday to the Trump administration by 33 business organizations asking for removal of the tariffs imposed earlier this year on steel and aluminum imports from Mexico and Canada.

For the letter – signed by groups from many sectors of the economy but principally by manufacturing organizations – unwittingly reveals the extent to which American industry has become addicted to supplies of metals whose prices have been artificially cheapened mainly by a global glut still primarily fed by subsidized over-supply from China. As a result, the letter also suggests a reason why American manufacturing productivity growth has been so lousy lately – in the process undermining the economy’s ability to generate lasting, as opposed to bubbly, prosperity.

To begin with, however, the signers’ leading claim is demonstrably, and whoppingly, false. They contend that the metals tariffs have caused significant harm to American manufacturers, consumers and workers. They have raised costs significantly for a wide array of industries….” Yet as I have repeatedly shown, (most recently here) since the levies began to be imposed, at the end of March, nothing in the official data on domestic manufacturing’s performance points to any harm whatever. In fact, in most respects, recent months have actually seen out-performance by metals-using industries – which logically should be where the greatest problems stemming from metals tariffs are concentrated.

Especially false is the insistence that because “Many manufacturing industries rely on imported inputs to produce goods competitively in the United States,” the tariffs “raise the costs of manufacturing in the U.S. and place our manufacturers at a competitive disadvantage with respect to finished products which are made outside of the U.S. and imported without being affected by the tariffs.  Further, consumers are starting to feel the pinch of higher prices across the board, as evidenced by recent increases in the CPI [Consumer Price Index].”

Indeed, this contention has been borne out neither by the consumer price numbers nor the producer price statistics.

But an examination of steel import figures and productivity performance suggests the real motive of the manufacturing signers in particular: They hope to resume relying on cheap foreign government-subsidized foreign metals for their growth and profits, rather than the kinds of productivity improvements that will do the most to strengthen both their bottom lines and the entire economy’s foundations over any significant time span.

The evidence comes from comparing total U.S. steel imports on the one hand, and total factor productivity (the broadest of the two main measures of efficiency tracked by the Labor Department) for the main metals-using industries on the other, during the previous and current American economic recoveries (the best way to generate apples-to-apples results).

That previous recovery officially lasted from late 2001 to late 2007, and through 2006, measured by quantity, steel imports increased by nearly 28 percent – largely fueled by a purchases from China that jumped more than 260 percent. (As the impact of the housing bubble’s bursting spread throughout the economy, steel imports from China and the rest of the world fell sharply before the recession’s official onset in the fourth quarter of 2007.)

And here are the total factor productivity increases for that 2001-2006 period for the American private sector for a whole, manufacturing overall, the metals industries themselves, and the key metals-using sectors:

private sector:                                      +9.19 percent

manufacturing:                                  +13.55 percent

durable goods manufacturing:          +19.44 percent

primary metals:                                   +5.72 percent

fabricated metals products:                 +6.35 percent

non-electrical machinery:                  +11.01 percent

transportation equipment:                 +13.38 percent

The figures for the current recovery look markedly different. Let’s examine the results from its 2009 start through 2016 (the year for the latest available detailed total factor productivity statistics). During that period, total national steel imports soared by just under 104 percent by quantity. Purchases from China sank like a stone (by more than 63 percent) between 2015 and 2016, because of China-specific anti-dumping tariffs. But clearly many other countries and their subsidized steel sectors picked up the slack, because total U.S. imports dropped off by only 17.31 percent. And continuing Chinese over-production kept exerting downward pressures on prices worldwide.

And how did total factor productivity fare during that big steel import run-up?

private sector:                                      +5.93 percent

manufacturing:                                     -4.48 percent

durable goods manufacturing:            +1.24 percent

primary metals:                                   +5.76 percent

fabricated metals products:                  -7.68 percent

non-electrical machinery:                     -7.08 percent

transportation equipment:                    +9.67 percent

That is, as artificially cheap foreign steel poured into the U.S economy, total factor productivity growth in most of the chief metals-using sectors shifted into reverse – and by startling extents. The only exceptions were transport equipment and durable goods as a whole, with the former clearly holding up the latter. And even in both these cases, total factor productivity growth slowed dramatically.

True, the letter’s signatories claim that they support continued tariffs on steel and aluminum imports from China – the main overcapacity and over-production culprit. They also say they back “negotiation of global arrangements to deal with overcapacity.”

But this position looks phony given their opposition to import quotas for steel from countries where tariffs have been lifted (South Korea, Brazil, and Argentina) because these measures allegedly have “placed severe supply constraints on U.S. manufacturers and created even more business uncertainly than tariffs regarding exports from these countries.” In other words, the signatories are opposed to the very policies that have helped ensure that all other metals-producing countries don’t simply keep transshipping China’s over-production into the U.S. market, or respond to China’s glutting their steel market by ramping up their own exports to the United States.

So the real message being sent by the manufacturers’ metals tariffs letter couldn’t be clearer: “We want to regain access to that artificially cheap foreign steel, regardless of its impact on the entire economy’s future.” Arguably, that’s an appropriate, or at least understandable, priority for companies viewing their prime obligation as maximizing shareholder value at any given moment. But just as understandably, it’s the type of priority that America’s political leaders should emphatically reject.

Following Up: The China Aid Bank Debate Gets Dumb and Dumberer

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AIIB, allies, Asian Infrastructure Investment Bank, Australia, China, containment, Financial Crisis, Following Up, Global Imbalances, IMF, Japan, pivot, quotas, TPP, Trade, Trans-Pacific Partnership, World Trade Organization

It’s been a while since any global development has generated so much hypocrisy, baloney, and hypocritical baloney as China’s new Asia infrastructure bank and America’s response. (OK – maybe it’s only been a couple of days.) Still, the hubbub about something whose name is dominated by a MEGO word if ever there was one (“infrastructure”) is worth examining again. For it once again reminds that U.S. leaders, as well as most of our leading commentators, really aren’t smarter than a fifth grader when it comes to foreign policy, international relations, and the Pacific Rim.

Last week, I focused on how the rush of American allies to join the Asian Infrastructure Investment Bank (AIIB) exposed the folly of President Obama’s dream of a Pacific Rim trade zone that would be governed by U.S.-style commercial rules. Since then, however, it’s become embarrassingly clear that the same ridicule is deserved by the president’s belief that his Trans-Pacific Partnership (TPP) trade deal will balance rising Chinese power in the region. For Japan is now apparently ready to join the long list of TPP countries (including Australia, one of the planned pact’s other major economies) that is signing up with the Chinese. Whether Mr. Obama really does believe in “leading from behind” or not, it’s getting painfully obvious that he has precious few followers.

In addition, some recent commentary shows that it’s imperative to dispel two other myths surrounding the AIIB and hanging over the future of the Asia Pacific region and the rest of the globe.

The first has to do with the nature of President Obama’s China strategy. Critics of his administration’s opposition to the AIIB’s creation charge him with pursuing a crude, outdated strategy of containing China’s rise the way many of his predecessors sought to contain the former Soviet Union. Nothing could be further from the truth. There’s no question that the president wants the United States to remain the Asia-Pacific region’s preeminent power, that he sees China as America’s main challenger, and that he’s even announced that America’s grand global strategy will “pivot” from its preoccupation with the Middle East to give economically dynamic Asia its proper due. There’s also no question that, even before the last year’s flareup of large-scale Middle East violence, it was apparent that the Obama pivot was nearly all talk and little military redeployment.

But Mr. Obama’s China/Asia strategy is not simply half-hearted. It is completely incoherent. For despite his stated China concerns, the president has steadfastly continued his predecessors’ policies of looking the other way while Beijing’s predatory trade policies led to huge trade surpluses with the United States (which have undoubtedly helped China finance its huge, ongoing military buildup), and while U.S. technology and manufacturing companies transferred much of their most advanced knowhow to China (which has undoubtedly increased the sophistication of China’s weapons and helped teach the Chinese how to hack effectively).

In other words, Mr. Obama has kept feeding the beast he has warned against. As a result, the only legitimate beef American allies have with the administration’s current opposition to the AIIB is that it has been so sudden, and so completely out of character.

The second myth entails the claim that the United States (and especially the hawks in its Congress) are reaping what they have sown when they decided to block a decision by other International Monetary Fund members to give China more voting power in the institution. What the critics forget is that the world already has experience bringing China into a front-line international organization before making sure that Bejiing would act as “a responsible stakeholder” of the international system (as a former senior Bush administration policymaker once put it). And it’s backfired disastrously.

Since joining the World Trade Organization, China has profited handsomely from the benefits of membership (which include substantial immunity from unilateral American counters to Chinese protectionism). But it shouldered few of the obligations. The immense, China-centric global trade and investment imbalances that built up subsequently were crucial in setting the stage for the financial crisis. Those who hope that dealing with Western powers in the AIIB will lead to more constructive Chinese behavior need to explain why China will not remain as parasitic as ever, and even backslide – as it has on trade and economic liberalization during its WTO years.

More broadly, the free-riding U.S. allies who are grabbing for Chinese money while still enjoying American military protection are forgetting a vitally important (for them) truth. The United States is geopolitically and economically self-sufficient enough now – and potentially much more so – to be able to get by quite nicely a world with a much more influential China. Few of them, particularly in China’s neighborhood, can say the same.