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

02 Monday Nov 2020

Posted by Alan Tonelson in (What's Left of) Our Economy

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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.

Making News: Last Night’s National Radio Interview on China, Manufacturing, & the Election Now On-Line

01 Thursday Oct 2020

Posted by Alan Tonelson in Making News

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China, election 2020, Gordon G. Chang, Joe Biden, Making News, manufacturing, reshoring, The John Batchelor Show, Trade, Trump

I’m pleased to announce that the podcast of my interview last night on John Batchelor’s nationally syndicated radio show is now on-line.  Click here to listen to a timely, wide-ranging discussion involving John, co-host Gordon G. Chang, and me covering the presidential election, China, trade policy, and bringing manufacturing back to America.

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

Making News: Back on National Radio Tonight, a New Podcast…& More!

30 Wednesday Sep 2020

Posted by Alan Tonelson in Making News

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Angela Merkel, Cato Journal, CCP Virus, China, collusion, coronavirus, COVID 19, election 2020, Germany, Gordon G. Chang, Joe Biden, journalism, Making News, manufacturing, Market Wrap with Moe Ansari, natural gas, Nord Stream 2, presidential debate, recession, recovery, reshoring, Russia, stimulus package, Ted Galen Carpenter, The John Batchelor Show, Trade, trade war, Trump, Trump-Russia, Wuhan virus

I’m pleased to announce that I’m scheduled to return to national radio tonight when I guest on The John Batchelor Show.  The subjects for John, co-host Gordon G. Chang, and me will be China, trade, manufacturing, and the election.

The pandemic is still forcing John and Gordon to pre-record segments, so I’m not yet sure about air-time.  But it seems that you can listen live to the show on-line at this all-purpose link starting at 9 PM EST.  And of course, if you can’t tune in, I’ll post a link to the podcast as soon as one’s available.

In addition, yesterday, I was interviewed on the popular Market Wrap with Moe Ansari radio show on the election (including the debate!), trade policy, the future of the entire U.S. economy, the fate of CCP Virus relief legislation, and a surprising recent example of collusion with Russia.  To listen to the podcast, click here and then on the show with my name on it.  My segment starts at about the 23:38 mark.

Finally, my friend Ted Galen Carpenter has just published in the Cato Journal a fascinating piece on the history of U.S. news coverage of U.S.-China relations – which certainly has seen its ups and downs in recent decades.  It was great, moreover, to see Ted cite two of my writings along the way.  Here’s the link.

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

Making News: National Interest Post Examines Biden’s Often Head-Scratching Manufacturing Plans

14 Monday Sep 2020

Posted by Alan Tonelson in Making News

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2020 election, allies, Barack Obama, China, Joe Biden, Making News, manufacturing, offshoring, reshoring, tariffs, taxes, Trade

I’m pleased to announce that my latest article for an outside publication is now on-line.  It’s an analysis of Democratic presidential nominee Joe Biden’s proposals to revive American domestic manufacturing, and it leads off this morning’s edition of The National Interest.  Here’s the link.

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

(What’s Left of) Our Economy: Trade Derangement Syndrome, Libertarian Style

03 Wednesday Oct 2018

Posted by Alan Tonelson in (What's Left of) Our Economy

≈ 4 Comments

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: U.S. Productivity Remains in the Doldrums

09 Friday Jun 2017

Posted by Alan Tonelson in (What's Left of) Our Economy

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China, Labor Department, labor productivity, living standards, manufacturing, multi-factor productivity, offshoring, productivity, reshoring, World Trade Organization, WTO, {What's Left of) Our Economy

The Labor Department reported earlier this week that America’s labor productivity flat-lined at an annual rate between the last quarter of last year and the first quarter of this year. And relatively speaking, that was good news. The initial study of this measure of economic efficiency – and key determinant of the nation’s living standards – estimated that business labor productivity in the non-farm business sector (the government’s main proxy for the entire economy) fell at an annualized 0.6 percent.

Labor productivity, you may recall, is the narrowest of two measures of productivity. It gauges how much in the way of stuff or services Americans produce per hour of work from each worker. So the resulting picture isn’t as complete as that provided by multi-factor productivity – which as the name suggests looks at production per man or woman hour generated by many different inputs. But the labor numbers come out on a much timelier basis (each quarter), and for all the unusual amount of uncertainty that economists admit when they analyze productivity, they’re viewed as being reasonably reliable.

One small consolation, especially if you value manufacturing highly (as you should): Industry’s labor productivity not only grew quarter-to-quarter during the first three months of 2017 (by 0.50 percent annualized). It grew faster than the original estimate of 0.40 percent.

Manufacturing’s role as the economy’s productivity leader is also crystal clear upon reviewing the longer-term trends. During the 1990s expansion (as known by RealityChek regulars, comparing similar phases of the business cycle produces the most informative data), non-farm business labor productivity increased by 23.25 percent, while manufacturing labor productivity improved by 46.18 percent.

That recovery was America’s longest on record – just under ten years. The next expansion, during the bubble decade that preceded the financial crisis, lasted only six years. Non-farm business labor productivity rose by about the same annual pace as during the 1990s – 16.03 percent. But manufacturing labor productivity grew even faster year-by-year, advancing by 41.22 percent during the entire period.

The story is as different during this recovery as it is depressing. Although it’s so far been nearly as long as the 1990s recovery (having started nine years ago), the improvement in non-farm business labor productivity has been just 8.05 percent overall. For manufacturing, it’s been much higher – 21.55 percent – but relatively speaking, it’s a big fall-off.

Incidentally, undoubtedly one big reason for manufacturing’s excellent productivity performance during that bubble decade has to do with production offshoring. As I’ve written repeatedly, the way labor productivity is calculated results in productivity gains being recorded when businesses send jobs overseas, as well as when they use other techniques for saving labor or using their employees more effectively. And because the United States helped China enter the World Trade Organization at the start of that decade, and thus assured multinational companies that they’d remain overwhelmingly free to supply the American market from Chinese factories, that bubble decade was a major manufacturing offshoring decade.

The fall in productivity growth could indicate that, as widely claimed, manufacturing offshoring has dropped off significantly. But the evidence is mixed at best. What’s much more apparent is that, if Americans want their country’s productivity performance to rebound, they’ll press their leaders to make robust growth in domestic manufacturing a much higher priority.

Following Up: More on Why Tariffs Can Bring Back Much U.S. Manufacturing

03 Tuesday Jan 2017

Posted by Alan Tonelson in Following Up

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Andrew Grove, China, Defense Science Board, exports, Following Up, Foxconn, globalization, innovation, Intel, manufacturing, offshoring, reshoring, subsidies, tariffs, Trade

What a shame that David Barboza’s New York Times article on all the help from government in China that powerfully shaped Apple’s investment decisions was published during the holiday week – when so many Americans are paying so little attention to the news . A Pulitzer-worthy piece of reporting, it also adds to the abundant evidence debunking two critical claims often made about the globalization of manufacturing.

First, the article makes clear how much offshoring of American industry has taken place due to foreign government decisions that clash violently with the idea of “free trade.” And second, it exposes further weaknesses in a related, though more recent, claim that most offshoring during the 21st century has stemmed not from foreign tariffs and similar interventionist economic policies, but from technological innovations that enable effective management over far-flung international manufacturing operations. This second claim is especially important, since it’s also been used to demonstrate that American tariffs will be unable to reverse this offshoring significantly.

Apple’s chief manufacturing partner in China, Foxconn, claims that the government supports it receives in the PRC are “no different than similar tax breaks all companies get in locations around the world for major investments.” And Barboza mistakenly seems to confirm this argument, characterizing China’s various market-distorting practices as “not unlike” those “in other countries, “including the United States, where states and cities vie for companies” – except that they are much greater in scale and much more secretive.

But the author himself provides key examples to the contrary. For instance, the Chinese province in which Apple’s manufacturing is concentrated is actively encouraging Foxconn to export. And when the company meets these targets, it gets hefty bonuses. Exports were also fostered via rebates for the value-added tax Foxconn would otherwise pay for at least the first five years of its operation.

Nor was China’s central government simply a bystander. Of course, the value of its currency was manipulated – which artificially lowered the price of goods China exported (including those from factories affiliated with foreign companies like Apple) and raised the price of imports for Chinese individual and certain business consumers. But there was also this scheme described by Barboza:

“Since China began opening its economy to the outside world in the 1980s, the government’s policies have encouraged manufacturing and exports with the creation of special economic zones. But those same policies have discouraged domestic consumption of overseas brands.

“Most products made in China by big multinationals had to be physically shipped out of the country and then brought back so that they could be taxed as imports — hence, the U-turn employed by many companies.”

Revealingly, these arrangements stayed in place well into the 21st century, and similar export-focused zones can still be found all over China.

Barboza’s reporting also bears out arguments I made in a post last week on this subject – that technological change has been a necessary, but not sufficient, condition for the export of advanced manufacturing capacity, and that much offshoring was encouraged by the guarantees of wide-open access to the U.S. market provided by trade policy decisions like backing China’s entry into the World Trade Organization.

As the author notes, “When Apple first moved into China, the country was largely a low-cost production site.” That was in the late-1990s. He also quotes a former long-time executive for Wal-Mart and other multinationals as stating that most of these firms’ China investments represented “supply chains good at making things in the East and selling them in the West.”

China’s domestic market has of course developed impressively since then. But as I observed last week, the continuing importance of exports to these firms’ business models has been spotlighted by their loud protests of Donald Trump’s plans to erect trade barriers against production they aim at American customers.

But it’s also crucial to point out that this initial offshoring of production set in motion a dynamic with huge future implications for America’s economy and for today’s claims about “knowledge-based” offshoring of scientific and technical knowhow – and jobs – that supposedly are immune to trade policy overhaul. Simply put, the offshoring of production made the export of manufacturing’s more knowledge-based activity inevitable in case after case.

The two main reasons: First, super low-cost developing countries are full of smart, people that are highly educable, and trainable by multinational corporations; and second, manufacturing production and innovation rarely exist in isolation. Their relationship is typically interactive, and fueled by continuing and close contact between the researchers and engineers and product designers etc who come up with new products and processes, and the production supervisors and other workers who need to translate their ideas into real world products.

And don’t take my word for it. Listen instead to the late Andrew Grove, founder of Intel. Or Hank Nothhaft, retired Chairman and CEO of Tessera Technologies. Or former Allegheny Technologies executive Jack Schilling. Or the Defense Science Board (both quoted in this 2010 study).

In other words, Apple has found success in locating its manufacturing “brain work” thousands of miles from its production work.  But that formula appears to be the exception, not the rule, in manufacturing, including in advanced manufacturing.  And interestingly, this tech giant has recently announced it’s building its first two research and development centers in China.  

So the United States has a fundamental choice ahead of it.  It can keep listening to multinational companies and their hired guns, pretend that the keys to long-term prosperity move around the world purely or even largely due to market forces, and run ever greater risks of sliding into second-class status.  Or it can finally recognize Washington’s immense potential power over globalization, and use it to make sure this process works for its own citizens and domestic producers as well.    

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

27 Tuesday Dec 2016

Posted by Alan Tonelson in (What's Left of) Our Economy

≈ 5 Comments

Tags

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

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

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

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

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

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

Classic misthinking of globalisation by @AlanTonelson

Recent globalisation driven by knowledge offshoring not freer trade

Tariffs don’t address the driving force

Could foster reshoring of some production but also more offshoring

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

Jobs for U.S.-based robots

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

Knowledge offshore drove 21st century globalisation

Tariffs don’t address globalisation’s driving force

US tariffs foster some reshoring and some more offshoring

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

Protect individual workers, not individual jobs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

24 Tuesday May 2016

Posted by Alan Tonelson in Im-Politic

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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: Manufacturing Insourcing is More Grimly Comic in Fact than in Fiction

30 Wednesday Dec 2015

Posted by Alan Tonelson in (What's Left of) Our Economy

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"The Campaign", "Trading Places", Boston Consulting Group, China, competitiveness, Dan Aykroyd, insourcing, manufacturing, renaissance, reshoring, wages, Will Ferrell, Zach Galifianakis, {What's Left of) Our Economy

Here’s a TV-watching tip for the upcoming holiday – and No, it’s not the college football championship games. Catch or stream the 2012 Will Ferrell comedy “The Campaign.” And it’s not mainly because I’m a big Will Ferrell fan. Rather, the film deals with the idea of manufacturing insourcing in an especially funny way. In fact, make that “two funny ways” – only one of which the scriptwriters seems aware of.

“The Campaign” is about a Congressional race in a small-town North Carolina district between the worthless – though sort of lovable – gadabout of an incumbent (Ferrell). and a humble, endearingly wholesome political novice unwittingly fronting for ruthless tycoons. The puppet is played perfectly, touchingly old-fashioned sense of honor and all, by (get this) Zach Galifianakis. Special casting bonus for fans of the near-classic “Trading Places”:  Dan Aykroyd, whose arrogant young financier character in that 1983 feature was chewed up and spit out on a bet by his bosses, the nefarious Duke brothers, plays one of the equally villainous “Motch Brothers” in “The Campaign.”

I’m betraying no momentous secret by revealing that the climax involves the challenger indignantly refusing to go along with the Motches’ plan for the district. But the scheme itself was striking (at least for a policy wonk) and creative: The moguls need a pliable Congressman to help them buy up huge tracts of land, build factories on them, and then sell them for a ginormous profit to a Chinese manufacturer. He, in turn, would staff them not with the locals, but with 50-cent-an-hour workers shipped in from the PRC. As the Motches proudly announce, “We call the concept ‘insourcing.’”

The writers obviously viewed the term as a simple pun that would elicit laughs from an audience by-then largely familiar with the term “outsourcing.” They also seem to have known that insourcing (along with “reshoring”) was a term that had begun to be used by analysts who believed that the United States was on the verge of an historic manufacturing renaissance. Production and jobs would increasingly be brought home, they confidently predicted, because wages in outsourcing destinations (like China) were rising, along with the freight costs of shipping the output to American customers. In fact, just like the insourcing cheerleaders, the Motches explain that their plan would combine labor savings with the transportation savings from producing close to their market.

But here’s what the “Campaign” writers couldn’t have known: As dependent as insourcing has been on cheap labor, lower costs on this front haven’t required using workers from China. Thanks to the always available option of re-outsourcing (which has continued to undermine workers’ bargaining power), Americans – especially in the non-union South – have accepted sufficiently abysmal pay to supercharge profitability.

In fairness, the pioneers of real-world insourcing claims – the Boston Consulting Group – made clear from the start how the South’s low wages were keys to the U.S. manufacturing renaissance. But although the journalists and politicians who believed such predictions seemed neither surprised nor dismayed about this low-road route to restoring competitiveness, “The Campaign’s” story line apparently assumed that American wages could never sink low enough to attract much investment. I wonder if the writers realize that, once again, truth has been stranger than fiction. And in a final irony, not even rock-bottom wages have been enough to cure what’s ailed U.S. manufacturing.

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