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

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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.

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

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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

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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 21^st 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 21^st 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

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

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

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

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

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

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

Classic misthinking of globalisation by @AlanTonelson

Recent globalisation driven by knowledge offshoring not freer trade

Tariffs don’t address the driving force

Could foster reshoring of some production but also more offshoring

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

Jobs for U.S.-based robots

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

Knowledge offshore drove 21^st century globalisation

Tariffs don’t address globalisation’s driving force

US tariffs foster some reshoring and some more offshoring

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

Protect individual workers, not individual jobs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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

Tags

"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.

(What’s Left of) Our Economy: RIP, Manufacturing Renaissance – & Reshoring – Claims

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Asia, China, competitiveness, Deloitte, investment, local content, Manufacturers Alliance for Productivity and Innovation, manufacturing, manufacturing renaissance, MAPI, Mexico, multinational corporations, North America, Obama, offshoring, reshoring, TPP, Trade, Trans-Pacific Parternship, {What's Left of) Our Economy

Because manufacturers (and others) don’t always do what they say, surveys of their intentions on hiring and investment and the like should always be taken with a big boulder of salt – the more so since the questions are often asked and the answers given in a political and policy context. So when one of these surveys clashes with manufacturing reshoring and renaissance claims that America’s most powerful manufacturers – the offshoring multinationals – have been energetically pushing, they deserve special attention. That’s why it’s worth looking closely at a new sounding on where new factories are likely to be built from a major consulting firm and a leading manufacturers association.

As the nation has heard endlessly from the biggest names in American industry and their witting and unwitting political dupes, U.S. domestic manufacturing is either enjoying an historic comeback, or is on the verge of one. These boasts and predictions have become a little less common lately, as manufacturing data keeps disappointing, but they haven’t been recanted or simply dropped because they serve two powerful purposes.

First, at a time of continued U.S. economic weakness, contentions that American-owned manufacturing firms are boosting their U.S. production and employment counter fears and accusations that they have abandoned their home country wholesale. Second, a crucial feature of these renaissance claims – that China’s competitiveness has faltered so dramatically that American industry is actually abandoning the PRC and returning stateside – helps the multinationals defend the offshoring-friendly trade deals they worked so hard to pass by indicating that they did little, if any, long-term harm to the U.S. economy despite critics’ accusations.

It’s hard, however, to read the Footprint 2020 study just released by Deloitte and the Manufacturers Alliance for Productivity and Innovation (MAPI), and take any of the above seriously for one minute longer.

Take the reshoring narrative so central to the renaissance story. According to the Deloitte-MAPI report, “reshoring is a real phenomenon.” But get a load of this kicker: “[A] common misconception is it represents a return of previously offshored operations to US soil. In practicality, reshoring may include returning operations to Mexico. This offers greater access to the US market, but allows companies to maintain advantageous operating cost structures. Sixty-six percent of survey respondents offshored their operations in the past 20 years, and a third are now considering bringing them back to North America. These moves focus on primary production and assembly operations currently located in China, India, and/or Brazil. Mexico is the first choice destination to re-shore operations, followed by the US.”

To be fair, there is a respectable argument made that even reshoring (and other) investment in Mexico helps domestic U.S. industry, too. The supposed reason: Manufactured goods made in Mexican factories, especially if they’re owned or related to American firms, use much more in the way of Made in the USA parts and components than similar products made in Asia and elsewhere.

But this argument overlooks the reality that the U.S. content of America’s imports from Mexico has been falling, and that this trend will accelerate if Congress approves the Pacific Rim trade deal just concluded by the Obama administration. That Trans-Pacific Partnership (TPP) will make it easier for countries like Japan to send more goods, like automobiles from Mexican assembly plants into the United States that contain more parts and components from outside Mexico and “North America.”

The idea that investing in Chinese manufacturing doesn’t make much sense nowadays also takes a body blow from Footprint 2020. The study found that 98 percent of the companies surveyed plan to expand operations in countries where they’re already in business, either through adding on to existing facilities, or by opening new factories or labs or warehousing and distribution centers. The country that will get the biggest share of this new capital? China. (The United States is second.) Moreover, between the 2002-2007 period (before the financial crisis struck) and the 2010-2015 period (when the American manufacturing renaissance was supposed to have taken off), “North America’s” appeal to American-owned companies increased only slightly, while “Asia’s” (meaning largely China) nearly doubled.

Of course, for literally years, manufacturing renaissance claims have been steadily punctured by the most authoritative data available on production, trade balances, productivity, and wages. With hitherto cheerleading multinational manufacturers themselves now throwing cold water on this idea, too, it’s legitimate to wonder whether domestic industry is closer to suspended animation than to rebirth.

(What’s Left of) Our Economy: Globalization Unraveling? Maybe. U.S. Manufacturing Reshoring? Barely

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fast track, globalization, imports, manufacturing, offshoring, recovery, reshoring, TPA, TPP, Trade, Trade Promotion Authority, Trans-Pacific Partnership, {What's Left of) Our Economy

Here I was all set to start rethinking my skepticism about American manufacturing reshoring after reading Jeffrey Rothfelder’s thoughtful, detailed Washington Post piece claiming that globalization is “unraveling.” And then I remembered all the facts that the author has overlooked.

Reshoring isn’t Rothfelder’s main point. But it’s one important trend he cites on behalf of his contention that “hardly any of the promised returns from globalization have materialized, and what was until recently a taboo topic inside multinationals — to wit, should we reconsider, even rein in, our global growth strategy? — has become an urgent, if still hushed, discussion.”

According to the author, “Given the failures of globalization, virtually every major company is struggling to find the most productive international business model. Several approaches have emerged. Reshoring — or relocating manufacturing operations back to Western factories from emerging nations — is one option.”

I can’t comment knowledgeably about reshoring by multinationals from other countries. But I do know that anyone believing that reshoring by American multinationals is much more than “a drop in the bucket” needs to explain why:

>The American business establishment, which, as Rothfelder writes, has been enamored with offshoring for at least two decades, is lobbying so hard for passage of President Obama’s proposed Pacific Rim trade deal. Just as important, why are these companies lobbying so hard to keep out of the agreement and the legislation that would fast track it through Congress requirements to punish currency manipulation? The reason: This practice artificially under-prices – and advantages – foreign products made by offshored U.S.-owned or affiliated factories, to the detriment of domestic American products, as surely as it under-prices foreign products made by foreign-owned factories;

>U.S. manufacturing’s output during the current recovery has exceeded its rebound during past recoveries only if you ignore the growing likelihood that mis-measurement of price changes has produced a significant over-count of real manufacturing production for nearly two decades;

>Americans should take any satisfaction from a manufacturing rebound during this recovery that’s been driven significantly by falling real wages. Since the recession technically ended in mid-2009, these wages after inflation are down 0.75 percent – even though such pay throughout the private sector is up 2.23 percent during this period.  

Another problem with the evidence presented on behalf of robust reshoring:  Manufacturing imports during this recovery are not lagging their pace during previous expansions. For example, it’s true that these imports have risen more slowly during the current recovery than during the previous decade’s. In full-year terms (which aren’t 100 percent accurate because economic cycles don’t start and finish at the beginning or end of calendar years – but which are close enough), such imports were up 54.92 percent during this expansion between 2009 and 2014. That is indeed slower than their 62.90 percent growth during the 2001-2007 six-year economic recovery. (All figures in this and the following paragraph are in pre-inflation terms.)

But the reason is that growth (and therefore demand for all manufactures) during this recovery has been historically weak: 20.80 percent versus 36.30 percent during the previous decade’s recovery. Obviously, the year’s worth of difference between the two isn’t even close to the explanation. Indeed, if anything, adjusted for overall growth, manufactures imports are rising ever faster. 

The Rothfelder article makes some great points about how expanded world trade and investment haven’t even remotely produced miraculous returns for the offshoring businesses that predicted them, much less for the U.S. economy as a whole. His discussions of underwhelming consumer market growth in China and elsewhere in the developing world, and of the continuing challenges from foreign state-owned or controlled enterprises, deserve particular attention – especially by American legislators considering those new Obama trade deals and a blank negotiating check for the president.

But the kind of high road manufacturing comeback he describes, and that America urgently needs, couldn’t possibly take place even if the globalization unraveling he portrays proceeds exponentially further. Instead, policies of strategic reversal will be required – starting with Congress’ rejection of new trade pacts modeled on past exemplars of globalization hype.

(What’s Left of) Our Economy: Could We Get Real About Manufacturing Reshoring?

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Jobs, manufacturing, manufacturing renaissance, offshoring, reshoring, Trade Adjustment Assistance, {What's Left of) Our Economy

Like a bad penny, manufacturing renaissance and reshoring items keep turning up in the mainstream and even trade media. Just take a look here and here. And as long as they do, I’ll keep debunking them with the facts.

This time, I’ll take a closer look at reshoring claims, and illustrate how they completely ignore the enormous overall shrinkage of the American manufacturing workforce over the last decade. A staple of reshoring optimism has been a set of allegations claiming that whereas domestic industry was sending a net of about 150,000 jobs overseas in 2003, now offshoring and reshoring are just about cancelling each other out.

Before getting to the actual data, however, some commonsense but widely neglected points need to be made about what’s known for sure and not known about manufacturing job flows. In the first place, there are no comprehensive figures kept on offshoring. The U.S. government is (understandably) not anxious to publicize these effects of indiscriminate trade liberalization, and companies have learned that this information can trigger public relations disasters. Just as understandably, news of reshoring operations are loudly trumpeted, and therefore easy to find.

Second, the reshoring cheerleaders seem to think that only American jobs sent overseas and then brought back should be counted in analyses of manufacturing competitiveness. But as they should know, foreign-based companies have been investing in new manufacturing facilities in the United States for many decades. So-called “transplant” auto factories are major cases in point. In other words, there’s long been significant manufacturing job inflow from abroad. Why don’t the reshorers count it?

But although no comprehensive offshoring numbers are available, the U.S. Labor Department does track the number of workers certified for job loss each year under its Trade Adjustment Assistance (TAA) program. The benefits are granted to those who have been displaced for a variety of trade-related reasons, including import competition and production moves overseas. These data are far from perfect, since awareness of the program is anything but universal, and since companies have no reason to broadcast its existence. But even these limited figures undercut the notion that reshoring has caught up to offshoring.

The reshoring cheerleaders are correct in observing that the TAA certifications are down since early in the previous decade. In 2003, 197,748 total workers became eligible; most were in manufacturing. In 2013 (the latest data available), this number was down to 104,158. As is typical, more than three-quarters (80,581) were from goods sectors, and most were from manufacturing.

But surely at least some of this decline stems from the sad reality that there are now so many fewer manufacturing jobs left to send overseas. Between 2003 and 2013 (on a December basis), total U.S. manufacturing employment sank from 14.30 million to 12.05 million. So rather than simply trot out the number of annual TAA certifications, it’s more valid to present them as a share of total manufacturing jobs.

This methodology does show that fewer TAA certifications proportionately were awarded in 2013 than in 2003 (representing 0.86 percent of the manufacturing workforce in the former versus 0.86 percent in the latter). But the 2013 figure was higher than the 2012 figure (0.69 percent). Moreover, during the previous decade, the shares were lower in several years (0.83 percent in 2005, 0.85 percent in 2003). And if you go back a bit further, you see a 0.89 percent figure for 2001 and a 0.57 percent figure for 2000 – when no one believes domestic manufacturing was especially competitive. And once again, these TAA figures are anything but exhaustive.

Reshoring champions can argue that these data fall short of making valid comparisons, because not all certifications were granted for production shifts, or even for manufacturing. They’re right – but I haven’t been able to find detailed enough data for individual workers to satisfy these concerns going back beyond 2009. But I have found the next best indicator – figures that do the trick for numbers of certifications as such awarded each year (since workers do not petition for TAA individually)

They come from the Washington, D.C. law firm Stewart and Stewart, and they show that the share of certifications granted each year for production offshoring has jumped from 31.5 percent in 2003 to 84.2 percent in 2013. And since the first major prediction of a reshoring-driven American manufacturing renaissance appeared in 2011, this share is up from 53.1 percent to 84.2 percent.

This kind of realism should not be misinterpreted as pessimism about America’s manufacturing potential, or the possibility of a renaissance. If I wasn’t fundamentally optimistic, I wouldn’t bother studying the subject. But I am downright dismissive – as you should be – of efforts to build a manufacturing renaissance on sand.

(What’s Left of) Our Economy: Manufacturing Renaissance Claims Debunked — Again

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A.T. Kearney, competitiveness, manufacturing, manufacturing renaissance, reshoring, {What's Left of) Our Economy

Manufacturing renaissance types are starting to look like the black knight character in Monty Python’s “Holy Grail” movie. You know – the warrior who remains confident of victory even as his limbs keep getting hacked off. This month, these cheerleaders have taken yet another body blow, but their delusions seem similarly intact.

The latest manufacturing reality check comes from the well known consulting firm A.T. Kearney, and makes a strong case that cheerleaders’ heralded claims of widespread “reshoring” of manufacturing production and jobs back to the United States are not what they’re “cracked up to be.” My only critique of the new Kearney report: Despite its skepticism, it still paints a more flattering picture of the renaissance and reshoring than they deserve.

The report examines both the number of reshoring cases that have been announced in recent years and their apparent effect on manufacturing and the broader economy. Its conclusions: First, although much of the announced reshoring hasn’t yet been fully implemented, it’s too soon for definitive answers. Yet the authors also write that “the fact that the number of reported reshoring cases appears to be no longer growing as fast as it did over the past three years is a first interesting observation that appears to contradict the hype.”

Second, the Kearney team compared the growth of U.S. manufacturing output with the growth of manufactures imports from countries that have been prime offshoring destinations. Both have slowed significantly during the current recovery – which is also the timespan during which the manufacturing renaissance claims took off. The explanation no doubt is that American industry’s snapback from a deep downturn has (understandably) lost momentum as the recession’s effects have worn off.

What’s less understandable from the renaissance standpoint is why, in recent years, the growth of domestic manufacturing output has been faster than the growth of imports from offshoring countries only once – and why after this encouraging development in 2011, the old pattern of import growth outpacing domestic growth promptly returned. According to the Kearney authors, the clear implication is that offshoring to foreign manufacturing markets is once again outpacing reshoring. 

The relevant Kearney graph (Figure 4) does show that such imports outgrew domestic output much faster during the previous decade than they have since, and that definitely looks like progress. But here’s where two serious limitations of the report come into play.

First, Kearney doesn’t include Mexico as a major offshoring destination. Its explanation is weird – to put it kindly: “[T]he reshoring debate is about the return of manufacturing from mostly Asian, so-called low cost countries.” Yet offshore is offshore, and in terms of labor costs, Mexico is becoming as cheap as China – and even cheaper, according to some research. Moreover, a point often made to justify viewing offshoring to Mexico as somehow different has been getting weaker, as the U.S. content of its imports from Mexico has been falling.

Second, Kearney’s comparison of gross U.S. manufacturing output with import flows may not be the best. For several years, I’ve tried to measure American industrial competitiveness by what I regard as a superior gauge – the import share of the nation’s manufacturing consumption. This methodology provides exact apples-to-apples data – showing how foreign-based and U.S.-based manufactured goods are comparing in the same market. In addition, gross output includes U.S. exports – which are certainly worth counting, but which can’t provide genuine competitiveness information unless it’s also shown whether they have been gaining or losing share in foreign markets.

I’m still waiting for the Census Bureau to publish the detailed output data that will enable me to take the U.S. import penetration story past 2011.  But given the new manufacturing trade deficits amassed by the American economy in recent years, it looks as if imports’ inroads into the American market have continued their rapid expansion.

The reactions of reshoring advocates? One of the most prominent insists that the Kearney report shows that “reshoring momentum is building,” though he also now states that “Reshoring will not come back in a year. It will take decades to bring it back.”

As Python’s King Arthur heard from his arm-less adversary, “The Black Knight always triumphs!”