(What’s Left of) Our Economy: The Post’s (Unwitting) Case for Tariffs

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competition, foreign direct investment, free trade, Jobs, manufacturing, manufacturing trade deficit, Ronald Reagan, tariffs automotive, The Race to the Bottom, Trade, transplants, Trump, {What's Left of) Our Economy

On the surface, this was just another thoroughly predictable Washington Post editorial attack on President Trump’s trade policies and defense of the freest possible global commerce – a conclusion I think fair-minded people would support even if they oppose its proximate target, the possibility of new U.S. auto tariffs. But the distinctive nature of American and global automotive production and trade patterns on the one hand rendered one of these predictable trade arguments puzzling at best and downright bizarre at worst for anyone caring to think about it even momentarily: the claim that such tariffs would spur a “fall off” of the automotive quality enjoyed by American consumers because existing U.S.-based producers would face “less healthy competition.”

Let’s assume that the Post – and supporters of the longstanding trade policy status quo – are right in arguing that the least-fettered trade generally forces businesses to offer better and cheaper products in order to maintain and increase sales and profits. Does this maxim really apply to the automotive industry any more?

As widely noted, this industry is one of the world’s most globalized, and nowhere is this truer than in the United States. The Post recognized this reality as well – but in a way that casts major doubt on the relationship at least in this case between trade and the benefits of cross-border competition.

In the editorial’s words, “No doubt U.S. manufacturers, both U.S.-headquartered and Asian and German ‘transplants,’ and their workers would reap a windfall” from Trump-ian tariffs. By my recollection, this is the first time a commentary on trade policy has acknowledged that foreign-owned companies producing in the United States would benefit from American trade barriers as surely as their domestically owned counterparts.

More important, this observation leads logically to a game-changing conclusion: Trade barriers – in at least such instances – can generate a win-win outcome for Americans. The benefits of foreign competition (like better quality and lower prices) can be preserved for American consumers – since the foreign-owned firms producing domestically inevitably bring to their U.S. operations their distinctive management approaches and other strengths.

Yet because these operations have been transplanted to U.S. soil, the employment-related gains will flow mainly to American workers. The broader manufacturing-related gains (i.e., high production multipliers, strong productivity growth – at least for much of the nation’s recent history – and robust innovation activity), can mainly remain inside the U.S. economy.

Even more revealing: These foreign auto transplants initially set up shop in America partly because of trade curbs imposed by the Reagan administration. And American trade barriers in that era played a role in drawing foreign steel-makers to the United States as well. (The desire to hedge against exchange-rate risks also figured prominently in such investment decisions, along with the gains from producing abroad versus exporting predicted by the product cycle theory.)

Nor is there any reason to believe that tariffs and quotas won’t achieve similar successes today – unless you want to argue that America’s gargantuan market doesn’t give its leaders equally gargantuan leverage. In fact, as my book The Race to the Bottom reported in 2000, such restrictions have been so successful even for much smaller economies (along with China) that they’ve become standard operating procedure around the world. Here’s just one recent example of their effectiveness.

Since not all industries are the same, tariffs surely are no panacea for solving America’s intertwined problems in trade and manufacturing. (For those doubting their existence and relationship, consider that domestic manufacturing production is still down in real terms since the late-2007 outbreak of the last recession, and that this year’s U.S. manufacturing trade deficit is on course to top $1 trillion.) But the Post’s unwitting insight unmistakably reveals how and why trade curbs can help make major contributions to the American domestic economy. Time for the Trump administration to start thinking more carefully and strategically about how to accomplish these goals. And for free trade ideologues in the American chattering class to start opening their eyes.

Im-Politic: Meet the Real Trade and Jobs Know-Nothings

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2016 election, Bernie Sanders, Clyde V. Prestowitz, Donald Trump, Im-Politic, Jr., manufacturing, manufacturing jobs, Morris Chang, Ronald Reagan, Taiwan Semiconductor Manufacturing Company, The Race to the Bottom, Trade, transplants

Nothing during this wildly unconventional presidential campaign has anchored the economic conventional wisdom more strongly than the claim that only know-nothings like presidential candidates Donald Trump and Bernie Sanders could possibly think that better U.S. trade policies can bring back lots of high-paying manufacturing jobs from countries like China to the United States. And nothing during this same campaign has revealed more Establishment ignorance than this attack on these White House hopefuls.

An excellent recent op-ed in USA Today by former U.S. trade negotiator Clyde V. Prestowitz, Jr. explains why. As Prestowitz (with whom I worked in the early 1990s at the Economic Strategy Institute think tank he founded) writes, anyone thinking that free market forces have turned China, for example, into a major producer of advanced manufactured goods needs to get a clue. China’s natural manufacturing advantage lies in labor-intensive products like apparel and toys, because its workforce is so gargantuan and its technological development still has a long way to go.

But Beijing wasn’t content to keep making such low-value products an instant longer than necessary. So it’s used a raft of active policy carrots and sticks to lure even information technology manufacturing to its shores. My book on globalization, The Race to the Bottom, has exhaustively documented how these policies have long been standard operating procedure for governments all over the world – except America’s. And the supposedly all-powerful multinational companies they’ve mainly targeted? Instead of standing on their high horses, and refusing to jump, they’ve simply asked “How high?”

If you still doubt any of this, forget about what Prestowitz and I have reported. Listen to Morris Chang. He started up and still chairs the Taiwan Semiconductor Manufacturing Company (TSMC), which is the world’s largest contract manufacturer of computer chips, and in fact, pioneered the “foundry” model for the industry.

Chang’s company just announced that it’s building a $3 billion semiconductor fab in China, where it will produce advanced (if not leading-edge) semiconductors. How come? There’s no question that part of the reason is that so many of TSMC’s customers – in the information technology products industry – now manufacture so many of their goods in China. But as Chang also admitted, “We say that with some degree of assurance from the authorities, some degree of assurance that building a plant there will indeed enhance our access to the Chinese market. And reversely, not building a plant there will not enhance.”

That is, China’s policy is “Pay to play” – because it wants to develop its own semiconductor sector, regardless of what economic theory says it should be doing. And Chang doesn’t think he can afford to Just Say No.

Revealingly, no one is more aware than the Chinese that the United States is capable of playing this game effectively, too. As a Chinese company told Bloomberg last year, it chose Alabama as the site of a new factory both “to bring it closer to clients in the South and avoid anti-dumping tariffs on copper products.”

Also revealingly, American leaders haven’t always been brain-dead on this score. In 1981, for example, President Ronald Reagan successfully pressed Japan’s auto makers to curb their exports to the United States “voluntarily.” The following year, Honda began assembling cars in Ohio. By 1990, all the major Japanese auto makers had gone the transplant route.

Can using America’s market power bring back all production and jobs lost to trade? Of course not. Can it bring back or create lots? Of course it can, especially in high-value sectors where a technologically advanced country with well developed capital markets like the United States should be fully competitive. The actual trade know-nothings are those unfamiliar with the historic record and current global realities. Assuming of course that any of them really want to know.

(What’s Left of) Our Economy: Why the Auto Boom Has Been So Hollow

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auto boom, auto parts, automotive, bailouts, Buy American, Cash for Clunkers, Detroit automakers, George W. Bush, imports, manufacturing, manufacturing renaissance, next-generation vehicles, Obama, trade policy, transplants, wages, World Trade Organization, WTO, {What's Left of) Our Economy

I’m happy to recommend two cheers for the Wall Street Journal reporters who have just told us that the ballyhooed boom enjoyed by the American automobile industry since the U.S. economic recovery technically began in mid-2009 has been marked by vehicles increasingly stuffed with foreign parts (which has held down potential production increases) and largely, as a result, by falling wages.

These reporters would deserve three cheers, however, if they’d written on the inevitability of these woefully subpar results when it counted, and especially about what needlessly sabotaged the domestic industry’s prospects from the get-go. The best timing, of course, would have been at the height of the financial crisis, when the Bush and Obama administrations both blew the opportunity to re-invent the nation’s crippled domestically owned auto sector as an industry capable of contributing to a real renaissance in manufacturing and a much healthier, production-based recovery.  And the industry’s emerging underperformance is rooted in offbase U.S. trade policies.

As I wrote back then, and later told Congress, neither president promoted auto rescue strategies dedicated to maximizing automotive output and employment. Rather, they deferred to World Trade Organization rules that prohibit member governments from discriminating in favor of domestically owned companies and factories in their economic policy making (but that are overwhelmingly honored in the breach outside the United States).

The result:  Both Presidents Bush and Obama refused to condition their bailout of the Big Three Detroit automakers on requirements that vehicle production at home be prioritized, and that the use of U.S.-made parts be greatly increased. Just as perverse was the impact on initiatives aimed at spurring the production of “next generation vehicles” that would curb oil use. They were structured in ways that made import-heavy foreign auto transplant operations eligible for subsidies. The Obama administration, therefore, had few options other than focusing on improving Detroit’s “competitiveness” by cutting its wage and pension costs.

The counterproductive results were visible by late 2009. As I documented, for fear of WTO-authorized retaliation, the “Cash for Clunkers” law intended to aid the industry by stimulating auto buying provided taxpayer subsidies for the purchase of imported as well as domestic vehicles. As a result, more foreign auto production (of parts as well as vehicles) was fostered than American production.

Today’s Journal piece does usefully update the foregone gains and damage done by Washington’s timid and shortsighted trade policies. U.S. auto parts imports hit a new record last year. The share of domestic content in American-made vehicles has never been lower. (This statistic, moreover, bizarrely includes Canadian parts.) U.S. automotive employment remains nearly 32 percent below its recorded (1999) peak – slightly more than total manufacturing employment during this period. Real wages during the current economic recovery are way off throughout the sector, and entry-level pay at at least some parts companies down to Wal-Mart levels.

Imagine, however, the effect had Journal journalists – as well as so many others – been paying attention when these trends were unfolding, and focused on the (at least debatable) government decisions behind them, rather than drinking so much of the Kool-Aid of manufacturing and automotive renaissances.