State of the Union: Manufacturing a Better Future

In his State of the Union Speech last night, President Obama outlined a blueprint for rebuilding the economy the right way, by rebuilding American manufacturing, expanding clean energy investments and by fixing our broken infrastructure. Kudos to him for continuing to highlight this important issue, but he failed to mention the main cause of our manufacturing woes in the first place: currency manipulation.

First, some background. China currently engages in massive intervention in currency markets, buying U.S. dollar-denominated assets to boost the value of the dollar and keep their own currency artificially cheap. This acts as a subsidy to U.S. imports from China, and it raises the cost of U.S. exports — both to China and to every country where U.S. exports compete with goods coming from there. Of the nearly 6 million manufacturing jobs we lost between Jan. 2000 and Dec. 2009, 2.8 million jobs were displaced by growing trade deficits with China between 2001 and 2010.

Manufacturing employment is growing again, with 322,000 jobs added in the past two years. But millions of jobs have been left on the table. By ending currency manipulation with China and other Asian countries, we could create up to 2.25 million jobs over the next 18 to 24 months, boost GDP by up to $285.7 billion, and reduce the federal budget deficit by up to $857 billion over the next 10 years.

The president proposed some well-intended changes in tax policy designed to reduce incentives for manufacturing firms to outsource production abroad and to encourage them to bring jobs home. But tax policies only work around the margins of manufacturing employment. We need to go after root causes of manufacturing job loss such as currency manipulation by China and other Asian nations.

The Senate passed a bill last fall that would allow the Commerce department to penalize imports from China that have benefited from illegal currency manipulation. But House leaders will not allow the measure to come to a vote.  The Obama administration has failed to do its part as well. Six times they have refused to identify China as a currency manipulator, denying the elephant in the room.

There are certainly other unfair trade practices beyond currency manipulation worth fighting.  China provides illegal subsidies to domestic and foreign firms in a wide range of industries including steel, glass and paper. It also subsidizes clean and green technology industries, and maintains extensive barriers to imports of manufactured goods from the United States and other countries. The president announced important steps to create a new trade enforcement unit to bring together resources from across the government to attack unfair trade practices. This will allow the government to initiate new unfair trade cases against China and other unfair traders.

But with a gridlocked Congress held hostage by the Republican controlled House that has refused to compromise with the Senate or the administration, President Obama’s hands are tied on new initiatives that require congressional approval. Certainly, there is more that he could do to fight unfair trade, for example by confronting China over currency manipulation. But the administrative measures outlined in his SOTU address will begin to make a difference.

  • hansenabcd


    I agree. Obama’s speech, which laid out many excellent initiatives, was great — despite the fact that he failed to mention the all-important issue of currency
    manipulation. But, I would suggest that, like Obama, you also failed to mention an all-important point – that, under its so-called “Strong Dollar” policy, the U.S. has de facto manipulated its currency —  probably by as much as the Chinese have manipulated theirs. 

    Smitten by the sad delusion that “the market knows best”, our leaders — led by successive Secretaries of the Treasury – have allowed floods of often-speculative foreign capital to pour into our country, driving the value of the dollar to levels completely inconsistent with economic fundamentals, external trade balances, economic growth (particularly in the manufacturing sector), decent rates of employment, and sustainable foreign debt.

    This flood of foreign capital grew steadily during the speculative investment
    bubbles in the tech and housing sectors during the 1990s and early 2000s. As
    result of this uncontrolled flood of foreign exchange, the value of the dollar rose by over 50% between 1991, the last year that our external trade was balanced, and 2002. Talk about currency manipulation!

    True, the “manipulation” could be blamed on the foreign investors, but they were only doing what comes naturally. Instead, the blame should be laid fully at the feet of our leaders who failed to take action when action was  possible and clearly needed. 

    Despite the dollar’s substantial movement since 2002 towards a value that makes American businesses and workers more competitive internationally, the U.S. dollar, according to the latest data from the Peterson Institute for International Economics, is still overvalued by almost as much as the yuan is undervalued.

    In short, because of our own inaction, we are as guilty as the Chinese when it
    comes to maintaining exchange rates that are inconsistent with balanced trade.

    Furthermore, we cannot control China’s foreign exchange policies, but we clearly can and should control our own. Sure, let’s continue to encourage China to quit manipulating its currency. But let’s start taking action now, here at home, to correct the equally serious distortion of the U.S. currency’s value.

    How can this be done?  Many policy tools are available that would help make the U.S. dollar more competitive internationally. But perhaps the most important way to start would be to impose a “Capital Inflows Moderation Charge” — a very small transaction charge on all foreign capital inflows whenever such inflows are driving the dollar’s value above levels consistent with a sustainable current account deficit.

    Your thoughts are welcomed.

    John Hansen, PhD
    World Bank (retd.)

  • Dluria

    yes, clearly a weaker dollar would help. But there’s a lot wrong with the “animal spirits” of US-based mfrs, some due to impatient US capital markets, but some due to the fact that, by ceding consumer electronics in the 1970s, these US firms are now 2 generations of incompetent. Compare these 2 same-sales, same-employment companies: Samsung and Ford Motor. In 2011, Ford invested $6 billion and made profits of $8.8 billion. Samsung made $16 billion in profit, but invested $41 billion. Samsung spent $8 billion on R&D, Ford less than $1 billion. A weaker dollar might keep more Ford jobs in the US and induce Samsung (which is investing $2 billion to build Apple iOS chips in Texas) to move more work here, but In the end Samsung wins because it’s trying to win rather than just to make money. The coming challenge is to figure out how to do what the Chinese do — induce more FDI and make the investor teach about the technology. Exchange rates can’t fix stupid, especially when stupid is cash-rich. The final proof is in what rich US-based companies do rather than invest: they buy back their own shares.

  • Janet Spitz

    Rob, you are off base.  That’s like blaming domestic violence on baseball bat manufacturers:  it omits the agents.  Business School have been instructing MBA and undergrad students for 30 years in 

    a) using the K/L ratio to cut jobs and labor hours overall, by measuring “productivity” not as output per input dollar, but as output per labor dollar, a measure which only increases performance if jobs are cut overall, and

    b) leveraging the lack of global standards for wages, working conditions, and pollution control, into increasing the percentage of company costs which can be externalized onto others.  In the US, decent labor and pollution law has sharply limited the ability of firms to transfer those costs of production onto taxpayers (although our regular spills and Wal-mart strategies illustrate that firms take advantage of such wiggle room as remains).  Internationally in less developed regions, firms can pay a few dollars a day, blame workers for injuries, and dump every pollutant imaginable in the ground and water.  While claiming they moved for cheaper labor, firms taking advantage of NAFTA’s maquiladora regions, for ex, left this locale “the most polluted area on earth” according to the World Bank.  

    This has little to do with currency imbalances, and much more to do with compelling preferences of managers to exacerbate inequality.  

    Obviously, the solution is not to weaken our own or the EU’s pollution and labor laws, but rather to establish global standards for the environment and labor both.
    Janet Spitz
    Assoc Prof of Business (yeah, that’s how I know…)
    the College of St Rose
    Albany NY

  • Marvin McConoughey

    The Chinese, among others, have worked harder than we have for lower wages. That is the core of their economic gains.  Until our labor costs become more aligned with global realities, we will be unable to recapture jobs now being done overseas. Currency manipulation exists, broadly, among nations.  It is only one of many factors.  Economists don’t have a consensus that it is the major cause of our job losses to other nations.