Trade and Globalization
This past year, President Obama’s commitment to rebuilding our nation’s manufacturing sector has taken center stage. In February, he explained why producing goods here at home is important to our country:
“For generations of Americans, manufacturing was the ticket to a good middle-class life. We made stuff. And the stuff we made—like steel and cars and planes—made us the economic leader of the world. And the work was hard, but the jobs were good. And if you got on an assembly plant in Detroit or in a steel plant in Youngstown, you could buy a home. You could raise kids. You could send them to college. You could retire with some security. And those jobs didn’t just tell us how much we were worth, they told us how we were contributing to the society and how we were helping to build America, and gave people a sense of dignity and purpose. They saw a Boeing plane or one of the Big Three cars rolling off the assembly line, and they said, you know what, I made that. And they were iconic. And people understood that’s what it meant for something to be made in America.”
The president has continually called for curtailing corporate incentives to outsource manufacturing to other countries, saying “it is time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America.” A White House fact sheet summarizes his plans for restoring U.S. manufacturing jobs.
Apparently, some folks in the administration haven’t gotten the message. On May 22, the Office of Management and Budget issued a notice for comments on a proposal to dramatically alter the way government keeps statistics on domestic industries. The proposal suggests “that factoryless goods producers (FGPs) be classified” as manufacturers.
The Brookings Institution’s Mark Muro and Scott Andes recently published two blog posts which claim that the problems of U.S. manufacturing demand being depressed by large trade deficits—particularly trade deficits with China—are “a manufactured chimera,” and that the problems facing U.S. manufacturing are actually just evidence of insufficient domestic innovation. By deflecting attention from China’s manufacturing surplus, and the trade and currency policies China has used to dominate the market for manufacturing exports, Muro and Andes are distracting, not educating, those genuinely concerned with giving U.S. manufacturing a chance to compete in global markets. Claiming that it’s the domestic pace of innovation that is somehow the real cause of trouble is oddly provincial, and ignores some key global facts—like the fact that China has doubled down on its currency manipulation policies in the past year, and that its manufacturing trade surplus is projected to grow in the future unless something is done about it.
The most fundamental problem facing U.S. manufacturing is a shortage of demand for U.S. manufactured products. Four years after the end of the Great Recession, real U.S. manufacturing output was 2.2 percent below its pre-recession level. Demand for U.S. manufactured products was much higher at this point in earlier business cycles: 11.1% higher in 2005 (after the end of the dot-com bubble), and 23.9 percent higher in 1995, four years after the 1990-1991 recession. In other words, our manufacturing problem today is, first and foremost, a macroeconomic problem. Without adequate demand, manufacturers will not invest in R&D, build new plants, or hire new workers. Demand for output from U.S. manufacturing can either come from domestic sources—American consumers, businesses and governments—or from foreign sources. Net foreign demand for U.S. manufacturing output is best measured simply as net exports (exports minus imports) of manufactured goods.
In a blog post, Martin Kessler and Arvind Subramanian of the Peterson Institute claim that, contrary to popular belief, the Chinese renminbi is not undervalued. Their assertion is based on new estimates of prices and income in China relative those in the United States. The Wall Street Journal concludes that the world should “stop bugging China on the undervaluation of its currency.”
However, by failing to consider the effects of China’s purchases of foreign exchange reserves and its significant trade surplus, the Kessler-Subramanian model appears fatally flawed. China invested more than half a trillion dollars in purchasing foreign exchange reserves in 2013 alone—a new record. But for those purchases, the value of the RMB would have been significantly higher. Kessler and Subramanian claim that the RMB was “only slightly undervalued in 2011” is simply not credible, when that exchange rate is being sustained with such massive purchases of foreign exchange reserves.
In fact, China’s currency needs to rise in value every year because productivity growth in manufacturing is so much higher than in the United States and other countries. Between 1995 and 2009, China experienced manufacturing productivity growth that ranged between 6.7 percent and 9.6 percent per year. Over the same period, productivity growth in U.S. manufacturing averaged only 2.4 percent per year. Thus, China must allow its currency to rise by four to seven percent a year simply to keep its trade surplus from expanding.
Earlier this week, I estimated that up to half million (583,600) U.S. jobs are at risk due to surging imports of unfairly traded steel. A recent post by blogger Tim Worstall suggests that the number can’t possibly be that large because the steel industry employs only 150,000 people. But this misses the point—the risk to the steel industry goes far beyond the steel companies themselves, and the workers they employ. It also includes workers in iron ore and coal mines, in other manufacturing industries that support steel production, as well as lawyers, accountants, managers and other workers who supply services to the steel industry. All these jobs, 583,600 in total, are threatened by the flood of steel imports.
Half of the 46 top steel companies in the world were government-owned, and they accounted for 38 percent of global production. Illegally dumped and subsidized steel products are stealing market share and jobs from domestic producers. Worstall claims that we should ignore unfair import competition because, “if we get cheaper steel then this makes us all richer.” He concludes that “the market price is the fair price” for imports.
Responding to a similar question from a reporter this week, Ohio Senator Sherrod Brown said that this is “like arguing it’s OK to buy stolen TVs because they are cheaper.” Even a market economy needs rules to prevent cheating and unfair trade.
Worstall claims that we performed “some very heroic calculations” in estimating the jobs at risk due to unfair imports. He goes on to claim that “what is being done here is to assume that… steel workers buy restaurant meals so waiters are employed…and so on.” But this is exactly what we did not do.
Our model used standard data from the Bureau of Labor Statistics to estimate the direct and indirect jobs supported by U.S. steel production. Indirect jobs include those in production of “input commodities such as minerals and ore, coke, and other fuels, as well as downstream services and other resources consumed in the production of and distribution of steel products.” Furthermore, we very clearly stated that our estimate did “not include respending jobs supported by the wages of workers in the steel industry.”
This Saturday is the second anniversary of the U.S.-Korea Free Trade Agreement (KORUS), which took effect on March 15, 2012. President Obama said at the time that KORUS would increase US goods exports by $10 to $11 billion, supporting 70,000 American jobs from increased exports alone. Things are not turning out as predicted.
In first two years after KORUS took effect, U.S. domestic exports to Korea fell (decreased) by $3.1 billion, a decline of 7.5%, as shown in the figure below. Imports from Korea increased $5.6 billion, an increase of 9.8%. Although rising exports could, in theory, support more U.S. jobs, the decline in US exports to Korea has actually cost American jobs in the past two years. Worse yet, the rapid growth of Korean imports has eliminated even more U.S. jobs. Overall, the U.S. trade deficit with Korea has increased $8.7 billion, or 59.6%, costing nearly 60,000 U.S. jobs. Most of the nearly 60,000 jobs lost were in manufacturing.
Trade deals do more than cut tariffs, they promote foreign direct investment (FDI) and a surge in outsourcing by U.S. and foreign multinational companies (MNCs). FDI leads to growing trade deficits and job losses. U.S. multinationals were responsible for nearly one quarter (26.9 percent) of the U.S. trade deficit in 2011. Foreign multinationals operating in the United States (companies like Kia and Hyundai) were responsible for nearly half (44.2 percent) of the U.S. goods trade deficit in that same year. Taken together, U.S. and foreign MNCs were responsible for nearly three-fourths (77.1 percent) of the U.S. goods trade deficit in 2011.
The second installment of the Netflix original series, House of Cards, became available recently to the delight of binge watchers everywhere. In the backdrop of Frank Underwood’s (played by Kevin Spacey) uncompromising assent to power is a very relevant debate about trade policy with China. Specifically, one of the primary sources of tension between the two countries is the U.S.’ contention that China artificially keeps the value of their currency down to gain an advantage in trade. Defining currency manipulation is an ongoing debate, but Bergsten and Gagnon laid out their own criterion and found China to be one of the “most significant currency manipulators.” The effort to label China a currency manipulator falls by the wayside in Underwood’s duplicitous schemes to push his own personal agenda, but China’s currency manipulation has real effects on trade, and the United States can take real actions to reduce the trade deficit and create jobs. In fact, EPI’s Robert Scott just released a paper which found that ending currency manipulation across 20 of the most prominent practitioners (including the linchpin, China) would create between 2.3 million to 5.8 million jobs in the United States over the next three years.
So how is “currency manipulation” defined? Bergsten and Gagnon categorize a country as a currency manipulator if it meets the following four criteria:
- They held federal exchange (FX) reserves that exceed six months of goods and services imports.
- They maintained a total (global) current-account surplus between 2001 and 2011.
- Their total FX reserves grew faster than their GDP between 2001 and 2011.
- They have gross national income in 2010 of at least $3,000 per capita, the median among 215 countries ranked by the World Bank (this criterion excludes low-incoming developing economies).
Growing trade deficits have cost US workers millions of jobs over the past two decades, (these were good jobs in manufacturing industries). Currency manipulation by more than 20 countries, of which China is by far the largest, is the single most important reason why U.S. trade deficits have not decisively reversed. Currency manipulation lowers the value of foreign currencies, relative to the U.S. dollar, which acts like a subsidy to their exports, and a tax on U.S. exports to China and every other country where the U.S. competes with the exports of currency manipulators.
In an era of fiscal austerity, ending global currency manipulation is the best way to reduce trade deficits, create jobs, and rebuild the U.S. economy, as shown in Stop Currency Manipulation and Create Millions of Jobs. Eliminating currency manipulation would reduce the U.S. trade deficit by between $200 billion and $500 billion in three years. This would increase annual U.S. GDP by between $288 billion and $720 billion and create 2.3 million to 5.8 million jobs. About 40 percent of the jobs gained would be in manufacturing.
Ending currency manipulation would not require any government spending – a key political virtue during this time of Congressional gridlock. In fact, it would reduce the federal budget deficit by up to $266 billion dollars per year as the extra economic activity and employment it creates boosts tax revenues and reduces safety net spending. Ending currency manipulation would create jobs in every state, with gains from 8,200 jobs (2.64 percent of total employment) in the District of Columbia to 687,100 jobs (4.18 percent of employment) in California. Ending currency manipulation would likely create jobs in every Congressional District, with gains of up to 24,400 jobs (7.05 percent of employment) in the 17th District in CA.
Last week my colleague, Rob Scott, published a report highlighting the impact of ongoing currency manipulation on employment in the United States. In the report, Scott explained that currency manipulation by U.S. trading partners—including China, Denmark, Hong Kong, South Korea, Malaysia, Singapore, Switzerland and Taiwan—distorts trade flows in two ways. It raises the cost of U.S. exports, and lowers the cost of U.S. imports.
Currency manipulation has cost the U.S. economy millions of jobs, including a disproportionately large share of manufacturing jobs. The impact of these job losses is clearly evident in the Midwest, which suffered significant manufacturing job losses. Further, the displacement of manufacturing jobs not only meant fewer job opportunities, but also the elimination of unionized jobs that pay family-supporting wages. Ending currency manipulation would likely lead to significant growth in the American manufacturing sector, a necessary step to begin rebuilding a strong middle class.
In his State of the Union Address, President Obama said that because “ninety-eight percent of our exporters are small businesses, new trade partnerships with Europe and the Asia-Pacific will help them create more jobs.” This suggests that small businesses will benefit most from trade, but that is not the case. In fact, two-thirds of U.S. exports are generated by multinational companies (domestic and foreign) operating in this country, as shown in the figure below. These massive firms also generated more than two thirds of U.S. imports and an even larger share of the job-destroying U.S. goods trade deficits.
And therein lies the not so hidden underbelly of international trade and investment deals that the president has consistently refused to discuss: job displacing imports. A surge of imports from low wage countries has driven down wages for working people in the United States. In fact, imports are responsible for 90% of the growth in the college/noncollege wage gap since 1995.
Those same multinational companies were the biggest supporters of trade and investment deals with Mexico, Korea and China, deals that have cost U.S. workers nearly four million jobs in the past two decades. Now, the multinationals are demanding that the president complete trade deals with nearly a dozen countries in Asia and Latin America (the TPP), and a new trade and investment deal with Europe (the TTIP) that will open our markets to goods made by millions of low wage workers in Eastern Europe.
President Obama will deliver his State of the Union this coming Tuesday, the 28th. It seems obvious that no big new policy initiative that requires action from Congress will pass in the next year, given DC gridlock. This is a real shame, because the crisis of joblessness and failure to fully recover from the Great Recession remains the single largest economic challenge facing the country, and solving it would require a serious course correction on policy. The most reliable fix for this crisis of joblessness would be simply allowing public spending to rise to levels that characterized every other recovery since World War II. Even better would be to allow this spending to rise to levels characterizing the recovery from the similarly steep early 1980s recession. In short, what is needed is not some historically unprecedented stimulus program, but simply an end to the historically unprecedented austerity program now underway.
And it’s pretty easy to specify where the first $25 billion or so of this spending should be allocated: extending the Emergency Unemployment Compensation (EUC) program for long-term unemployed workers—a program begun in June 2008 when the unemployment rate was significantly lower than today and when long-term unemployment was literally half as high. I’d be shocked if the president did not issue a forceful call to pass EUC for the upcoming year.
After this, a substantial program of public investment would be most welcome, boosting job-growth and economic activity in the short-run and boosting productivity in the longer-run. The talking point mobilized in favor of infrastructure investment—that it once was a bi-partisan priority—has the rare virtue of being true even today, so long as one listens to policy analysts and not politicians. For example, Martin Feldstein, Chair of the Council of Economic Advisors under Ronald Reagan, has endorsed a deficit-financed increase in infrastructure investment (granted, he endorses plenty of other things in that column that I’m not on board with, but the point remains). And Ken Rogoff, an economic adviser to John McCain in 2008, has also noted that infrastructure investment would be hugely beneficial in the current economic climate.1
Fast track legislation is moving forward. Retiring Senator Max Baucus(D-MT) and Republican leaders introduced a bill to give trade promotion negotiating authority (a.k.a. “fast track” authority) to complete the proposed Trans-Pacific Partnership and a trade and investment deal (the TTIP) with the European Union. The sponsors were unable to obtain a Democratic co-sponsor in the House, and House Ways and Means Ranking Member Sander Levin introduced a strong statement calling for a better model for negotiating trade agreements.
Fast Track is a terrible idea because it’s a proven job killer. It gives the president the right to send treaty implementing legislation to Congress for a vote without any opportunity to amend or improve it. Setting enforceable job creation goals or creating effective mechanisms to deal with currency manipulation, for example, will be impossible if the legislation is fast-tracked.
NAFTA, which was fast-tracked in 1993, and which was the prototype for more than a dozen U.S. trade and investment deals negotiated over the past decade, resulted in growing trade deficits with Mexico that eliminated nearly 700,000 U.S. jobs by 2010. More recently, President Obama pushed through a new trade deal between Korea and the United States (the KORUS deal), which resulted in the loss of 40,000 jobs in the first year alone.
Fast track legislation in its current form is opposed by more than 170 Republican and Democratic House members, so this legislation might be dead on arrival. The House Republican leadership is reportedly insisting that at least 50 Democrats co-sponsor the legislation, including at least one House Democratic leader, before it will be allowed to come to a vote on the House floor. With luck, the fast track bill will die in the House. The last thing America needs is renewal of fast track and more trade and investment deals rushed through Congress.
The post originally appeared on The Huffington Post.
New Year’s Day, 2014, marks the 20th anniversary of the North American Free Trade Agreement (NAFTA). The Agreement created a common market for goods, services and investment capital with Canada and Mexico. And it opened the door through which American workers were shoved, unprepared, into a brutal global competition for jobs that has cut their living standards and is destroying their future.
NAFTA’s birth was bi-partisan—conceived by Ronald Reagan, negotiated by George Bush I, and pushed through the US Congress by Bill Clinton in alliance with Congressional Republicans and corporate lobbyists.
Clinton and his collaborators promised that the deal would bring “good-paying American jobs,” a rising trade surplus with Mexico, and a dramatic reduction in illegal immigration. Instead, NAFTA directly cost the United States. a net loss of 700,000 jobs. The surplus with Mexico turned into a chronic deficit. And the economic dislocation in Mexico increased the the flow of undocumented workers into the United States.
Nevertheless, Clinton and his Republican successor, George Bush II, then used the NAFTA template to design the World Trade Organization, more than a dozen bilateral trade treaties, and the deal that opened the American market to China—which alone has cost the United States another net 2.7 million jobs. The result has been 20 years of relentless outsourcing of jobs and technology.
In a swift reaction to ugly publicity about suicides, injuries, and mistreatment of workers, Biel Crystal, one of Apple’s most important suppliers of touchscreen cover glass for its iPhones, reached an agreement with the Chinese labor rights group, SACOM, to take three steps toward better conditions by January 2014:
- Clear work contracts for workers that include details on terms of contract, terms of probation, position, affiliated department. The company also will not ask workers to turn in the contract when work relation ends.
- Compensation and assistance for injured workers in accordance with China’s Regulation on Work, related injury insurance and adequate measures to protect workers from work injury.
- One day off every seven working days.
These very basic protections might seem like minimal progress, but in light of the appalling conditions at Biel Crystal’s plant, even providing limited basic protections is welcome.
The fact that the company has acknowledged such significant shortcomings in these fundamental areas of labor rights shows just how far Apple is from living up to its commitments to decent labor conditions throughout its supplier chain. It should be a reminder to all who follow Apple that the recent report by its hand-picked monitor, the Fair Labor Association, was little more than a whitewash that covered up the truly horrendous labor conditions in the factories that make Apple products. The FLA’s investigation also assessed conditions for less than one-fifth of the workers in Apple’s supply chain and thus missed gross violations at other factories, such as at the Biel Crystal plant.
The North American Free Trade Agreement (NATFA) was the door through which American workers were shoved into the neoliberal global labor market.
By establishing the principle that U.S. corporations could relocate production elsewhere and sell back into the United States, NAFTA undercut the bargaining power of American workers, which had driven the expansion of the middle class since the end of World War II. The result has been 20 years of stagnant wages and the upward redistribution of income, wealth and political power.
NAFTA affected U.S. workers in four principal ways. First, it caused the loss of some 700,000 jobs as production moved to Mexico. Most of these losses came in California, Texas, Michigan, and other states where manufacturing is concentrated. To be sure, there were some job gains along the border in service and retail sectors resulting from increased trucking activity, but these gains are small in relation to the loses, and are in lower paying occupations. The vast majority of workers who lost jobs from NAFTA suffered a permanent loss of income.
The Obama administration has been rushing to complete a trade agreement with a dozen Pacific Rim countries including Japan, Canada, Malaysia and Vietnam, with key negotiations set to start next week in Salt Lake City. A bi-partisan group of more than 170 Democrats and Republicans sent letters to the president this week signaling their intent to oppose so-called “Fast Track” procedures (also known as Trade Promotion Authority) which would allow the White House to submit trade agreements to Congress without the opportunity to amend the deals.
Congress is wise to pause before giving the president carte blanche to negotiate new trade deals and wise to demand fuller consultation with Congress on the content of those deals. Fast track authority was first developed by the Nixon administration to rush trade agreements through Congress without threat of amendment. But deals such as the North American Free Trade Agreement and the recently ratified Korea-U.S. trade agreement (KORUS) have failed to live up to expectations precisely because they are much more than simple trade agreements. These agreements are concerned with stimulating foreign investment and remaking a host of regulatory policies covering labor law, patents and copyrights, food safety standards, and state owned enterprises, as well as financial, healthcare, energy, telecommunications, and other service industries, as noted in a letter this week from 151 Democratic members of Congress to the president. KORUS and dozens of other trade and investment deals have resulted in a huge surge in outsourcing and have eliminated millions of jobs, especially in U.S. manufacturing.
The Senate Finance Committee held hearings this week on the proposed Transatlantic Trade and Investment Partnership (TTIP). The committee chair, Sen. Max Baucus, claimed that the TTIP could boost U.S. exports to the EU by a third, adding “more than one hundred billion dollars annually to U.S. GDP,” and that it “could support hundreds of thousands of new jobs in the United States.” The statement is remarkable for its sheer audacity in the face of massive evidence of the failure of similar deals to deliver promised benefits. U.S. trade with Mexico after the North American Free Trade Agreement (NAFTA) has cost the United States nearly 700,000 jobs through 2010. U.S. trade with China has certainly failed to deliver on the promised benefits of growing exports. Since that country entered the World Trade Organization (WTO) in 2001, the U.S. has lost 2.7 million jobs through 2011 due to growing trade deficits with China. And the Korea-U.S. Free Trade Agreement (KORUS) has also resulted in growing trade deficits with that country and the loss of more than 40,000 U.S. jobs. Most of the trade-related job losses are concentrated in manufacturing, and growing trade deficits are responsible for a large share of the decline in U.S. manufacturing employment over the past fifteen years.
Using estimates of changes in two-way trade between the U.S. and the EU under the agreement reveals that TTIP is projected to result in a growing U.S. trade deficit with the EU and the loss of at least 71,000 additional U.S. jobs. Senator Baucus, citing advice from Benjamin Franklin, advises the U.S. to “jump quickly at opportunities.” When it comes to evaluating trade deals, Congress and the public would be better served by the common law principle of ‘Caveat Emptor,’ or, let the buyer beware. Congress has a duty to perform their due diligence in evaluating proposed trade and investment agreements before jumping at the next “great deal.” In particular, members should note that Sen. Baucus’s claims that the TTIP “could support hundreds of thousands of new jobs” are pure baloney.
People wrongly think the economy is like the weather, a natural force outside of our control. So thinking about problems like high unemployment and declining wages leave people feeling hopeless because they seem to result from large historic forces that we can’t affect like globalization.
The truth, however, is that the economy isn’t like the weather: It’s entirely man-made and the rules are set by politics, not God or nature. Globalization is real, but the terms of globalization—the rules for how the internationalization of trade and production operates and affects workers and companies—are set by politicians and the organizations they’ve created through international treaties. We can change those rules and shape globalization so it does less harm to working people in the United States and around the world.
One of those rules changes would prevent companies from manipulating their currencies to make their exports cheaper while simultaneously making goods imported from other countries more expensive. China, Japan, and other countries have done this for years, buying hundreds of billions of U.S. dollars to weaken their own currencies and making it cheaper and easier to export goods to the United States. This strategy has been very successful, and together, China, Singapore, Taiwan and several other countries, including Japan, export hundreds of billions of dollars more to the United States in manufactured goods than we send to them, leaving us with a huge trade deficit that costs jobs and undermines wages here. The Peterson Institute for International Economics estimates that foreign currency manipulation has cost the United States between one million and five million jobs.
So much is wrong in Stephen Richter’s NYT op-ed today, called “What Really Ails Detroit,” starting with his grossly inaccurate timeline. Richter says Detroit’s (and the United States’) “day of reckoning” came in the 1970s when American car manufacturers began facing competition on their home soil for the first time. That’s 20 years after the Big 3 started to abandon Detroit for the suburbs and Detroit began to hemorrhage its white population. As I said in an earlier blog post, “Between 1947 and 1958, the Big Three built twenty-five new plants in the Detroit metropolitan area, all of them in suburban communities, most more than fifteen miles from the center city. As the jobs moved away, so did the city’s residents. From 1.85 million in 1950, the city’s population declined to 1.62 million in 1960 and 1.51 million in 1970.” That’s a loss of more than 300,000 residents in two decades. The exodus of white residents (the entire decline was accounted for by whites, since the number of black residents increased), of jobs, and of wealth has never stopped. Detroit now has a population under 700,000, but the white population has declined by more than 1.4 million since 1950.
What ails Detroit is not the skills gap that Richter posits, but abandonment by its white population and by the owners of capital, starting with the auto industry, but including retail corporations, insurance companies and almost everyone else who had previously invested in the city. Detroit’s unemployment rate is the highest of any of the 50 largest cities because almost no one is investing there. When corporations do invest, as Chrysler did with its new Jefferson North assembly plant, they will find plenty of employees with the skills to make manufacturing a success again.
Once Again, American Manufacturing Suffers from Lots of Things, but Excess Blue-Collar Pay Isn’t One of Them
In a NYT column today titled “What Really Ails Detroit,” Stephen Richter repeats a common story much beloved by serious-sounding pundits who don’t know much economics: that the thirty year run of broadly-shared growth after World War II was only possible because of “the absence…of any real competition from other nations,” and that American workers’ troubles since then are their own fault for not getting smart enough to compete on the global stage. He asserts that even as this international competition increased, “companies like General Motors continued to shower blue-collar workers with handsome pay and benefits,” hobbling their ability to compete, even as they refused to upskill sufficiently to compete in the global economy.
This narrative is really common—common enough to see if it holds up to any serious data scrutiny.
Start with claims that excessive blue-collar pay destroyed manufacturing. For a paper examining those claims, check this out (pdf). Spoiler alert: it’s not. Inflation-adjusted hourly wages for production workers in U.S. manufacturing peaked in 1978 and were about 8 percent lower in 2007, while manufacturing productivity rose by well over 100 percent in that period.
This piece originally ran in the Huffington Post.
Within the next few years, China will surpass the United States as the world’s largest economy.
Anticipating the impact of this milestone on our national psyche, the US policy class has been assuring Americans that there is nothing to worry about. Hardly a week goes by without a major media story suggesting China is an economic paper tiger: its economy is imbalanced, its leaders are corrupt, its banks are over extended, etc. Anyway, the stories routinely note, it will be decades before China catches up to us in per capita income.
Yet in the balance of global power, size matters. Many countries have higher per capita incomes than the United States (e.g., Norway, Qatar, Singapore). It is the large scale of the American economy that has made us the dominant political power in the world. Our big economy supports a big military, foreign aid, and allows policymakers to use access to our huge consumer and financial markets to buy allies and votes in the UN.
Unfortunately, it has also allowed us to borrow from the rest of the world to finance a chronic trade deficit. China, with whom we have the largest deficit, is as a consequence our largest creditor, holding over $1.2 trillion in US IOUs.
I just finished complaining in an earlier blog that the media wasn’t telling enough manufacturing and supply chain stories when Bill Vlasic proved me wrong with his piece on Chryslers’ Jefferson North Assembly Plant in Detroit: Last Car Plant Brings Detroit Hope and Cash.
Only two days later, the City of Detroit filed for the nation’s largest ever municipal bankruptcy. “Hope and cash” suddenly sounded like too little too late. It’s not. In fact, the story suggests what it takes to make recovery work.
We can all picture a Jeep. But Vlasic’s piece gives the new Jeep Grand Cherokee a powerful backstory:
“There is a section of Detroit’s east side that sums up the city’s decline, a grim landscape of boarded-up stores, abandoned homes and empty lots that stretch all the way to the river.
And in the middle of it stands one of the most modern and successful auto plants in the world.”
The article paints a picture of today’s high-quality, high-tech manufacturing that can’t be underscored enough: making 300,000 vehicles a year with $2B a year in profit, the unionized Detroit facility is “on par with the most efficient luxury car plants in Germany and the best factories operated by Japanese automakers in the southern United States.” It’s a positive story for the auto industry and for Detroit: jobs at the plant have more than tripled, from 1,300 to 4,600, a third of employees live in the city, and its property taxes send $12 million a year to the city coffers.
Calling it the “last car plant” in Detroit is a bit misleading, however. Not only is GM’s Hamtramck facility arguably within the city limits, as are two engine plants, but from an industrial perspective, Chrysler’s plant is hardly alone. It is part of a huge cluster of automotive parts and assembly facilities in the greater Detroit area that still make up a significant share of US manufacturing output. If we’re going to bridge the gap between the auto industry’s recovery and Detroit’s, it would be more helpful to think of Jefferson North as a leader in a new generation.
The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) have reported that significant portions of China’s exports to the United States contain non-Chinese value added, including some small fraction of parts and materials originating in the United States. The OECD and WTO have proposed new estimates of trade in value-added (VA), a measure of trade that is net of foreign value-added. They claim that “China’s bilateral trade surplus with the United States shrinks by 25% on a value-added basis, reflecting the high level of foreign-sourced content in Chinese exports.” But, my new EPI report shows that the OECD-WTO analysis is “fundamentally flawed and should not be used in anti-dumping or other types of fair trade cases.”
The OECD-WTO analysis suffers from at least three critical flaws:
- The OECD-WTO analysis fails to account for rapid technological change and the fact that China is rapidly moving up the value chain and increasing the domestic content of its exports.
- The OECD relies, in part, on flawed Chinese data on its own trade flows. Estimates developed in the EPI report show that China’s global trade surplus was 117 percent to 250 percent (i.e., 2 to 3.5 times) larger than reported by China in the 2005-2009 period.
- The OECD-WTO estimates do not accurately reflect the flow of Chinese exports coming into the United States through third countries. China became the world’s largest exporter in 2006, and roughly half of its exports are intermediate products and transshipped goods. As a result, the United States absorbed $54.2 billion to $77.9 billion per year in additional, indirect imports originating in China and imported from the rest of the world between 2005 and 2009 that were not reflected in the OECD estimates. When indirect imports are included, U.S. VA trade with China exceeds conventional measures of the gross bilateral trade deficit in this period.
Secretary of State John Kerry bought into the hype around trade in a speech this week in Paris when he claimed that the proposed U.S.–EU trade and investment agreement could help Europe emerge from the economic crisis. Kerry claimed that the proposed U.S.–EU trade agreement “may be one of the best ways of helping Europe to break out of this cycle [and] have growth.” As I’ve explained before, trade agreements do not create jobs. This is not some proprietary EPI view on trade – it is a standard view straight out of economics text books.
The issue is simple: it is trade balances—the net of exports and imports—that can affect jobs. Unless trade agreements promise to reduce our too-high trade deficit, they will have no positive effect on jobs. Even worse, past trade agreements have actually been associated with larger trade deficits in their aftermath.
This is mainstream (neo-classical) trade theory, as explained by Paul Krugman in “Trade Does Not Equal Jobs.” Responding (in 2010) specifically to claims that the Korea–U.S. trade agreement could be a driver of recovery, he pointed out that in macroeconomic terms, the United Sates had too little spending on domestically-produced goods and services, with spending defined by:
Y = C + I + G + X –M
Dylan Matthews at Wonkblog posts a graph from Robert Lawrence and Lawrence Edwards that purports to show manufacturing employment declines are simply a capitalist inevitability. It’s essentially this graph:
So, if manufacturing employment is always shrinking as a share of overall employment, the implicit argument is that nothing– say very large trade deficits that characterized the past decade and a half in the American economy – can really affect this trend one way or the other.Read more
The U.S. trade deficit with Japan has increased steadily over the past four years, reaching $79.9 billion in 2012, an increase of $13.4 billion (20.2 percent) over the 2011 bilateral deficit of $66.5 billion. Two of the most important causes of persistent U.S.-Japan trade deficits are currency manipulation and Japan’s vast and impenetrable network of non-tariff trade barriers. Last month, the United States and Japan agreed on language that could allow Japan to join negotiations to enter the Trans-Pacific Partnership (TPP), a proposed free trade agreement with 10 other Asia-Pacific countries (a new round of negotiations on the TPP began in Singapore last week ). Unless Japan is willing to end its currency manipulation and informal trade barriers once and for all, it should not even be allowed to participate in the TPP negotiations.
The effect of trade flows on U.S. jobs is relatively straightforward: exports support U.S. jobs but the larger volume of imports displaces even more jobs. Trade deficits such as the one we have with Japan have cost the United States millions of jobs, most of them high-paying jobs in manufacturing. Signing trade deals is an ineffective way to create jobs, in large part because they usually result in higher trade deficits. Further, trade deals have traditionally not included effective means to deal with one of the biggest causes of our trade deficits: currency manipulation by our trading partners, which acts as an artificial subsidy to other countries’ exports, and a tax on U.S. exports. Japan has a history of currency manipulation, and recently-elected Prime Minister Shinzo Abe campaigned on his intention to stimulate the Japanese economy, in part by weakening the yen. Financial markets have responded to Mr. Abe’s wishes, and the yen has declined 18.8% since October, falling to 96 yen per dollar on March 12, 2013.1Read more
When President Obama and Japanese Prime Minister Abe meet on Friday, currency manipulation and Japan’s unfair trade policies must be addressed. The Yen has declined 13% in the past three months, in part because Mr. Abe has pledged to weaken monetary policy to spur growth. A weaker Yen lowers the cost of Japanese imports in the U.S. and raises the cost of U.S. exports in Japan and other countries where our products compete. While a more expansionary domestic monetary policy is an appropriate tool for a country stuck far below economic potential because of demand shortfalls, Japan has also displayed a historic pattern of intentionally lowering the value of their own currency vis-à-vis the U.S. dollar by buying U.S. denominated assets. Because the first-order effect of this direct currency manipulation is to create demand for Japan at the expense of the U.S., which is also currently starved of demand, this is not responsible policy for a country as large and important in global trade markets as Japan.
Currency manipulation is the single most important cause of growing U.S. trade deficits and Japan has a well established reputation as a currency manipulator. Japan has expressed a desire to join the proposed Trans-Pacific Partnership (TPP), a regional free-trade agreement with 10 other countries. The TPP should include language to end currency manipulation by Japan and other trading partners. Elimination of currency manipulation by China, Japan and other countries could create 2.2 to 4.7 million jobs, expand U.S. GDP and reduce the federal deficit, according to a recent EPI report.
The U.S. trade deficit with Japan increased from $66.4 billion in 2011 to $79.9 billion in 2012, an increase of $13.4 billion (20.2 percent).1 Growing trade deficits lead to job losses and growing unemployment or weaker growth in the United States.Read more
As part of his proposals to spur job growth, President Obama promised in last night’s State of the Union address to complete negotiations on the proposed Trans Pacific Partnership (a proposed free trade agreement (FTA) with at least eight other countries in Asia and Latin America), and announced new talks on a comprehensive FTA with the European Union. This is a shame, because chronically high unemployment is a real crisis, while trade agreements are a fake solution.
The issue is simple: it is trade balances – the net of exports and imports – that can affect jobs. Unless trade agreements promise to reduce our too-high trade deficit, they will have no positive effect on jobs. Even worse, past trade agreements have actually been associated with larger trade deficits in their aftermath.
EPI experts read the following articles today:
- Can We Stabilize the Debt with Just $670 Billion in Deficit Reduction? (Next New Deal)
- Don’t focus on the deficit, Mr. President (Washington Post)
- Meat inspections could stall if federal spending cuts kick in (Des Moines Register)
- Increasing the Social Security Payroll Tax Base: Options and Effects on Tax Burdens (Congressional Research Service)
- No end to the GOP’s fiscal gimmickry (Washington Post)
- Quietly Killing a Consumer Watchdog (New York Times)
- In China, a Vast Chasm Between the Rich and the Rest (New York Times)
The president can end currency manipulation with the stroke of a pen, halving the U.S. trade deficit and creating millions of jobs
Five years after the start of the great recession nearly nine million jobs are still needed to return to full employment. And as the Administration lays the groundwork for its second term, job creation should be goal number one. Under existing authority, the President can execute one simple policy that would create 2.2 to 4.7 million jobs over the next three years: End currency manipulation by a handful of countries, especially China. This policy would boost GDP, reduce unemployment and, in budgetary terms cost nothing. It would, in fact, substantially reduce the federal deficit. No other policy could achieve this jobs trifecta.
Over the past fifteen years rising trade deficits have devastated U.S. manufacturing employment. Since April 1998, the United States has lost 5.7 million manufacturing jobs, nearly a third of manufacturing employment and most of those job losses were due to the growing U.S. trade deficit. Although half a million manufacturing jobs have been added since 2009, a full manufacturing recovery requires greatly increasing exports relative to imports. While exports support domestic job creation, imports (and growing trade deficits) eliminate domestic jobs. Although the overall U.S. trade deficit declined slightly last year, the trade deficit in manufactured products increased by $44.7 billion in 2012. This growing manufacturing trade deficit is a threat to manufacturing employment and the overall recovery.
Currency manipulation, which distorts trade flows by artificially lowering the cost of imports to the U.S. and raising the cost of U.S. exports, is the single most important cause of these growing trade deficits. Halting global currency manipulation by making it illegal for China and other currency manipulators to purchase U.S. Treasury bills and other government assets is the best way to reduce the U.S. trade deficit, create jobs, and rebuild the economy.Read more
To its credit, Apple is now posting monthly information tracking the extent to which employees in its supply chain are working less than its standard of 60 hours per week. The introductory language to this information states: “Ending the industry practice of excessive overtime is a top priority for Apple in 2012.” The accompanying graph itself, however, contains data from Jan. 2012 through Nov. 2012 and suggests otherwise. Not only has Apple failed to end this practice, but progress has significantly reversed in recent months.
Apple’s code of supplier conduct sets a maximum work week of 60 hours, with an exception clause, discussed below. Eyeballing Apple’s graph indicates (Apple only provides a specific number for November, so visual approximation is necessary):
- In Jan. 2012, about 16 percent of the workers in Apple’s supply chain worked more hours than Apple’s maximum standard. This proportion diminished through August, when approximately 3 percent of these workers had work weeks that exceeded this standard.
- But the proportion of workers meeting the standard dropped precipitously since then, presumably reflecting the increased intensity of work to produce and meet iPhone 5 demand.
- In November, 12 percent of the workers in Apple’s supply chain that are being tracked worked more than the 60-hour standard. This was the worst monthly compliance rate of the year, with the exception of January. More than one million workers are being tracked by Apple, so the 12 percent translates to more than 120,000 workers in their supply chain working excessive hours. Read more