Trade and Globalization
A recent blog post by the Heritage Foundation’s Derek Scissors claims that my estimates of the number of jobs lost due to growing trade deficits with China “are demonstrably wrong.” Scissors then fails to demonstrate how they’re wrong.
That’s because he can’t. The economic models used in our report (Scott 2012, 9, Appendix and note 15) are the gold standard for research on the employment effects of trade, and “all but identical models” have been used in similar studies by the Federal Reserve Bank of New York, by Martin Bailey and Robert Lawrence of the Brookings Institution, and in a U.S. Commerce Department study that represents the work of more than 20 government economists including the chief economists from that agency and the Office of the U.S. Trade Representative.
At its core, our model is based on a straightforward application of Keynesian economics and national income accounting, which show that exports stimulate the domestic economy while imports reduce demand for domestic products. Scissors (and many others before him, such as Dan Griswold at Cato and the U.S. China Business Council) claims that imports are good for the economy, in part because they are correlated with growth. But this assertion ignores two fundamental questionsRead more
Paul Krugman and others have recently claimed that Chinese currency manipulation is “an issue whose time has passed.” There are two fundamental problems with these arguments. First, China’s global trade surplus appears to be perhaps three to four times larger than has previously been reported. Second, productivity in China is growing much faster than in the United States and other developed countries and therefore, China’s exchange rate likely needs to appreciate at least 3 to 5 percent per year just to keep its trade surplus from growing. On the first issue—what the size of the Chinese current account surplus and its recent movement tell us about the need for currency realignment—it’s worth noting that most of the decline in China’s global trade surplus since 2008 is explained by the great recession and the sluggish recovery, especially in Europe. However, the U.S. bilateral deficit with China has increased by a third since it bottomed-out in 2009, which has slowed the U.S. recovery.
Further, China’s trade data likely understates its global trade surplus by a significant amount, a problem that has been ignored by officials in the United States, the International Monetary Fund and other international agencies. The IMF relies on self-reported data from each member country. Analysis of trade data from the United Nations shows that China is massively under-reporting its exports. Read more
A number of commenters declare that currency management by our trading partners is an issue “whose time has passed.” At the risk of violating Brad DeLong’s wise rules (Paraphrased: “Mistakes are avoided if you follow two rules: (1) Remember that Paul Krugman is right, and (2) If your analysis leads you to conclude that Paul Krugman is wrong, refer to rule No. 1”), I’m not convinced by claims—even Krugman’s—that this is a dead issue.
Look at one key piece of evidence Krugman presents: the real (inflation-adjusted) appreciation of the yuan in the last year. But, as Krugman himself has said in previous writings on this:
“Notice that I didn’t mention the value of the renminbi at all in this account [ed: of China’s currency management]. … You want to keep your eye on the ball: it’s the artificial capital exports that are the driving force here.
We know that the renminbi is grossly undervalued … on a PPE (proof of the pudding is in the eating) basis: the current value of the renminbi is consistent with massive artificial capital export, and that’s that.” [Edited for clarity; I’m pretty sure I haven’t done any (much?) damage to his argument].
So, have the artificial capital exports from China continued? Read more
As a follow-up to my earlier post, another issue likely to be raised in tonight’s debate is the issue of federal budget deficits that force us to “borrow from China.” Is this a real problem, and will it hurt if China suddenly decides to stop lending us money?
No and no.
First, rising budget deficits since the Great Recession began have actually been more than financed by rising domestic savings of U.S. households and businesses. In fact, the huge spike in private savings that began in 2007 (see the chart below) is the reason for the Great Recession: households and businesses stopped spending in 2008 and the economy cratered thereafter, cushioned a bit by the rise in government deficits. So, we have not relied on rising borrowing from China to finance the increased budget deficits in recent years, instead the rise in domestic savings has been more than sufficient to cover these.
But what happens if China turns off the spigot and stops trying to buy U.S. Treasuries and other dollar-denominated assets?
This would have two effects. First, the decline in available savings that can be borrowed by American households, businesses, and governments would decline. In normal times, this could bid-up interest rates. Think of interest rates as the price of loanable funds—as the supply of loanable funds falls, the price should be expected (all else equal) to rise. But we’re not in normal times. Instead, the American economy remains characterized by a huge excess of savings over demand for new loans, meaning that there’s no upward pressure on interest rates. Absent this upward pressure on interest rates, no damage would be done if China stopped plowing money into buying dollar-denominated assets.
Second, if China did stop buying U.S. assets, the value of its currency would increase vis-à-vis the dollar, and this would spur U.S. exports, both to China as well as to third-country markets.
So, in regards to China buying the U.S. government’s debt, it’s not only nothing to worry about, it would be better for the U.S. economy if they stopped.
Barry Commoner, path-breaking scientist and social activist, passed away yesterday at the age of 95. I was fortunate enough to work for Barry in the late 1970s as a research assistant on two of his books, The Poverty of Power (1976) and The Politics of Energy (1979). Commoner, a botanist and biologist, was a founder of the environmental movement, along with peers such as Rachel Carson (The Silent Spring, 1962) and Margaret Meade. He believed that scientists have an obligation to share scientific information with the general public to enable them to participate in public debate on scientific issues. His work on the effects of nuclear fallout, documented through the collection of baby teeth and reinforced by a petition signed by 11,201 scientists worldwide, provided the scientific foundation for the adoption of the Nuclear Test Ban Treaty of 1963.
Commoner also helped establish the roots of today’s BlueGreen Alliance of labor and environmentalists. He first began working with Tony Mazzocchi, a longtime leader of the Oil, Chemical and Atomic Workers in the 1950s, who collected baby teeth from the children of members of his Long Island local union. Commoner’s work showed the connections between the environmental crisis and social and economic issues such as “poverty, injustice, public health, national security and war,” and that the roots of the environmental crisis lay in excessive corporate power and flawed systems of production. He argued that only by changing those systems—for example, by replacing nuclear power, coal and oil with renewable energy—could the root causes of our environmental problems be eliminated. Not coincidentally, these same policies would create millions of new domestic jobs, reducing pollution, inequality and our trade deficit simultaneously. As Commoner established in The Closing Circle (1971), the first of his “four laws of ecology” was, “Everything is connected to everything else.” Indeed.
The recently released State of Working America, 12th Edition, documents in a variety of ways how the last decade in the United States has been a lost decade for all but the very well-off. One manifestation of this lost decade is the decline in the share of households owning stocks.
First, it’s useful to point out that even with the “401(k) revolution,” a surprisingly small share of households ever held any significant amount of stocks. As the figure shows, at its peak in 2001, just more than half (51.9 percent) of U.S. households held any stock, including stocks held in retirement plans like 401(k)s. Furthermore, many of that 51.9 percent held very small amounts—just over a third (37.8 percent) had total stock holdings of $10,000 or more. (Read this snapshot for more on the “democratization of the stock market” that never actually happened.) And even those modest shares have since lost ground. By 2010, less than half (46.9 percent) of all households had any stock holdings, and less than a third (31.1 percent) had stock holdings of $10,000 or more.
The strong rebound in stocks since 2009 amidst persistently high unemployment highlights the disconnect between Wall Street’s financial markets and most people. The stock market simply has little or no direct financial importance to the majority of U.S. households. Since 1989, the top fifth of households consistently held about 90 percent of stock wealth, leaving approximately 10 percent for the bottom four-fifths of households. If you want to assess how the economy is performing for most households in this country, don’t look to the stock market, look to the labor market, and measures of job opportunities like employment and wage growth.
Two new studies find that unemployment at older ages may shorten life and that the gap in life expectancy between less and more educated workers is widening. Though neither result may seem surprising, the first is at odds with some previous research, while the second reinforces earlier findings but provides shocking new statistics—notably the fact that the least educated white women have seen their life expectancy at birth fall by five years since 1990, as highlighted in a recent New York Times article.
A seminal paper by Christopher J. Ruhm (2000) found that recessions were associated with lower mortality rates, a counterintuitive result confirmed by later studies. Ann Huff Stevens et al. (2011) identified a possible reason: Reduced employment opportunities in the broader labor market appeared to leave nursing homes better staffed, explaining why the pro-cyclical mortality effect was concentrated among seniors.
In other words, while higher unemployment may be associated with lower mortality, this doesn’t necessarily mean working is bad for your health. Later research focusing on workers who lost their jobs (as opposed to economy-wide unemployment rates) found Read more
Here’s some of the thought-provoking content that EPI’s research team came across today:
- “About the 47 Percent Who Don’t Pay Federal Income Tax: Mitt, Meet Andrea” (Tax Vox)
- “Five Myths About the 47 Percent” (Tax Vox)
- “Labor’s Declining Share of Income and Rising Inequality” (Federal Reserve Bank of Cleveland)
- “Obama vs. Romney on China” (Center for American Progress Action Fund’s Adam Hersh via CNN.com)
- “Small Business and the Expiration of the 2001 Tax Rate Reductions: Economic Issues” (Congressional Research Service)
The National Association of Manufacturers is showing itself to be less a genuine representative of the nation’s manufacturing businesses than a political entity tied to the Republican Party. Despite the evidence that the Obama administration imposed fewer regulations in its first three years than the Bush administration, the NAM complains constantly about the regulatory burden Obama is imposing. In its own words: “New Survey Paints Bleak Picture Before 2012 Elections.”
This is especially surprising since we heard no such complaints at the end of George Bush’s first term.
It begins to look hypocritical and totally political when we consider that each year of the Bush administration resulted in a year-over-year loss of manufacturing jobs, a streak that ended only after Obama’s auto bailout and Recovery Act took effect. Over the last two years, manufacturing employment grew from 11,340,000 to 12,074,000, a gain of more than 700,000 jobs.
Looking at these data, it is hard to conclude that the increasing regulatory burden of the last few years—if there has been an increase, as NAM claims—has hurt manufacturing.
The latest red flag that all is not well with iPhone 5 production is the overnight riot that occurred at the dormitory of one of Foxconn’s plants in China that “makes parts for Apple’s iPhones and hardware for other companies” (quoting from NPR). According to Reuters, this riot involved 2,000 workers, was broken up by about 5,000 police, and the factory has been shut down for an indeterminate length of time.
The proximate cause of the riot is not yet clear; Foxconn said “the trouble started with a personal row that blew up into a brawl,” but Twitter-like postings claimed that “factory guards had beaten workers and that sparked the melee” (both quotes from the Reuters story). It is, of course, particularly difficult to obtain accurate, unbiased information of conditions at factories in China. At minimum, however, the severity of the riot demands an independent investigation and should give anyone pause before concluding that any worker rights concerns connected to the production of iPhones by Foxconn have been addressed.
Such pause is especially appropriate given other information that has come to light in the past two weeks. Read more
“It is disappointing that no matter how advanced the technology introduced by Apple is, the old problems in working conditions remain at its major supplier Foxconn.” — SACOM, Sept. 20, 2012
In Sept. 2012, researchers from the Hong Kong-based Students and Scholars Against Corporate Misbehaviour (SACOM) conducted off-site interviews at Foxconn’s plants in Zhengzhou, China; the sole product of these plants is the iPhone. SACOM just released the findings of its interviews, New iPhone, Old Abuses: Have Working Conditions at Foxconn in China Improved? The report (sometimes quoted verbatim below) indicates:
- Overtime work is excessive, and well above that permitted by Chinese law. Monthly overtime hours have been between 80–100 hours in some of the production lines. This is two to three times the amount (36 hours) allowed by Chinese law. Workers often only get one day off every 13 days.
- Overtime work is often unpaid. Workers have to attend the daily work assembly meeting without payment. Also, on some production lines, workers must reach their work quota before they can stop working even if that means working overtime without pay. Read more
The Obama administration announced another trade case against China, this one focused on China’s blatant, illegal subsidies to exporters of auto parts. These subsidies have helped China take a growing share of the huge U.S. auto parts market, at a cost of tens of thousands of good manufacturing jobs. EPI researchers reported on the breadth and depth of these illegal subsidies earlier this year and warned that they threatened to decimate employment in the U.S. industry just as it got back to its feet after the Great Recession. As EPI’s Rob Scott and Hilary Wething wrote in January: “Chinese auto-parts exports increased more than 900 percent from 2000 to 2010, largely because the Chinese central and local governments heavily subsidize the country’s auto-parts industry; they provided $27.5 billion in subsidies between 2001 and 2010 (Haley 2012).” The U.S. trade deficit in auto parts with China reached $9.1 billion in 2010 and has continued to grow.
It’s great to see President Obama stand up for fair trade, even if the timing is provoking some skepticism in the media. As I’ve pointed out to several reporters, Republican presidential nominee Mitt Romney has been calling on Obama to get tougher on China’s unfair trade practices. Romney can hardly complain when the president does exactly what Romney recommends. And with tens of thousands of good jobs at stake, it would have made no sense for Obama to delay this case until after the election; every month of delay would just mean more bankrupt manufacturers, more plant closings, and more jobs lost.
The administration, following its standard, cautious practice, has not tackled the full extent of illegal Chinese subsidies. Rather, it’s gone after the low-hanging fruit, the clearly prohibited, high-profile, publicly reported, targeted subsidies that depend on export volume. There’s much more to do. In a report for EPI, Usha Haley, Professor of International Business at Massey University in New Zealand, documented more than $27 billion in Chinese government subsidies to the auto parts industry from 2001 to 2011 and identified another $11 billion in subsidies planned for the future. Preventing this massive intervention will be critical if the U.S. auto parts industry is to get back on its feet, let alone to thrive and grow. The case announced today was a logical place to start.
Today is the 49th anniversary of Dr. Martin Luther King’s brilliant “I Have a Dream” speech, the final speech of the 1963 March on Washington, which was officially titled the “March on Washington for Jobs and Freedom.” That event is obscured by the distance of a half-century, but it’s worth the effort to review the official demands of the march and the economic thinking of King and his allies, A. Philip Randolph of the Brotherhood of Sleeping Car Porters and Walter Reuther of the United Auto Workers. What they wanted for Americans then is still badly needed today—perhaps more than ever.
The March was about civil rights, voting rights and racial equality, but it was also about the need for jobs and for jobs that paid a decent wage. The marchers wanted the federal minimum wage raised nearly 75 percent, from $1.15 an hour to $2.00 an hour. They also called for “A massive federal program to train and place all unemployed workers—Negro and white—on meaningful and dignified jobs at decent wages.”
In 1963, the unemployment rate averaged about 5.0 percent, which looks good compared to today’s 8.3 percent, but King and the other organizers wanted full employment and believed it was the federal government’s responsibility to provide it. Read more
Apple’s key Chinese supplier is Foxconn, made famous by the rash of suicides committed by its employees, who live packed into dorms, far from home, working brutal schedules of overtime (sometimes as much as 80 hours a month, on top of the core 160 hours), subjected to verbal abuse and humiliating punishment by supervisors, and systematically cheated on wages.
When labor rights groups in China and Hong Kong exposed these conditions and the New York Times published a front-page exposé, Apple hired the Fair Labor Association (FLA) to help it improve conditions—and its corporate image. In a public report, Apple committed itself to a broad range of reforms, and has made some headway on several fronts, according to the FLA.
But many observers are skeptical because Apple and Foxconn have put off most of the reforms that would actually cost them some money. The FLA could not, for example, get the companies to agree to comply with Chinese law limiting maximum overtime hours until the summer of 2013, and the companies continue to subject Foxconn workers to 60 hours of overtime per month—nearly twice the amount of overtime permitted by law. The companies also pledged only to study whether the workers were right in their complaints that wages are too low to meet basic needs. And most telling, there is no indication the companies have kept their public promise to pay back wages to the hundreds of thousands of employees Foxconn systematically cheated by working them “off the clock.” Read more
The U.S. economy has created 2.6 million net jobs since the end of the Great Recession in June 2009. According to a Los Angeles Times analysis of Bureau of Labor Statistics data, men have filled 2.07 million of these new jobs. There are several possible explanations for this, and a couple of important points to keep this disparity in context:
- Men suffered higher levels of job loss during the recession than women, and their level of employment today relative to pre-recession levels is still lower than women’s.
- Women hold the majority of jobs in the public sector, which is by far the sector that has seen the worst performance since the recovery began.
- Male-dominated manufacturing is recovering, albeit slowly.
- Men are taking jobs in sectors that women have traditionally been the majority in.
The construction sector suffered the largest job losses of any industry during the recession, followed by manufacturing. These sectors are overwhelmingly male, meaning that their initial losses in the recession outpaced losses for women. Even today, unemployment among men is 8.4 percent, while for women it’s 8.0 percent.
Because women have historically filled the majority of public-sector jobs, they’ve been disproportionately affected by state and local governments’ decisions to cut positions in the wake of state fiscal troubles—a phenomenon that has largely occurred since the recession’s end. An EPI report from May found that of the 765,000 public-sector jobs lost between 2007 and 2011, 70 percent were jobs held by women. While the private sector has slowly recovered some of the jobs it lost during the recession, the public sector is still cutting them at a rapid rate; 2011 was the worst public-sector job decline on record. This public-sector employment loss is almost surely the single largest reason for women’s comparative struggles since the recovery began. Read more
The Obama administration announced yesterday that it has filed a complaint at the World Trade Organization (WTO) with China over its tariffs on large vehicles exported from the United States to China. This is the seventh complaint filed by the administration against China, and the White House noted that “the previous six have all been successful.”1 The Obama administration should be applauded for its continuing support of the U.S. auto industry, and for this action, which will help preserve U.S. jobs supported by about $3 billion of U.S. exports in 2011.
Much more needs to be done to stop unfair trade and industrial policies in China’s auto industry, which the Chinese government has targeted as a “pillar industry,” for development. Between 2001 and 2011, according to a report by EPI Research Associate Usha Haley, “the Chinese auto parts industry has received about $27.5 billion in subsidies.” U.S. imports of auto parts (including tires) increased more than 600 percent between 2001 and 2011, and are on track to reach $14.5 billion in 2012. The rapid growth of subsidized and unfairly traded auto parts from China puts at risk every job both directly and indirectly supported by the U.S. auto–parts industry. The U.S. auto parts industry directly and indirectly supported 1.6 million jobs in 2009, with jobs at risk in every state.
Adding insult to injury, China continues to manipulate its currency. This magnifies the benefits of subsidies and other unfair trade policies that benefit China’s auto-parts exports. Currency manipulation artificially reduces the costs of China’s exports and inflates the costs of exports from the United States (and other countries) in China and all other countries where they compete with China. I estimated last year that a 25-to-30 percent appreciation of China’s yuan and other manipulated Asian currencies would support the creation of up to 2.25 million U.S. jobs, stimulating up to $286 billion in GDP growth (1.9 percent) and reducing federal budget deficits by up to $71 billion per year. Read more
A story in Tuesday’s Wall Street Journal highlights a truth about the economy that Washington’s policy makers have chosen to ignore. The value of our currency relative to our competitor nations’ currencies is a huge driver of factory location. Despite its positive connotations, a strong dollar is bad for U.S. exports and U.S. manufacturers. For years, Japan bought U.S. treasurys as a way to cheapen its own currency and strengthen ours, just as China does. The result was that Japanese imports to the U.S. were artificially cheaper and Japanese cars built in Japan had a price advantage even overseas, when competing with U.S.-built cars. (The same would be true for refrigerators or construction equipment, or any other manufactured goods.)
But lately, Japan has been unable to prevent its currency from strengthening against the dollar, so much so that the advantage has been flipped, and it is beginning to make more sense for Japanese automakers to build their cars in the U.S. than in Japan. As a result, Nissan is closing plants in Japan and moving lines to Tennessee and Mississippi, and Honda plans to export cars from the U.S. in large numbers—150,000 a year by 2017.
What is true for Japan is true in spades for China, which for years has maintained a weak yuan relative to the dollar. Other countries in Asia have also followed China’s lead. If China let its currency strengthen, products made in China would be much more expensive here, leading many producers to move manufacturing operations back to the U.S. By the same token, products made in the U.S. get an immediate price advantage and would once again be competitive in world markets.
The Obama administration and Congress should agree to legislation that would force China and other Asia currency manipulators to give up their tactics and give our manufacturers a fair chance to compete. As EPI’s senior trade economist Robert Scott has shown, no other single legislative action is likely to create more jobs, do more to correct our trade deficit, or do more for our budget deficit.
The U.S. Bureau of Economic Analysis (BEA) recently announced that the U.S. net international investment position (NIIP) was -$4 trillion at year-end in 2011 (see figure, below). The NIIP stood at -$2.5 trillion at year-end 2010. The $1.6 trillion increase in the net debt was largely caused by price changes of -$802 billion (on domestic and foreign holdings of stocks and bonds) and by net financial flows of -$556 billion. Net financial flows were largely explained by financing of the $466 billion U.S. current account deficit in 2011. The current account is the broadest measure of the U.S. trade deficit. While the costs of financing the NIIP were relatively small in 2011, they could rise rapidly if interest rates return to more normal levels in the future.
The United States has been borrowing hundreds of billions of dollars per year for more than a decade to finance its growing trade deficits. However, until 2011, the U.S. NIIP has not declined proportionately, as shown in the figure below, primarily because of gains in the prices of foreign stocks, the decline of the dollar (which made foreign currency holdings more valuable), and frequent accounting revisions (which have found more and more U.S. investments abroad).
Last year, several of those factors moved against the United States as the NIIP declined $1.6 trillion to -$4 trillion. That’s real money. Foreign investors (primarily foreign central banks) held $5.7 trillion in treasuries and other government securities at the end of 2011. The United States paid, on average, about 2.3 percent in interest on all of those securities. These low rates are caused by the still-depressed U.S. economy operating far below potential, and are unlikely to rise unless the U.S. economy begins operating much closer to full-employment. But, if this recovery happens and the NIIP remains roughly as large as it is today, then debt service costs could rise significantly. For example, if the average cost of government debt rises to 4.5 percent, it would add another $124 billion to the U.S. government deficit. If this rise in U.S. borrowing costs, furthermore, was not matched by a rise in global interest rates, then this would actually cause a net decline in U.S. GDP, as income flows out of the country to service debt increased and were not matched by increased inflows that paid U.S. owners of foreign assets.1
The U.S. NIIP represents a potential claim against future national income, and the size of this potential claim is growing dramatically as shown in the figure above. Each year that we allow large trade deficits to continue is another year that adds to this claim on future incomes—yet this actual intergenerational transfer is often ignored while a non-existent intergenerational transfer (that one allegedly caused by rising federal budget deficits) attracts much attention from pundits and economic commentators.2
Board of Governors of the Federal Reserve System. 2012. “Selected Interest Rates (Daily) – H.15: Historical Data.”
U.S. Bureau of Economic Analysis (BEA). 2012. “International Economic Accounts: Balance of Payments.”
U.S. Bureau of Economic Analysis. 2012. “International Economic Accounts: International Investment Position.”
1. Average rate of return on U.S. government securities in 2011 calculated from data in the current account (BEA 2012a) and the NIIP (BEA 2012b). Return on seven-year treasury securities used for comparison. The average return on seven-year treasuries was 2.16 percent in 2011 (Board of Governors of the Federal Reserve System 2012). Their average return in the pre-recession period of 2000-2007 was 4.52 percent.
2. Interest payments on government debt owed to U.S. citizens only reallocate income from taxpayers to domestic bondholders. Foreign holdings of U.S. securities represent claims on future income, which are qualitatively different. Interest payments on foreign holdings reduce U.S. GDP, while interest paid to domestic holdings does not. Given the existence of substantial unemployment and the predominance of deficit opponents in Congress, increases in the government debt due to financial outflows could result in further spending cuts, which would cause a further decline in U.S. GDP.
Many in the media have accepted the notion put forward by conservatives and business associations that unions make businesses uncompetitive by raising wages and benefits irresponsibly. The poster child for this view of the world is the auto industry, where the United Auto Workers supposedly drove the “Big Three” (Chrysler, Ford, and General Motors) into the ground while foreign competitors ate their lunch.
This is false history. As Case Western Reserve University manufacturing scholar Sue Helper has helped me understand, the auto industry’s problem stemmed from decades of mismanagement, and regardless of the UAW contracts, the Big Three made choices that doomed them to lose market share and the ability to compete.
The biggest element of mismanagement was designing and selling poor products. Anyone who lived in Michigan in the 1970s remembers when Detroit began building truly terrible cars, like the Chevy Vega, the AMC Gremlin, the Chrysler Imperial, and the Ford Pinto; it was the beginning of what became a slow-moving train wreck. As the Economist published in the May 2009 story, “A Giant Falls,” Detroit began making cars that were both dull and unreliable:
“Only in the 1970s, after the first oil shock, did faults start to become visible. The finned and chromed V8-powered monsters beloved of Americans were replaced by dumpy, front-wheel-drive boxes designed to meet new rules (known as CAFE standards) limiting the average fuel economy of carmakers’ fleets and to compete with Japanese imports. As well as being dull to look at, the new cars were less reliable than equivalent Japanese models.
By the early 1980s it had begun to dawn on GM that the Japanese could not only make better cars but also do so far more efficiently. A joint venture with Toyota to manufacture cars in California was an eye-opener. It convinced GM’s management that “lean” manufacturing was of the highest importance. Unfortunately, that meant still less attention being paid to the quality of the cars GM was turning out. Most were indistinguishable, badge-engineered nonentities.”1
Bad design and engineering were accompanied by disastrous pricing decisions, which further jeopardized quality:
“As the appeal of its products sank, so did the prices GM could ask. New ways had to be found to cut costs further, making the cars still less attractive to buyers.”
Autoworker wages didn’t make the Big Three uncompetitive by driving prices up; poor value drove prices down. As prices and quality fell together, consumers fled. The UAW’s contracts were almost irrelevant. One way to show this is to compare the pricing of the competitors’ vehicles with the size of the labor cost differential bargained by the UAW. Labor costs make up only 10 percent of the cost of a typical automobile. Before the auto rescue, the Big Three paid $55 an hour in compensation per auto worker while the Japanese paid only $46 an hour. (Company lobbyists and publicists inflated the total Big Three labor cost to $71 by attributing the unfunded pension and health benefit costs for decades of retired workers to the much smaller currently employed workforce2; the legacy costs for Japanese transplants were only $3 an hour.)3 But even if, for the sake of argument, we accept the unfairly inflated $71 figure, the difference in the cost of a vehicle attributable to the UAW (the UAW premium) would be 30 percent of the average 10 percent labor cost, or 3 percent of total cost.
In 2008, according to Edmunds, GM sold its average large car for $21,518. Assuming GM sold its cars at cost, the UAW premium would have been only $645 (3 percent of $21,518). Did the UAW premium raise the selling price so high as to make GM cars uncompetitive with Toyotas? Not exactly. Toyota sold its comparably equipped average large car for $31,753—$10,000 more than GM.4 It wasn’t price that made GM cars uncompetitive, it was the quality of the product and the customers’ perception of quality.5
For nearly 30 years, the Big Three’s market share fell steadily, from 77 percent in 1980 to 45 percent in 2009, almost entirely because the U.S. companies built cars that were noisier and less comfortable, had poorer fit and finish, poorer gas mileage, more defects, and a poorer repair record and resale value.6 Helper has documented the hostile relationships the Big Three developed with their suppliers,7 which led to the provision and assembly of parts that did not work well together, did not fit seamlessly, and whose inherent quality was sometimes substandard.8 In 2006, before the auto industry collapsed (and before gas prices skyrocketed), economists Kenneth Train and Clifford Winston did a careful econometric analysis of buyer preferences and concluded that:
“… the U.S. automakers’ loss in market share during the past decade can be explained almost entirely by the difference in the basic attributes that measure the quality and value of their vehicles. Recent efforts by U.S. firms to offset this disadvantage by offering much larger incentives than foreign automakers offer have not met with much success. In contrast to the numerous hypotheses that have been proffered to explain the industry’s problems, our findings lead to the conclusion that the only way for the U.S. industry to stop its decline is to improve the basic attributes of their vehicles as rapidly as foreign competitors have been able to improve the basic attributes of theirs.”
The authors conducted a simulation to determine “how much U.S. manufacturers would have to reduce their prices in 2000 to attain the same market share in 2000 that they had in 1990 and found that prices would have to fall more than 50 percent.” In other words, reducing the cars’ price by the UAW premium would have had no discernible effect on market share. The Big Three were building cars that most people simply didn’t want to buy, and only by cutting the price in half could they have retained their market share.
What happens to a corporation that sells its products at a low price while losing market share for 30 years? It goes bankrupt.
Fundamental mismanagement and building cars that customers didn’t want doomed the Big Three, not the UAW. Read more
The Cambridge Forum hosted a videotaped mini-conference on the impact of global engagement on the U.S. and world economies on April 16. Speakers and topics included University of Massachusetts Amherst economic professor Robert Pollin on the “Globalization of Labor: Is a Race To the Bottom Inevitable?”; Economic Policy Institute Director of Trade and Manufacturing Policy Research, Robert Scott, on the “Globalization of Capital: The Rise of the Multinationals”; editor-at-large of The American Prospect and Washington Post columnist Harold Meyerson on the “Globalization of Markets: Do Corporations Need American Consumers?”; and Harvard Kennedy School of Government Professor of International Political Economy Dani Rodrik, who delivered the keynote address on his book, The Globalization Paradox (New York: W.W. Norton & Company, Inc.).
Each participant delivered brief remarks and engaged in wide-ranging question-and-answer sessions with the audience that were moderated by Robert Kuttner, co-founder of The American Prospect (Note: Kuttner is an EPI co-founder and board member). You can watch videos of all four speakers below:
The Commerce Department released another depressing report on the U.S. trade deficit this morning, our monthly reminder of the huge gap between globalization’s economic reality and American economic policymaking.
In March, we bought about $52 billion (28 percent) more from the rest of the world than we sold. From first quarter 2011 to first quarter 2012, the deficit on goods and services rose almost 8 percent, with China representing almost two-thirds of our non-oil deficit with the rest of the world.
Yet, over the past year or so, a drumbeat of analysis in the establishment business press has been telling us to stop worrying; our chronic trade imbalance with China will soon disappear. New York Times columnist Eduardo Porter last week summed up the happy scenario: Chinese wages and transpacific transportation costs are rising and the Chinese are allowing their currency to appreciate. The implication is that rather than exerting unpleasant political pressure on China, we should trust in the natural workings of the market and the good common sense of the Chinese leaders who “appear to understand the need for change.”
Don’t hold your breath.
Porter is correct that wages are rising in China faster than they are in the United States. But to get a perspective, check out the Bureau of Labor Statistics’ numbers on international labor costs in manufacturing, where the latest data—for 2008—is that Chinese manufacturing costs are a little over 4 percent of U.S. levels. Yes, they probably have risen since then, but the gap is still immense and will clearly not be closed anytime soon.
Moreover, the narrowing of the gap may have as much to do with U.S. workers getting less as Chinese workers getting more. The corporate poster boy for looking at the bright side is General Electric, which has moved some production of a few heavy appliances back to the U.S. from China. What the poster leaves out is that GE workers who used to make $22 an hour are now making $13.
It is also true that rising fuel costs are making it more expensive to import large, heavy products from across the Pacific. But that hardly means that production will move back to the U.S. Thanks to the North American Free Trade Agreement, multinational producers of big appliances and autos and parts who find importing from China too expensive, are moving to Mexico where labor costs are 18 percent of what they’d pay in the U.S.
Finally, Porter writes that the Chinese strategy of manipulating their currency to keep their exports cheap and imports expensive “may be turning the corner.” He notes that the Chinese, while they don’t want to appear caving to American pressure, have quietly allowed the renminbi to appreciate 40 percent against the dollar since 2005.
Just so. And over that time our trade deficit with China has grown by over 45 percent, suggesting how large China’s comparative advantage in trade has become. Moreover, despite the endless parade of American officials to Beijing pleading for more currency appreciation, the Chinese apparently think they’ve already done enough. Porter himself quotes China’s premier Wen Jiabao to the effect that the dollar-renminbi now may “have reached equilibrium level.”
Thus, there is little evidence that either the market or the Chinese leadership intend to rescue the U.S. from its trade quagmire.
Unfortunately, neither is there evidence that American leaders—from either party—intend to take responsibility for doing it themselves. Not only do they have no strategy to deal with the trade deficit, but President Obama and congressional Republicans are busily preparing for yet another of the so-called free trade agreements—this one to a group of countries around the Pacific rim—that have allowed our multinationals to off-shore production for the American consumer for over three-and-a-half decades.
But the market will not be denied; eventually we will balance our trading account. So, in the absence of a proactive policy, GE will be the model—the relentless lowering of American wages and living standards until the gap with workers in China and Mexico is closed.
New data from the United Kingdom indicates that its economy has seen six consecutive months of economic contraction—the rule of thumb definition of recession.
Let’s be even more concrete: If the U.K. had just followed the fiscal stance of the United States over the past two years, they would not have re-entered recession. Adam Posen of the Bank of England recently estimated that the U.S. fiscal stance has contributed about 3 percent extra to overall GDP growth compared to a scenario where they had followed the U.K. stance. And this gap has actually widened in more recent years (and is projected to widen even further for 2012).
Posen’s estimate crucially includes the drag from state and local governments in the U.S., so it’s not like this overall fiscal stance in the U.S. over this time has been wildly expansionary. Just matching the U.S. fiscal support over this time period would have been a pretty modest goal.
But of course, this goal was rejected by the conservative government elected in mid-2010, and instead the U.K. has followed a plan based on austerity.
There is plenty to lament in policymaking responses to the crisis of the past four years, but the U.K. fiscal tightening may well be the single most avoidable own-goal over the period. Greece, for example, really can’t run expansionary fiscal policy right now (at least not without help from the core countries of the eurozone) without getting savaged by bond markets that will push up interest costs on debt.
The U.K., on the other hand, faces no such constraints. They print their own currency so they cannot be forced into default by bond markets, and there has been no upward pressure at all on their debt-servicing costs since the Great Recession began (see chart below). There is, in short, no actually-existing macroeconomic problem that austerity addresses. Instead, the swing towards it has been driven by ideology. And it has not turned out well.
Apple and its key manufacturing partner, Foxconn, have been justifiably criticized for their labor practices in China, which include excessive, oppressive and illegal overtime hours, hazardous conditions, inappropriate and sometimes forced labor of 16-18 year-old student “interns” on night shifts, and wages so low that 64 percent of workers claim they don’t cover basic needs.
Many observers have remarked that with Apple’s gigantic profits, it can afford to ensure better treatment of its production workforce. A close examination of the iPhone’s cost structure leaves no doubt.
Various market researchers, including iSuppli and Horace Dediu of Asymco, have broken down the costs of the iPhone, which Apple sold to wireless carriers for an average price of $630 in the fourth quarter of 2011. All agree that Foxconn’s assembly cost— approximately $15, or 2% of the total—is a miniscule part of the iPhone’s cost. Apple’s estimated $319 profit per phone is at least 20 times the cost of producing the iPhone. In fact, because the labor cost is only part of Foxconn’s costs, which include energy, property, and its own profit, Apple’s profit per phone is more than 20 times the labor cost.
Last week, Eduardo Porter wrote in the New York Times’ Economix blog about a response he received on his recent piece on manufacturing from Robert Lawrence of the Kennedy School. Porter should have dug into the topic further because what Lawrence wrote was rather misleading. Here are Porter’s words:
“Prof. Robert Lawrence from Harvard makes an interesting point in response to my Wednesday column about our misplaced hopes in manufacturing as a source of new jobs: even if every single thing we bought was “made in America” — if we stopped multinationals from outsourcing production to China and closed our doors to imports — even then, manufacturing employment would lag.
The reason is simple: we are spending less and less on goods and more and more on services. In 1969, American consumers were allocating half of all their spending on consumption to goods. By 2010, that share had fallen to one-third.”
Lawrence clearly wants people to believe that manufacturing jobs are declining because “we” just don’t buy much manufactured stuff anymore, or, in economic terms that there’s less demand for goods now than in the past. But that’s wrong, for a couple of reasons. First, goods are not only produced for household consumption, they are also produced for business and public investment, and for export. Second, and more importantly, the prices of goods have fallen relative to other types of products, so the goods share of total nominal (not inflation-adjusted) spending might fall, but the share in real (inflation-adjusted) spending might not follow. Or, to put it simply, people might have more TVs in their homes than ever before even while the share of their total income they spend on TVs has fallen. But, nobody would describe this state as a declining demand for TVs.
The following graph shows the share of goods in final sales of domestic products (the Bureau of Economic Analysis provides data on major types of products, dividing final sales into goods, services and structures. See NIPA Tables 1.2.5 and 1.2.6). The goods share of final sales in nominal terms did fall from 40.8 percent in 1969 to 28.3 percent in 2011, a roughly 30 percent decline in relative spending. However, the share of goods in real final sales actually rose 50 percent from 21.5 percent in 1969 to 31.3 percent in 2011. This means that the economy was even more goods-intensive in 2011 than in 1969 and that it was not a relative decline in the demand for goods that caused the shrinkage of manufacturing employment.
In the end, manufacturing employment is a horse race between demand for manufactured goods (which boosts jobs) and productivity (which, all else equal, means fewer jobs are needed in the sector). One thing that this analysis should remind us of is that even faster productivity has its upside: As prices fall because productivity rises in this sector, people demand more manufactured goods.
It should be noted, however, that neither Porter nor Lawrence denies that lowering the trade deficit would boost jobs. Rather, Porter says that even without any imports, manufacturing employment would lag. Lawrence, meanwhile, says that even without a trade deficit, goods employment would fall. In reality, closing the trade deficit would provide millions of jobs and boost the economy. For instance, my colleague Robert Scott has shown that growing trade deficits with China eliminated 2.8 million U.S. jobs between 2001 and 2010 alone, including 1.9 million jobs displaced from manufacturing. Similarly, correcting the currency imbalances with China, Hong Kong, Taiwan, Singapore, and Malaysia could add up to $285.7 billion (1.9 percent) to U.S. GDP, create up to 2.25 million jobs over the next 18 to 24 months (most in manufacturing), and reduce U.S. budget deficits by up to $71.4 billion per year.
Moreover, as Scott’s recent blog post notes, the recent recession was especially hard on manufacturing (we lost 2.3 million jobs between 2007 and Jan. 2010) and we can get those jobs back in a robust recovery.
So, sure, manufacturing employment will not return to 25 percent of employment. Nevertheless, we can gain a lot of manufacturing jobs by strengthening the recovery and through appropriate trade and currency policy. This would provide millions of good jobs, aid many communities, and be good for the nation. No head-fakes about household consumption shares should distract us from these facts.
A recent commentary by Eduardo Porter in the New York Times claims that a “revolution in manufacturing employment seems far-fetched,” despite the recent recovery of manufacturing employment. Porter then proceeds to pound nails in manufacturing’s supposed coffin, claiming that “most of the factory jobs lost over the last three decades in this country are gone for good. In truth, they are not even very good jobs.” Perhaps not for a physicist like Porter, but manufacturing does provide excellent wages and benefits for many working Americans. And, with 11.9 million jobs today, U.S. manufacturing is very much alive and kicking.
Laura D’Andrea Tyson got the wage issue right in Why Manufacturing Still Matters, a post she wrote for the Times’ Economix blog in February. She notes that manufacturing jobs are “high-productivity, high value-added jobs with good pay and benefits.” According to Tyson, in 2009, “the average manufacturing worker earned $74, 447 in annual pay and benefits, compared with $63,122 for the average non-manufacturing worker.”1 Manufacturing wages and benefits are particularly attractive for workers without a college degree, for whom the alternative is often a job at low pay with no benefits.
Porter is also wrong to suggest that manufacturing employment has been on a downward trend for three decades (see graph below). In fact, manufacturing employment was relatively stable between 1969 and 2000, generally ranging between 16.7 million and 19.6 million workers. During this period, employment in big-ticket, durable goods industries such as autos and aerospace was more volatile than employment in non-durable goods. Starting from a peak in early 1998, U.S. manufacturing declined rapidly after the Asian financial crisis (which caused widespread devaluations in Asia), and total employment in both durable and non-durable goods began a sharp drop. This decline was associated with the rapid growth of the U.S. trade deficit, especially with China. Growing trade deficits with China eliminated 2.8 million U.S. jobs between 2001 and 2010 alone, including 1.9 million jobs displaced from manufacturing. Thus, U.S. job losses in manufacturing are really just a phenomenon of the past decade.2
Manufacturing has been hit with two distinct waves of job losses since 2000. Between 2000 and 2007, growing trade deficits were largely responsible for the loss of 3.9 million manufacturing jobs. In this period, employment declined in both non-durables (-20.3 percent) and durables (-19.8 percent) at similar rates. The great recession eliminated another 2.3 million jobs between 2007 and Jan. 2010 as the demand for cars and other manufactured goods collapsed. Employment in durable goods was hit especially hard by the recession, falling an additional 19.7 percent, while employment in durables fell 11.3 percent. However, since the end of the recession, employment in the two sectors has behaved in very different ways, as shown in the graph. Non-durable employment has remained essentially flat, adding only 5,000 jobs (0.1 percent) over the past 26 months, while durable goods industries have added 454,000 jobs (6.7 percent).
It does seem unlikely that the U.S. will recover many jobs in apparel or footwear. However, the non-durables sector also includes chemicals, pharmaceuticals, and petroleum refining. The U.S. exports large amounts of those commodities, and they certainly support the kind of high value-added, high-wage jobs Tyson described.
Durable goods industries such as aerospace products, machine tools, electronics, and motor vehicles and parts also support lots of exports, and those industries could grow with support of appropriate trade and industrial policies. Countries such as Japan and Germany have managed to support large and growing trade surpluses, especially in those sectors, because the vast majority of their exports are manufactured products. And, contrary to Porter’s assertions, they have lost a much smaller share of their manufacturing jobs than the United States. According to OECD statistics, between 2000 and 2009 (from peak to the trough of the recession), Germany lost fewer than 700,000 manufacturing jobs (an 8.3 percent decline). Japan lost 2.1 million (-17.4 percent), and the United States lost 5.7 million (-30.2 percent). The U.S. suffered nearly twice as much manufacturing job loss as Japan, and nearly four times as much as Germany.
Manufacturing employment in each of these countries has been hurt by the recession (although Germany, for example, did much more to prevent manufacturing job loss during the downturn), but the big difference is trade. In the German “Kurzarbeit,” or short work program, firms cut workers’ hours rather than make big layoffs, and the government helps make up the difference in workers’ paychecks (rather than paying unemployment compensation), thus limiting mass unemployment and stabilizing the economy. Growing trade deficits eliminated millions of manufacturing jobs in the United States, while growing trade surpluses helped support manufacturing jobs in Japan and Germany. It didn’t have to be that way, and we can recover lost manufacturing jobs in the future, especially in high-wage, durable goods industries. Read more
The most annoying responses to the revelations about Apple’s inhumane and exploitative factory pay and working conditions in China are the variations on the theme that the Chinese workers are grateful (or ought to be) to have the work and even the grueling overtime hours. “Sure, it looks like exploitation to Westerners, but really, Apple is lifting their living standards.” No. Apple is exploiting these young Chinese workers, grinding them down, forcing them to work for pay so low they can’t survive on it without working far beyond anything fair or reasonable – or even legal under Chinese labor law. And the workers don’t have a choice; they either work the overtime or they’re fired.
The Fair Labor Association, Apple’s hand-picked auditor, found that Apple’s most important supplier, Foxconn, works employees far beyond the hours permitted by Apple’s code of conduct (a maximum of 60 hours per week), let alone Chinese law, which limits work hours to 49 per week. The FLA reports that “in November and December 2011, 34% and 46% of the workforce respectively worked up to 70 hours per week.” Students and Scholars Against Corporate Misbehaviour (SACOM), a Hong Kong-based labor rights organization, has documented Foxconn employees working 140 hours of overtime a month.
Keith Bradsher’s recent “news analysis” in the New York Times, “Two Sides to Labor in China,” blamed the workers for these sweatshop hours and tried to portray them in a positive light. Bradsher wrote: “But one reason that workweeks of 60 hours or more have been possible at factories run by Foxconn and others is that at least some laborers already on the payroll have wanted the extra hours.”
Bradsher believes the employees have a choice about working 60-70 hours a week. He writes that “the added expense of hiring additional workers can make it cheaper to ask employees for extra overtime…” Ask? When Foxconn employees were throwing themselves out of dormitory windows, committing suicide in reaction to the harsh conditions at Foxconn, the company reduced work hours to 60 a week, but it didn’t give workers a choice about working them. As an Oct. 2010 SACOM report revealed, “Despite fatigue, workers cannot reject overtime work, because Foxconn requires workers to sign a Voluntary Overtime Pledge.”
Bradsher cites the FLA’s survey of Foxconn employees, 34 percent of whom reported they “actually wanted even more hours.” How can workers want more than 60 hours a week? Bradsher says they’re young and bored, have nothing better to do, “and were eager to make as much money as possible so as to return to their home villages.” He never suggests that their pay is so low they can’t survive working the legal maximum number of hours. But that is exactly what SACOM found in 2010 when it compared the cost of living in Foxconn’s factory cities with Foxconn’s pay. Without overtime, the average Foxconn production employee earned about 60 percent of what was required to meet basic needs. Today, after wage increases that have been offset by higher food prices and what Bradsher admits are “soaring rents,” 72 percent of Foxconn employees at Chengdu told the FLA their salaries did not cover basic needs.
So when Apple apologists tell you that “the Chinese are different, they want to work long hours,” don’t buy it. The richest corporation in the world is grinding its workers to the bone because it can get away with it, not because the workers want to live that way.
Is the eurozone in recession? Eight consecutive months of rising unemployment indicate that the region could indeed be facing another economic downturn.
According to Eurostat, the European Union’s version of the Bureau of Labor Statistics, the unemployment rate in the 17 countries that use the euro climbed to 10.8 percent in February, its highest level since the currency’s introduction in 1999. Seven eurozone countries have unemployment rates of more than 10 percent; in comparison, the United States’ unemployment rate is 8.3 percent. Past historical periods have also seen lower unemployment rates in the United States than in most of Europe, but the difference over the last couple of years is that joblessness in the eurozone is obvious collateral damage stemming from the embrace of fiscal and monetary austerity.
“Europe’s leaders just haven’t been nearly as committed [as U.S. leaders] to boosting demand with expansionary macroeconomic policies, either fiscal or monetary,” says EPI macroeconomist Josh Bivens.
“To be clear, the United States hasn’t provided adequate support to its economy and job market—but Europe has been even worse,” he continued.
In Spain, nearly a quarter of the labor force is unemployed, including more than half of workers under age 25. Spain’s plan to combat its troubles? A $36 billion austerity package passed by its new conservative government. As EPI has argued before, austerity measures are inappropriate solutions to unemployment crises. This is clearly the case in Greece, Ireland, and Portugal, all of which had to enact austerity measures as a condition of receiving bailouts. In these countries, austerity has compounded economic troubles and failed to improve staggeringly high unemployment rates.
So how can the eurozone avert another crisis? Bivens thinks there are two separate questions that need to be answered. First, how are countries like Greece (and if we’re unlucky, Ireland, Italy, Portugal, and Spain) going to pay their debts (and how much of their debts will be written off by creditors)? Second, how are these same countries going to see growth in the next decade sufficient to ward off disastrous unemployment levels?
Bivens believes the second question gets much less attention—but is far more important.
“A key barrier to a country like Greece achieving growth in the coming decade is the lack of an independent monetary and exchange-rate policy,” says Bivens. “Greece absolutely needs to gain competitiveness in global markets as part of its medium-term macroeconomic strategy.”
He continued, “There are two paths there, exchange-rate adjustment or ‘internal devaluation’ [i.e., having Greek wages and salaries grow painfully slow for years]. The latter course is much more damaging; just look at Latvia, which fully embraced that strategy. The real lesson of the euro crisis is that all the tools of macroeconomic management need to be taken much more seriously than they have been.”
The Fair Labor Association (FLA), Apple’s auditor for its labor rights problems in China, issued a report last week that received widespread praise, including in the New York Times, whose reporting about workplace deaths, employee suicides and grueling overtime forced Apple to conduct the audit in the first place. This is not the first time Apple has commissioned such an audit, and it’s not the first time the auditor found serious problems.
In 2006, after British newspapers wrote about labor standards violations at Apple’s suppliers, Apple said an audit of a Foxconn facility revealed that more than a third of its employees worked more than the 60 hours-per-week limit imposed by Apple’s code of conduct. According to CorpWatch, Apple admitted that about 25 percent of the time, employees worked more than six days straight without a day off.
Apple vowed to clean up the violations it found and hired an outside consultant, Verite, to conduct ongoing audits of all of the factories where Apple’s products are assembled.
Fast forward to 2012, and Apple is once again telling the public it intends to improve, in precisely the same areas. But why should anyone think Apple’s commitment is any greater today than it was in 2006? Two important signs make me skeptical.
The first sign of trouble is the fact that the FLA’s “Remediation Plan” focuses exclusively on Foxconn and its scheduling, compensation, health and safety and industrial relations practices. Nothing in the plan makes Apple responsible for changing Apple’s own key behavior, the price it pays for Foxconn’s production. If Apple’s pricing is so tight that Foxconn can’t meet its profit targets without exploiting its employees, who’s responsible for their exploitation? If, as Apple claims, it truly wants to reduce the overtime hours Foxconn’s employees work to legal norms, without reducing the pay the workers receive, Apple can make that happen by paying more for each unit of production – enabling Foxconn to pay more more for each hour worked. But Apple hasn’t pledged that and the FLA doesn’t even mention the economics of Apple’s contracts with Foxconn. Apple’s public attitude is akin to saying: “We’re as pure as the driven snow, and our only taint comes from Foxconn’s sins.” But Apple has tolerated or compelled these practices for six years.
The second sign of trouble is that Apple and Foxconn have agreed to keep violating the law for the next 15 months, with the FLA’s blessing. Chinese labor law limits overtime per month to 36 hours, yet Apple and Foxconn have agreed to wait until July 1, 2013 to live within the law (page 12 in FLA’s report). As outrageous as this is, it seems to have gone unnoticed in all of the reporting on the FLA report. Perhaps the companies are right to think that Chinese law is a joke that can be ignored. But why doesn’t the FLA require the companies to comply with the law today, rather than next year? The FLA hours of work standard permits employees to work 60 hours per week — 80 hours of overtime a month, 44 hours longer than the law permits. How is this different or more acceptable than a standard that permits paying 25 percent less than the legal minimum wage?
Finally, I recommend that any of Apple’s customers who care about the well-being of the people who make their iPads take a few minutes to read the FLA report before taking comfort in Apple’s new commitment to decent labor standards. Almost three-quarters of Foxconn’s workers in Chengdu “said their salaries did not cover their basic needs (report page 9).” It’s no wonder so many are willing to work 80 hours a week; they can’t afford not to. Yet the FLA does not call on Apple and Foxconn to raise wages. Rather, “Given the concerns expressed by workers about whether wages cover their basic needs, the FLA recommends a follow-up study to document spending patterns and the actual costs of the components of a basic needs wage (report page 12).”
Now that’s a tough audit!
Last week, the Fair Labor Association released a report on its “independent investigation” of Apple supplier Foxconn, which employs 1.2 million workers and is China’s largest private employer and single exporter. I discussed the FLA report, and labor rights in the U.S. and China, trade, jobs and currency with C. Fred Bergsten, Director of the Peterson Institute for International Economics, and Judy Gearhart, Executive Director of the International Labor Rights Forum, on NPR’s Diane Rehm Show this morning.
There are serious questions about the “independence” of the FLA report, which was commissioned by Apple to conduct the investigation; Apple is a major contributor to FLA’s activities. Furthermore, although the report raised important issues such as excessive and unpaid overtime and health and safety concerns, it failed to address others, such as Foxconn’s harsh management practices and public humiliation of employees (well documented by groups such as the Hong Kong based Students and Scholars Against Corporate Misbehavior), Foxconn’s systematic abuse of forced interns, and China’s refusal to permit free, fair and independent trade union elections (although the report does acknowledge that company officials dominate local unions in Foxconn plants and it calls for open, democratic elections of union officials, it fails to address the fact that all unions in China must belong to the All China Confederation of Trade Unions, which is controlled by the government). Without the protections afforded by free, independent trade unions, it is unlikely that Apple or Foxconn will ever make good on the promised improvements in wages and working conditions in these factories.
Problems with excessive overtime, widespread safety problems and the absence of worker safety and health programs have been well known at Foxconn since 2006. Apple publicly promised at that time that it would correct these problems. The new FLA reports promise that excessive overtime will be eliminated by July 2013, 15 months from now. Apple could end this problem in a matter of weeks, not months or years, simply by raising the prices it pays for Foxconn’s products and then directing Foxconn to raise wages and hire more workers. The solutions are obvious. Engrained behaviors, however, are hard to change.
–The author thanks Ross Eisenbrey and Scott Nova for helpful comments.
In a conference call with investors Monday, Apple CFO Peter Oppenheimer argued that the company could not repatriate its $65 billion (yes, with a ‘b’) in earnings and investments held overseas because the corporate income tax constituted too large a “disincentive” to do so. This was apparently the latest in a lobbying effort by Apple to have Congress institute a repatriation “tax holiday” similar to one passed in 2004, that saw hundreds of billions of dollars of foreign-held corporate earnings brought back to the country under preferential tax rates.
Calls for another corporate tax holiday have been growing in the past six months, with various pieces of legislation introduced in the House in 2011 that would reward companies that repatriate profits with a low tax rates. These calls for a repatriation holiday are often bipartisan (House legislation introduced in the summer of 2011, for example, is co-sponsored by Utah Democrat Jim Matheson and Texas Republican Kevin Brady).
It is important to note that a repatriation holiday solves no economic problem at all … unless one defines Apple investors’ obligation to pay taxes as a problem.
The best economic case made in favor of such a holiday is that by encouraging U.S. corporations to return their overseas holding to the domestic economy, this will greatly increase the supply of investment capital that can be mobilized to help businesses increase capacity.
But, as we’ve noted over and over again, U.S. businesses today still are not using anywhere near the full amount of capacity they already have. And access to cheap credit for corporations is historically easy. And business investment is the one area of the economy that is actually growing historically fast. And corporations are already sitting on historically large amounts of investable capital. In short, there is no plausible reason at all to think that repatriating foreign earnings provides any relief to the actual economic problems facing the U.S.
What a holiday would do, especially given the 2004 holiday, is convince U.S. corporations that profits earned abroad will always be given an opportunity to be brought home at very low tax rates in the future. And this will provide further incentives to firms to increase the share of their profits that are earned abroad, which means increasing the share of jobs and capacity that is held abroad.
Apple (and other multinationals) already has the chance to defer taxation on profits held overseas – this is a substantial tax benefit already. There is no public policy case at all for giving them and other multinationals another holiday from corporate taxes. Luckily, the Obama administration seems unswayed so far by Apple’s complaints.