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Sunday, June 29, 2008

Myths About Manufacturing That Are Hurting America

It surprises me but every once in a while the Washington Post gets it right, even on the economy. That's especially true when they let an op-ed writer pen something for the Sunday Outlook section. Today, they carried an essay, by Gilbert B. Kaplan, a partner in King, Stamp and Spalding, that spells out five of the most prevalent myths about American manufacturing and its decline. According to Kaplan, it's not that Americans can't compete on a level playing field. As he claims, the playing field starts out leaning steeply uphill. The American worker - and the U.S. manufacturer - hardly have a chance, and the miracle is that anybody succeeds at all at starting and maintaining a manufacturing company. Here's some of what Kaplan says in dispelling the myth of American manufacturing.
1. It's all about cheap wages. American workers are just paid too much.

For most manufacturing sectors, that's just wrong. Labor costs are already less than 10 percent of the cost of making many products, including steel and semiconductors. Many of the real cost disadvantages the United States confronts are self-imposed. Our government doesn't rebate taxes to corporations when they export manufactured products, the way other countries do: A Brazilian steel company, for example, can get a 17 percent tax credit for every ton of steel it sends abroad. In addition, many foreign countries keep their currencies valued extremely low against the dollar. Most economists believe that China undervalues its currency by as much as 40 percent. That makes Chinese goods very cheap here and U.S. exports very expensive in China. This is a key driver of the $260 billion trade deficit with Beijing. We should deal with these issues in our international trade negotiations, but we haven't.

2. U.S. manufacturers can save themselves by investing in innovation.

Okay, but how much are you going to invest? U.S. private-sector companies can't put as much money into technology and research and development as foreign governments do to build up their sectors. As the chief executive of a technology firm with whom I've worked for many years says, "We're the best company in the world, but we can't compete with foreign governments." Consider Airbus. The European Union has put more than $15 billion into building this aircraft company from the ground up. Whatever you may think about the recent U.S. Air Force decision to buy tankers from Airbus rather than Boeing, one thing is clear: Through its subsidies, the E.U. has managed to build a highly competitive aircraft industry. South Korea has put more than $12 billion into its semiconductor industry to similar effect, severely harming the U.S. semiconductor manufacturing base.

3. Trade laws and trade agreements level the playing field for U.S. manufacturers.

If only this were so. This should be the main goal of our trade negotiations. The manufacturing sector is hurting more than any other, but we're using our political capital -- in the Doha round, for example, the latest World Trade Organization negotiating round -- to help the service and agricultural sectors. Little is being done for basic manufacturing. There are international trade laws under which U.S. companies can file cases to offset unfair practices in China, Japan and other countries, but they're difficult to use, expensive and haven't solved the problem. In 2006, despite a manufacturing trade deficit of more than $600 billion, U.S. manufacturers filed only eight new trade cases. If these statutes were really working, we would see hundreds of new cases each year, instead of watching U.S. companies decide that it's better to give up and just move manufacturing plants abroad -- something I've recently heard executives in both the textile and electronics sectors say they're thinking about doing.
There are only two more myths to list and I'm already in serious danger of violating the fair use laws here. I'd love to just reprint the whole article because it's so good at shattering most of the shibboleths the right wing and the free trade advocates hold so dear about the global economy and competition.

One of the main points that screamed out at me was that U.S. manufacturers are not just competing against their foreign counterparts, they are also competing against foreign government subsidies to key industries. When the European Union, for example, subsidizes investment in Airbus, that tilts the so-called playing field into one lopsided sports ground.

Likewise, other countries provide tax credits and other financial breaks to private companies to encourage them to stay in country and export their products elsewhere. We do the opposite. We provide tax shelters for windfall profits made overseas and give breaks that encourage our big businesses to relocate to other countries and import goods back to us. That's the reverse of what Europe does. While they attempt to keep good jobs in their countries and export their goods, our screwy policy is to encourage outsourcing of jobs and valuable resources and importing of foreign products.

American companies are also hamstrung by rising health care costs. While most first world industrial nations provide universal health care to their citizens, we rely on privately funded insurance, picked up by our employers. Ironically, Europeans and Canadians often get better care at cheaper rates than we do. I know the arguments about long lines for government paid care and the inefficiency of socialized medicine. But that's only true in England. Most of Europe provides subsidies directly to individuals and families and lets them choose their doctors. And the most vocal critics of European health care obviously haven't seen the restrictions that American HMOs impose on patients, limiting their choice of doctors and causing long waits for health care services.

Another myth to bust: The high tech jobs that were supposed to replace manufacturing jobs in the rust belt are also going overseas. Anybody with a computer, any where in the world, can do the jobs we were training displaced workers to do. Meanwhile, our government does not even negotiate good trade deals to relieve some of the worst of our disadvantages. Instead, the trade deals we have in place have only encouraged more off shoring.

In addition, many of the emerging nations with whom we are competing, such as China, keep their currencies artificially low against the dollar so our goods are too expensive on the world market, while theirs are cheaper even to import back here. It's not the high salaries of American workers, but manipulation of the world currency market that boosts our product prices and makes them uncompetitive. And that's something our government should be doing something about. It's not free market competition but the interference of other governments on behalf of their businesses that is causing our economic problems in the global economy.

Besides creating a shrinking job market, our policies are creating other problems for Americans. It's just not healthy for a nation to import everything, produce nothing, and simply depend on a service economy for all its jobs and income. It's bad for the overall economic prosperity and it's bad for national security. All you need is a belligerent nation to cut off their supplies to us (like oil maybe?) or to blockade the ports of an exporter nation and they will have choked our life line. Isn't it time to reinvigorate our manufacturing sector and regain our self reliance?

1 comment:

MB said...

Lots of good points in here, but lots need some counterbalancing (the US subsidizes the hell out of a number of industries, for example). But the larger point is well taken. I've got to dig for the link, but someone recently made (what I thought was) a very convincing argument that the US is to corporate/capital regulation what China is to labor regulation. That is, we're the proverbial third world backwater when it comes to responsible and adequate regulation of the capital/legal component of business.