The global media consistently paint a rosy picture of globalization that is at odds with the facts. When U.S. trade deficits are rising, the press emphasizes any gain in exports it can find. When the deficits plateau or dip a bit, there is a rash of stories arguing that export led economies (China, South Korea, Germany, Japan e.g.) are finally doing what they "should" do -- shifting to domestic consumption led growth.
A great recent example was a story in the Washington Post with the headline "U.S. Exports to China Boom Despite Trade Tensions." It emphasized that U.S. exports to China are up 50 percent since 2008 and attributed this to a "richer China showing a growing appetite for U.S. products" such as soybeans, cars, airplanes, and medicine. This, of course, is just what the conventional wisdom has been saying China should and would be doing as its economy matures, and the increase in U.S. exports is apparently just the tonic orthodox economists have long been predicting for the U.S. economy.
Except that none of it holds up to even casual examination. The use in the story of 2008 as the base year from which to measure the 50 percent increase in U.S. exports to China was actually a giveaway. Yes, U.S. exports rose substantially over the past four years and increased by $11.2 billion in 2011. But, as the Economic Policy Institutes Rob Scott points out, China's exports to the United States far outstripped that and rose last year by $34.4 billion. Thus, despite all the sales of soybeans, airplanes, and so forth to China, the U.S. trade deficit with China actually increased last year by $23.2 billion. That translates into a loss of 200,000 - 300,000 American jobs.
Scott further points out that the fastest growing U.S. exports to China were not soybeans, cars, airplanes, or medicine. Rather they were waste and scrap. Moreover, of the ten fastest growing categories of U.S. exports to China, seven were classified as raw materials, minerals, and commodities used for the manufacture of Chinese exports. So the picture of increasingly prosperous Chinese consumers voraciously buying American exports for their domestic use and consumption is the opposite of what is actually going on.
That this is true has been confirmed by Fung Global Institute Director and former World Bank economist Louis Kuijs in a recently released analysis and forecast of China's import and export balances. He begins by noting that: "Many a headline has recently highlighted how rising costs in China are putting pressure on profit margins and reducing the competitiveness of the country's huge labour-intensive, export-oriented manufacturing industry -- prompting multinational companies to start shifting production to other countries in Asia."
He then emphasizes that a closer look reveals that China's exports are still gaining global market share. Last year, he points out, China's exports rose 20 percent in dollar terms and 10 percent in real terms while real global imports rose only 7 percent. So the old export led strategy is still solidly in place.
Kuijs notes that a few high profile examples such as Nike have moved some of their low end textile production to Vietnam and elsewhere. But he says, the publicity accorded these few moves has given a very wrong impression of the overall trends which are actually in the opposite direction.
emphasizes a point that has been stubbornly avoided and ignored in the main
stream media. Says he, " The main reason why the amount of manufacturing
production that has left China has been very small is because the wage cost
pressures have largely been offset. Gains in efficiency and labour productivity
have been rapid. This has meant that, after their impressive fall between 1995
and 2004, increases in unit labour costs (wage costs per unit of product) have
been modest and gradual in recent years.
Figure below shows profit margins in industry holding up as unit labour costs remain contained.
Meanwhile, what is sometimes forgotten
is that wages have also risen quite a bit in countries mentioned as
alternatives to China, such as Vietnam and Bangladesh. This is even more so
with the higher raw material prices, which are by nature a global phenomenon.
Moreover, China's advantages in infrastructure, clusters of suppliers, and deep
labour markets are hard to overlook.
Taking into account all these data, what would be a more accurate description of what is going on than the headlines suggest?
Wage and raw material costs have risen in China. At the same time, continued rapid productivity gains have largely offset the impact on wage costs per unit of product, while raw material prices have risen everywhere. Factoring in the appreciation of the RMB, China's export prices have risen in U.S. dollar terms in recent years. Data on U.S. import prices are considered to be good because they are adjusted for quality adjustments. And they show that in January 2012, prices of U.S. imports from China were 5 per cent higher than two years ago.
But wage and raw material costs have risen in competitor countries as well, raising their export prices, especially in other emerging markets. In January, prices of US imports of manufactured goods from developed countries and emerging markets were up 3.7 per cent and 7 per cent, respectively. Thus, China's export-oriented manufacturers have basically maintained price competitiveness in foreign markets, especially compared to other emerging markets.
What is more, despite the cries of pain of export firms and industry organisations, China's manufacturers have, overall, maintained their profit margins. Thus, it is not that surprising that China's exports are holding up very well in global markets."
Exactly. Now why couldn't the Washington Post figure this out? Kuijs is easy enough to reach. Or did the truth not fit the storyline for the day?
As many readers know, I have long argued that much of the global discussion of free trade and free trade agreements is beside the point because the discussants are talking about vastly different things. I have tried to make this point by saying that America is playing tennis while some others such as China are playing football.
Frequently the U.S. tennis players complain that the Chinese ( or Japanese, or South Koreans, or others as the case may be) are not playing "fair." There is a demand to "get tough" and to file unfair trade complaints in the World Trade Organization (WTO) or to pursue some legalistic procedure in the U.S. dispute resolution mechanisms. I have always been skeptical of the value of such actions because of my view that the actions are based on the premise that all the players are playing the same game when in fact they aren't.
Recently the Wall Street Journal reported that China's Ambassador to the EU is claiming that "it makes sense" for China's airlines to buy Boeing jetliners rather than European Airbuses as long as the EU persists with its plans to impose a charge for greenhouse gas emissions from planes in European air space. In the same article, the head of Airbus confirms that China is withholding final approval on contracts for 45 Airbuses.
This is not free-trade tennis. This is football. In tennis, the decision on contracts to buy airplanes would be up to the airlines concerned not the government. But in this case, China's Ambassador said: "their (the Chinese airlines) decision will be influenced by the position of the central government." In tennis, decisions on emissions taxes are not trade issues per se and are not linked to aircraft private company aircraft procurement decisions. In football they are.
Now, here's the interesting thing. The Chinese aren't playing football unfairly. They've made it clear that they are linking the two issues and have given warning. Nor have they obviously transgressed any WTO rules. The Ambassador didn't say Beijing was ordering Chinese airlines not to buy Airbuses. He just said it made sense to him that the airlines might go for Boeing instead. He also said he thought the airlines would be influenced by the government's views but what does he really know about how airline executives think. He's only an ambassador after all. This is really football as it's played at the highest level.
Let's look at another example. U.S. solar panel makers have filed an anti-dumping case against heavily subsidized Chinese manufacturers and exporters that is currently being adjudicated. While the United States imports a lot of solar panels from China it remains a major exporter to China of the polysilicon from which the panels are made. In another football move, Beijing is now threatening to impose anti-dumping duties on imports of U.S. polysilicon( which had never been an issue before the solar panel complaint) in an obvious effort to pressure the U.S. government not to go ahead with the anti-dumping duties on solar panels.
This is not really a matter of fair or unfair. It really is a matter of two different games being played under the pretense that everyone is playing the same game. We really need to get this straightened out. It could easily explode into something a lot less fun than a game. We must recognize that we have many different trade regimes and not just one and that each needs its own sets of rules and procedures.
My last post on America's incoherent and internally contradictory de facto industrial policy elicited a number of comments (published and un-published) that suggest I have inadvertently confused a lot of readers. So let me take another stab.
Some seemed to conclude from my listing of farm, housing, medical, and other subsidies that I was calling for similar subsidies for industrial R&D and manufacturing. Some of these readers pointedly raised the question of whether such subsidies have done the nation any good. Let me hasten to emphasize that I believe the bulk of the farm, housing , and other subsidies have done more harm than good to the economy, and I in no way am calling for imitating them in the industrial/manufacturing realm.
The main point I have long tried to make is that industrial policy is not really about subsidies. Perhaps the term industrial policy is inadequate. What I believe to be really important might better be called an economic strategy. What I see in the United States is a situation in which analysts, commentators, and economists hold strongly to the view that we don't want any industrial policy or economic strategy (so called picking of winners and losers) on the grounds that such actions distort and harm the economy. Yet, our politics, geo-political and military policies and practices, humanitarian instincts, and policy fads drive us to make vast interventions without regard to any overall criteria of productive health and competitiveness. So the absence of a policy or of guiding criteria does not lead to absence of interventionist policies. It only exacerbates more incoherent and counter-productive intervention.
Some readers have commented that much evidence demonstrates that moving away from European-style planned systems greatly improves economic performance. This seems to me to be true only to a certain extent. In other words, moving away from communist style central planning and white elephant national champions is certainly beneficial. On the other hand, the German and Scandinavian style of government-labor-management cooperation and coordination and competitiveness planning seems to be working better than Anglo-American laissez faire. Even more significant is the out- performance of the Asian economies like Singapore, China, Korea, and Taiwan that engage in extensive development of five year planning to create criteria for judging and guiding appropriate policy interventions, subsidies, and investments. Of course, none of this is perfect. But the existence of an overall strategy with guiding criteria tends to make the inevitable intervention more coherent and sensible than the free for all system of the United States.
So my plea for the United States is for an Office of Competitive Assessment that benchmarks U.S. performance against that of other leading economies on a systematic basis and that develops alternative scenarios of U.S. development with guidelines on how to optimize performance. Of course, this kind of indicative thinking wouldn't always carry the day, but it would be extremely useful to have.
A final point is the issue of intervention in response to the policies of others. In principle I believe the U.S. market is big enough and robust enough to support virtually any industry on a competitive basis without special government support. However, a problem arises when foreign governments decide to target those industries for special assistance as part of a "catch-up" effort. We have seen this for the past forty years in the cases of the European Airbus, the Japanese steel, semiconductor, auto, and machine tool industries, the Korean semiconductor and electronic industries, the German solar panel industry, and many, many more. The question always is whether to respond to the foreign subsidy or trade or regulatory barrier in kind or not. Of course, it would be ideal if everyone could just sit around the conference table at WTO headquarters in Geneva and agree on free trade. But history has demonstrated that that just doesn't work, and it doesn't work because countries know from experience that by intervening they can become competitive and obtain substantial spillover and scale benefits. The Airbus is perhaps the best example.
But these situations are always zero-sum games. The win of the Airbus is the loss of the U.S. aircraft industry, for example. Or the win of the Japanese semiconductor industry was the loss of the U.S. semiconductor industry. In these circumstances, game theory tells us that tit for tat is the optimum strategy. Thus the United States (or any other country) needs an industrial policy at least to the extent of offsetting the interventions of other governments and that offsetting needs to be automatic and instant rather than at the end of a long period of drawn out complaint filing and negotiation during which the effect of the original intervention increasingly takes hold.
Ideally, this kind of response would lead to trade negotiations and disciplines within the WTO and/or other bodies to govern the interventions and responses as has been the case in the past with regard to direct export subsidies. But, if not, the target industry would not be left to wither on the vine.
In the wake of proposals by President Obama and the two leading Republican Presidential candidates, Mitt Romney and Rick Santorum, for tax breaks and other measures to support manufacturing, there has been an outcry from economists against industrial policy. Former Council of Economic Advisers Chairwoman Christine Romer, for example, wrote in the New York Times that there are no good reasons to give special assistance to manufacturing.
But Harvard Business School professor Gary Pisano now makes an excellent point in the latest Harvard Business Review that America has actually long had an industrial policy, and it's a policy that is essentially anti-manufacturing.
Pisano notes that U.S. agriculture is and has long been heavily subsidized. The bill is about $50 billion annually and among other things provides about $160,000 every year to each U.S. cotton farm despite the fact that American cotton farmers are much higher cost producers than those in Africa and the Middle East. Universities are tax exempt and receive large government research grants. Health care also receives an enormous tax break because employer provided health care plans are paid for with pre-tax dollars. The home mortgage interest tax deduction provides a huge subsidy to the housing industry and also stimulates loans for the banking industry. Finally, Pisano notes that the private equity industry is heavily subsidized with an income tax rate called carried interest that is set at 15 percent. This is what enabled Mitt Romney to pay taxes at a rate about half that of the rest of you gentle readers. Just imagine what U.S. manufacturing would look like if it paid a 15 percent income tax rate.
Pisano could have added to his list the U.S. military-industrial complex. Without the military business there would be no U.S. shipyards. Lockheed and a host of other major corporations would be shadows of their present selves or not exist at all without the Pentagon business. Then there is medical research. The National Institute of Health (NIH) spends more on bio-tech research than the rest of the world combined. That, of course, explains why the U.S. bio-tech industry is the world leader. Then there are the subsidies for big oil and the support given the airline industry through public funding of airports and of the Federal Aviation Administration that operates the radar and flight control systems across the country. Contrast that to the railroads that have to maintain their own systems and rights of way.
Finally, there is the big enchilada, the financial industry. Consider that its profits in 1980 were 6 percent of all business profits. By 1990 that number was 30 percent and by 2005 it had soared to 40 percent. How did that come to be? Abolition of regulatory rules like the Glass-Steagll Act, "light touch" regulation of banks by the Federal Reserve, the carried interest tax rates noted above, and loosening of the rules to allow banks to expand their loan to net capital ratios are just some of the special supports provided to the financial industry. Then, of course, when it all came crashing down in 2008-09, Washington bailed Wall Street out and didn't even fire anyone. So the guys who gave us the crisis are still riding high .
It looks to me as if the only part of the economy not getting special help, indeed, being neglected and even attacked by the government is manufacturing.
Of course, our tax system also subsidizes consumption and taxes saving and investment. So the American industrial policy is to over-consume, promote agriculture, military production, housing and construction, medical care, finance, and provision of a variety of services while moving manufacturing and all but medical R&D off-shore.
I don't understand why economists can't see that the issue is not whether we have an industrial policy. It's only what kind of industrial policy we're going to have. The fantasy of pristine free markets is just that - a fantasy that exists only in the economists' models. In the real world, there is inevitably massive government intervention in the economy. It is not going to go away. At the moment, American industrial policy is a residual, what de facto emerges from the arbitrage of special interests. It is incoherent, self-contradictory, and counter-productive for U.S. economic performance.
Rather than opposing industrial policy economists should be promoting one that could provide a rational framework within which the trade-offs could be made in a way that would be positive for long term wealth creation. Manufacturing would then not be a despised orphan, but would be treated at least as kindly as banking and finance.
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I just watched an online interview by the New York Times' Tom Friedman with Bill Gates. Friedman notes that as recently as six years ago there was no Facebook, no cloud, barely a Twitter, no iPad, and 4G was a parking place. Gates nods emphatically and says this shows that America is still number one in innovation. Indeed, he emphasizes that more innovation occurs in America than in the rest of the world combined. Then he gives a puzzled face and says that in view of all this innovation, he can't understand why poll after poll now shows Americans to be worried about their future and that of the United States. He adds that he guesses it must be because of uncertainty created by the political gridlock in Washington.
Well, it's always safe to blame Washington, but what I wonder is what Gates knows about innovation or worry. Don't get me wrong, I admire Gates as one of the great business minds of our time. But he's no Steve Jobs. Jobs knew about innovation. Gates knows about negotiation and standard setting and business strategy, but he's never been an innovator. The original MS DOS personal computer operating system on which the Microsoft empire is based was bought by Gates from a friend and then licensed by Microsoft to IBM. Gates bamboozled IBM by persuading it to take only non-exclusive rights to the system, but he didn't invent the system.
Or take the Microsoft Explorer browser. Mosaic and Netscape were the first browsers. Microsoft had no clue and was scared to death when Netscape debuted. Gates bundled Explorer to his Windows monopoly operating systems and, with the help of sleepy U.S. government anti-trust oversight and friendly courts, killed off Netscape. Brilliant, perhaps, but not innovative. More a copy of the Rockefeller Standard Oil model than of Apple.
Gates also doesn't know much about worry because he's a rich kid who always had a job and then bargained his way into one of the history's greatest monopolies. Again, let's give him credit for single-minded drive and focus, clever bargaining, and great business strategy. But he never had to worry. He never had to look at life through the eyes of an everyday American.
He does, however, present a perfect view of the world as seen through the eyes of the American elite. It worships at the alter of innovation and sees the future as an endless series of Facebooks, Twitters, and Groupons. If America is suffering from declining competitiveness and rising trade deficits, innovation, according to the elite, is the philosopher's stone that will turn everything around.
Well, as Santayana said, "Those who cannot remember the past are condemned to repeat it." The British have a long tradition of innovation. Indeed, Japan's Ministry of International Trade and Industry (MITI) once found that 54 percent of the world's most important inventions were British while only 25 percent were American and 5 percent Japanese. The first commercial jet liner was the British Comet. The first digital audio system was British, as was the first operating television system. I could go on and on, but the point is that British industry wound up far behind U.S. industry in all of these sectors, and in many more as well. The British economy reaped very little benefit from these innovations because it did not fully commercialize or mass produce them. They created nice jobs for a relatively few brilliant scientists and engineers in Britain, but none for the average bloke. It was the American companies who came along behind and copied the Brits that garnered most of the sales and profits, American workers who got most of the jobs, and the American economy that gained most of the GDP growth from the innovations.
This history is now being repeated between the United States and Asia with the United States in the role of Great Britain. Average Americans are worried because they can see that, even as the elite is blinded by its own brilliance.
Another great American business leader has been making this point recently from his base in Silicon Valley. Former Intel CEO and Chairman Andy Grove, whose company accounts for half of the WinTel standard that has dominated the PC industry for the past thirty years, wrote in Bloomberg BusinessWeek a bit over a year ago that innovation without follow-up on scale and production is not a great wealth producer. In short, it is a necessary but not sufficient generator of jobs, wealth, and economic growth.
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So President Obama is putting his money and his authority where his mouth is.
Yesterday, pursuant to comments in his State of the Union message, he issued an executive order establishing an Interagency Trade Enforcement Committee in the Office of the U.S. Trade Representative for the purpose of enforcing U.S. and international trade laws and of assuring a level playing field for U.S. workers and products and services. In announcing the new group in a speech to auto workers in Michigan, the president repeated the obligatory line that "American workers are the best workers on earth, and when the playing field is level, I promise you, America will always win."
This is an important move and the most serious of its kind since I was put in charge of the Reagan administration's Strike Force to halt unfair trade in the mid-1980s. It signals a major change of attitude and at the same time raises two key questions: Can trade law and trade agreements be effectively enforced and will U.S. workers always win on a level playing field?
For most of the past sixty years trade deals and trade law have largely not been enforced. On the one hand, economists and trade negotiators were mostly of the view that unilaterally open American markets are good for the American economy even in the face of protectionist or mercantilist trading partners. On top of that, they believed the U.S. economy to be pretty much invulnerable to foreign competition. They therefore had no great interest in policing the agreements they promoted and negotiated. On the other hand, the agreements and the enforcement machinery, such as it was, were structured so as to depend largely on complaints from private parties to initiate any action. Thus the government would usually (not always) wait for some affected corporation or labor union to file a complaint before even collecting data on suspected trade law violations. As I noted, a Strike Force was established by the Reagan administration in response to intense trade frictions with Japan in the 1980s, but this was short lived and did not at all change the deeply rooted dynamics of trade complaints and enforcement.
The Obama initiative is bigger and significantly funded and signals a major shift in sentiment. It has become clear over the past twenty five years that the U.S. economy is vulnerable and that unilateral free trade is not necessarily a win-win proposition. Even several completely conventional, long time orthodox free trade economists such as Peterson Institute Director Fred Bergsten have called some of China's policies the most protectionist of all time. In the past, those who urged enforcement of trade laws were typically castigated as protectionists or Japan bashers or some kind of other basher by the apostles of the conventional wisdom. This greatly inhibited trade law enforcement. Now, with mainstream voices calling for action that inhibition is not only gone, but the pressures have shifted in the direction of enforcement. After all, what's the point of making agreements if they're not going to be enforced, especially in view of the fact that dyed in the wool free trades say they should be.
But the question at this point has become whether the laws and the deals really can be enforced in any meaningful way. Of course, anti-dumping investigations can be undertaken and duties imposed and subsidies can be countervailed if proven to be doing damage. But these kinds of actions have a very narrow focus, proceed at the pace of molasses in winter, take enormous time and energy, and always occur after most of the damage has already been done. This kind of enforcement is not useless, but it is not likely to change behavior or the nature of the economic interaction. Broader cases against industrial and other policies that effectively nullify the concessions and undertakings of trade agreements can be filed in the WTO and probably should be. But the WTO rules are not always clear cut and in any case are not well tested in many areas, nullification and impairment being one of them. Moreover, a flood of actions in the WTO against a country like China will be seen as a hostile action and is likely to engender tensions with Beijing that could be quite uncomfortable. This will make the US. and other Governments hesitate to act decisively. Most importantly, the rules are often vague and subject to interpretation. Many of the most powerful policies and practices that hinder market access or that distort markets, such things as implicit investment guarantees in key industries or control of distributors by major producers are not clearly illegal and, in any case, are tools that are being used by various U.S. states or that the United States might want to use in the future.
Finally, it's not clear that Washington should want to abolish some of these policies and practices because it is not true that American workers will always win on a "level playing field." The playing field for U.S. workers playing with Germany is pretty level. Indeed, many say it favors the United States in that Germany's social welfare charges and taxes are higher and its unions more powerful than those of America. Yet, America runs a large trade deficit with Germany and long ago stopped making things like machine tools, tunnel boring equipment, and scientific instruments that Germany still does a good business in.
I certainly hope that the new Enforcement Unit will be aggressive and well led and that it will erase some egregious instances of unfair trade. But the major reasons why the United States is suffering declining international economic competitiveness is not unfair trade so much as absence of its own economic and competitiveness strategies. For instance, the United States does not match the investment packages of countries like China, Singapore, and France that induce the off-shoring of production. These packages are not illegal and no trade cases can be filed against them. But they will help to make it very difficult for U.S. workers to compete on what will be officially declared a level playing field.
What America needs in addition to the Enforcement Committee is a Competitiveness Strategy Committee that would draw from the policies of countries like Germany, Singapore, and China and figure out how to compete with them.
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With the term of World Bank President Robert Zoellick soon coming to a close, there has been much talk of breaking the U.S./European monopoly on the top posts at the bank and the International Monetary Fund (IMF) by naming an emerging market leader as the bank's new chief. I herewith throw my vote to Zhou Xiaochuan, the head of the People's Bank of China.
The U.S.-European deal under which an American always heads the World Bank while a European heads the IMF is musty with old age and is arguably in violation of the technical rules of the bank and possibly of the IMF as well. In the bank's structure the percentage of share ownership and voting power is supposed to be allocated according to GDP size. This has always resulted in the dominance of the United States. But the truth is that the GDP of the EU is nearly a third larger than that of the United States. So technically, it should be a European heading the bank instead of an American.
But the real point is that size of GDP should not be the determining factor. At the moment, the United States has 15.85 percent voting power with Japan next at 6.82 percent and China next at 4,42 percent, but China's GDP has already surpassed that of Japan and is set, according to several forecasts, to overtake that of the United States within the next three to six years. That kind of economic momentum should be recognized. More importantly, China has by far the world's biggest financial reserve holdings and is increasingly being turned to for various kinds of financial assistance by other countries, especially the developing countries of Africa. Perhaps the bank's rules should be altered to allocate voting power on the basis of reserve holdings rather than simply sheer size of GDP. That would unequivocally put China in charge.
Such a move would be particularly appropriate at this moment in as much as Zoellick is the originator of the phrase: "China must become a responsible stakeholder" in the global system. This way, he could give his stake to China.
No country has ever been more successful than China in achieving rapid economic development. Such a move at the bank would give it a platform upon which to develop more fully and apply more broadly its ideas for development and balanced globalization. At the same time, U.S. backing for a Chinese at the head of the bank would allay fears of a new U.S. containment policy raised by the Obama administration announcement of its "Pivot to Asia." It would also be a signal to other developing countries that America welcomes a larger role for them. At the same time, it would signal Americans that there is a new emphasis in Washington on Pivoting to America and its much needed re-development.
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It was heavily promoted well in advance, and I signed up early and waited with anticipation for GE's program on American Competitiveness: What Works, that played for four days last week at Washington's Mellon Auditorium. It was well-organized and smoothly done. The only problem was that it didn't talk at all about American Competitiveness.
GE Chairman and CEO Jeff Immelt opened on an elaborate stage set on Monday with the ubiquitous Power Point presentation -- ten bullet points on what GE says makes it and America competitive -- stuff like customer orientation, operation across the value chain, networked talent, and similar business school speak phrases. Immelt is a practiced presenter, informal, tells good jokes, self-deprecating, extemporaneous, and smooth. Yet, by the end of his solo session I knew no more about the state of American competitiveness than before he began. There was no discussion of the trade deficit, the increasing gap between rich and poor, off-shoring, out-sourcing, income stagnation, relative international technological position or any other benchmarks of competitiveness.
The Immelt solo session was followed by a three man panel discussion moderated by Meet the Press host David Gregory. In addition to Immelt on the panel were Boeing CEO Jim McNerny and Dow Chemical CEO Andrew Liveris. Their discussion wandered a bit because Gregory had little concept of the competitiveness debate or even of what competitiveness means and wasn't well aware of when the CEOs were saying something significant and when they were just blowing smoke which was most of the time. So he couldn't dig in and ask good probing journalist questions. He did, however, ask the key question which is "what is preventing you and other CEOs from investing more in America, producing more in America, and bringing jobs back to America?
Because Immelt is the Chairman of President Barack Obama's Commission on Competitiveness and Jobs, you would have thought he would have a quick five or ten bullet point response. But neither he nor his fellow CEOs did. In fairness, Liveris, who has written a book entitled Make It In America, did emphasize the importance of making things in America. But the main response to the question by all three CEOs was U.S. government regulation. There is too much of it and it is too unpredictable and causes too much uncertainty, they said. McNerny said he thought the government should just get out of the way and let business do its thing. Liveris and Immelt were a little more moderate and did admit that sometime government regulation is actually necessary to assure proper working of market forces. But they too jumped on the excess and uncertain regulation bandwagon as pretty much the main reason why business can't invest and produce more in America.
That was it. No mention of the chronic overvaluation of the dollar as a result of the currency management policies and practices of a number of big exporting countries. No mention either of the big tax holidays and other investment subsidies offered by the likes of China, Singapore, Ireland, and others. Nor was there any talk of the influence of value added taxes that are rebated on exports but added to imports in countries that have such taxes. That the United States is not one of those countries puts it at a disadvantage in the global trade competition because its exports bear a full tax load when they leave the United States and then have the additional VAT added on at their destination. But, as I said, this was not a topic of discussion. (Nor was the format such that questions could be asked from the floor). There was also no mention of the policies of China, Brazil, and others that often condition access to the market on doing local production and R&D.
Indeed, Immelt had just concluded a deal to move his avionics division into a joint venture with a state owned Chinese company that has little or no prior experience in avionics. When I asked him if he had done the deal because that was the only way to get access to the Chinese aircraft market, he avoided a direct and answer and told me that GE had not been forced into the deal, that it had, in fact ,sought the deal, and that the arrangement would create jobs in America. That's all true, and yet it's not true. I'm sure GE did seek the deal, but because they could read in China's Five Year plan that aircraft and thus avionics are industries targeted for development. They could deduce that the only way to hope to get a significant part of the business was to do a joint venture and transfer technology into a Chinese entity. So they sought to do that. Yes, the deal will produce some jobs in America, but it won't be nearly as many as it would have been and should have been in a truly free trade environment.
Now, I actually don't mind the deal as such and if I were Immelt I probably would have done the same thing myself. What I mind is that the CEOs don't discuss honestly what lies behind their actions. They should be coming clean with the U.S. government and the public on the real forces that act upon them and on what the U.S. could do to influence those forces. The CEOs are not fulfilling their duty as citizens when they blow smoke about excess or uncertain regulation. Sure that is a problem sometimes, but it is not the only factor by a long shot.
As for the government just getting out of the way and letting business do its thing, the three CEOs didn't really mean it. In closing their remarks they all called for more funding for the Export/Import Bank to help finance their exports and they all called for Washington to redouble its enforcement of laws protecting intellectual property.
In short the show was a sham. I don't understand why Immelt allows his staff to get him involved in this kind of thing. He's a better man than that. He instincts are public spirited. Instead of government letting business be business, Immelt needs to urge that his staff let Immelt be Immelt.
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Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.