Over the past five years, the issue of global currencies and unfair currency manipulation has received much attention as countries like China, Brazil, Switzerland, and the United States have been accused of distorting trade by the application of their currency policies. But a new book suggests that more attention should be focused on subsidies.
In Subsidies to Chinese Industry, Usha and George Haley of West Virginia University and the University of New Haven respectively argue that in addition to cheap labor and an undervalued currency China's economic miracle and industrial competitiveness owes a very large debt to good old fashioned subsidies. After exhaustive research into hard to find and even harder to understand numbers, they have calculated that between 1985 and 2005, China's biggest State Owned Enterprises (SOEs) were the recipients of more than $300 in gifts from the state. This included preferential access to cheap capital and underpriced inputs not available to other global competitors. In several cases, the significance of the subsidies is astounding. Take Geely Automotive which recently bought Sweden's Volvo as an example. In 2011, more than half its profits came from subsidies. (I had wondered at the time how Geely could afford to take over Volvo when no other global auto company was willing to step forward. Now I know why).
The consequences of this kind of government funded largess are severe both domestically and internationally. Consulting firm Fathom China notes that small and medium sized Chinese companies are usually starved of capital because their bigger state owned and private sector brothers are being fed capital at little or no cost. At the global level, subsidies have created huge gluts of overcapacity in the steel, solar panel, and other industries. In steel, for example, China's excess capacity of roughly 200 million tons exceeds the entire potential output of the Japanese industry. The solar panel glut has driven virtually the entire global industry into bankruptcy.
Nor is China the only subsidizer. South Korea, Taiwan, Brazil, India, the United States, France, and many others are culpable in various sectors, although China appears to make the most far reaching and aggressive use of subsidies.
As the World Trade Organization (WTO) is about to appoint a new director, this subsidy situation raises some profound questions. The kinds of subsidies noted above are all strictly illegal under WTO rules. This is not like currency issues on which the International Monetary Fund (IMF) plays a companion role to the WTO and which, in any case, are the collateral damage of macroeconomic policies. There is no ambiguity here. The subsidies are illegal and the WTO is supposed to be in charge of stopping them. Yet, they continue, apparently unabated. Why?
The main reason is that the WTO is not really structured to enforce its own rules. It does not monitor the policies, practices, and actions of its members. The U.S. government publishes every year a compendium of the unfair trade practices of other countries, and, as a kind of retaliation, China now does the same, at least with regard to what it sees as the unfair trade practices of America. But the WTO does no monitoring, or data collection, or issuing of warning letters, and does no direct policing. Rather it relies on member countries to file formal complaints in the dispute settlement mechanism. Such filings lead to appointment of a formal dispute settlement panel which then conducts an investigation, listens to the arguments of the contending parties, and finally renders a judgement that may then be appealed. The point is that this can take a very long time during which the subsidy continues so that by the time a conclusion is reached the possibility that the original victims are bankrupt and out of business is quite high. Countries thus hesitate even to enter into the process.
But wait. It gets worse. National governments also don't proactively monitor and take cases on their own initiative to the WTO. Rather, they wait for corporations to file formal complaints with them. But the corporations are often hesitant to do so for fear of offending the subsidizing governments whose markets they wish to enter. Think about it. If you were the head of Ford Motor, for example, and you had plans to make a big push into the Chinese market. Would you be running to Washington to complain to the U.S. government about China's subsidies to Geely? Or, if as is the case with GM, you were getting perhaps as much as half your sales in China, would you run to complain to Washington or to the WTO in Geneva? I thought not.
Now imagine that you are the President in Washington. You want the Chinese to help you with North Korea, Syria, and Iran. You also want the Chinese to stop being beastly to the Japanese in the Senkaku Islands and you want them to get their pollution and greenhouse gases under control before their environmental degradation becomes ours as well. You also want them to stop hacking all your computer systems and you have a lot of other wants as well. Are you going quickly and rashly to file a formal complaint over subsidies at the WTO? Again, I thought not.
And I rest my case. The anti-subsidy codes of the WTO are essentially unenforceable and worthless as presently constituted.
If the WTO is to remain a significant arbiter of global trade, it must find a way effectively to police and enforce its rules without relying on the complaint system. This should be the first task of the new director.
It was a desperate effort by Tokyo to preserve its oil lifeline and imperial ambitions in the face of the American oil embargo that led to the bombing of Pearl Harbor in Honolulu, Hawaii in December 1941.
Now, Hawaii appears about to become again a victim of collateral damage, this time from the fall of the yen in the wake of Tokyo's new desperate effort to jump start the Japanese economy with massive monetary easing, stimulus, and hoped for inflation.
The efforts of the new Tokyo regime of Prime Minister Shinzo Abe to have the Bank of Japan engage in so called quantitative easing by buying assets onto the BOJ balance sheet have already resulted in more than a 20 percent decline of the yen against the dollar. This has resulted in outcries of pain from Seoul, Taipei, and the capitals of other countries that compete with Japan in global export markets. Indeed, the head of General Motors in South Korea publically called on the Korean government to take counter measures to prevent the won from becoming too strong with regard to the yen. If it did not do so, he warned, Korea's export dependent economy could suffer severe damage.
Nevertheless, the Obama administration has blessed this move by announcing its support of Japan's efforts to revitalize its economy and by declaring that the BOJ's quantitative easing does not constitute currency value manipulation which would be contrary to the rules and commitments of the World Trade Organization (WTO) and the International Monetary Fund (IMF). The White House may be judging that a revitalized Japanese economy in the long run is worth some loss of competitiveness on the part of U.S. domestic producers and exporters in the short run. It may also be chary of criticizing another country's quantitative easing in light of the U.S. Federal Reserve Bank's own quantitative easing policies even though the Fed's efforts appear much less aimed at the exchange rate than the BOJ's.
For Obama, however, the impact of all this on his home state of Hawaii may make the real affect of the new Japanese policies more significant.
By far the largest industry in the state and the one that drives virtually all other economic activity in the islands is tourism or what is locally referred to as the Visitor Industry. With a recovering U.S. economy and strong growth in Asia outside of Japan, the number of visitors to the islands in 2013 is showing growth of about 4.3 percent. Having just arrived myself for a brief visit, I can vouch for the fact that the flights all seem to be full. Yet, Hawaii's leading economists are predicting that visitor growth in the later part of this year and in 2014 is likely to fall by nearly fifty percent .
Why? According to Hawaii Department of Business, Economic Development, and Tourism Chief Economist Eugene Tam, the decline in growth will be significantly a result of the depreciation of the Japanese yen . He points out that the falling yen will have a two edged negative affect. First, it will make flights from Japan to the islands more expensive and thereby reduce the number of travelers willing or able to buy a ticket and make the trip. Second, the travelers who do make the trip are likely to spend less because everything will seem more expensive in the light of the devalued yen. This means that the state of Hawaii's expected GDP and job growth will fall about eight percent from previous expectations.
Thus, Japan's gain, if there is any, will be partly at Hawaii's expense. This may be outweighed by longer term gains for the state if Japan actually achieves revitalization of its long dormant economy. But the fear is that because the Abe administration has not suggested the far reaching structural reforms necessary for a genuine Japanese economic renaissance, the exchange rate move will be the major influence. If so, the desired revitalization is likely not to occur with the result of a more or less permanent negative impact on Hawaii and on other economies significantly impacted by Japan.
This makes it imperative for the White House and the international community to make it clear to Tokyo that there must be far reaching structural reform is Japan is to continue to benefit from the forbearance of its global economic partners.
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The post World War II global trading system has always favored the mercantilist nations, but the GATT (General Agreement on Tariffs and Trade) and its World Trade Organization (WTO) successor were always more or less controlled by free trading countries and had as their Director a passionate devotee of free trade.
Now, with the elevation of Brazil's Roberto Azevedo to the Director's position, the mercantilist foxes have taken charge as well as advantage of the WTO chicken house.
Of course, this is not a personal commentary on Azevedo himself. For all I know, he may, in his heart of hearts, be as passionately devoted to free trade as any of his predecessors. Only time will tell. But he got to the top as a leading spokesman, negotiator, and policy maker for Brazil, a country especially noted for its subsidies to and protection of target industries. He also got to the top largely with the support of China and other emerging market countries with the mercantilist inclination that springs naturally in the souls of countries bent on development and the creation of new comparative advantages. The alternative was former Mexican Minister and North American Free Trade Agreement negotiator Herminio Blanco who both personally and as the representative of Mexico is without doubt an apostle of free trade. He had the support of the United States and the EU, the major free trade economies. That he was not chosen suggests that, at least for the moment, it is fair to say the mercantilists are in charge.
This, however, may turn out to be a good thing by bringing to the fore a fundamental cleavage that has long bedeviled the WTO but that heretofore has not been addressed because of the inadequacies of international economic theory and the polite convention that has assumed the cleavage away.
The GATT and the WTO were founded on the notion, first articulated by David Ricardo in 1817, of naturally occurring comparative advantage. Each country has a resource endowment that enables it to produce some things better than it produces others. It should concentrate on producing those things it does best and trade for the rest. For example, Brazil has a tropical climate favorable for raising sugar cane. So it should concentrate on producing sugar and trade that for airplanes made in America or Europe. Under this doctrine, there are no special supports for particular industries and no managed exchange rates. The main barriers to trade are border measures such as tariffs and quotas. Thus the main object of trade negotiations is the reduction and removal of the tariffs and quotas. Once they are gone, it is thought that trade will be free and that it will optimize global welfare.
The idea that comparative advantage can be created or acquired through use of protection, subsidy, management of currency values, and regulatory policy is ignored or rejected and is not part of the comparative advantage doctrine.
Of course, every developing country, beginning with the United States after 1815, has used protection, subsidy, and other mercantilist measures to "catch up " to and surpass the economic leaders on the way to becoming developed countries. This has been particularly true in the post-World War II period after Japan demonstrated its mercantilist economic "miracle" in the early 1960s and the rest of the developing world began to heed Lee Kuan Yew's advice to "look east" for guidance on how to achieve fast economic growth.
Yet the polite convention or fiction has held that all GATT/WTO members are free market free traders who reject mercantilist doctrine and methods. This fiction arises from three sources. One is the U.S. geo-political priority which leads Washington to be patient with mercantilists who are U.S. geo-political allies. Another is the belief that the mercantilists will relatively quickly evolve into free trades. Yet another is the view of most professional economists that the mercantilists are only hurting themselves by providing underpriced goods and services to global consumers.
As a consequence, very few effective steps have been taken in the GATT/WTO system over the years to curtail or stop mercantilism. Of course, there have been many negotiations on subsidies, intellectual property, etc., but they have resulted only in half measures and the major issues of strategic currency management, investment incentives aimed at luring the off-shoring of production and R&D facilities, and cartels have remained largely off the agenda. A consequence has been the evolution of chronic, destabilizing imbalances in flows of trade and finance that have led to or exacerbated continuing crises. Now that the mercantilists are in charge perhaps we can dispense with the polite fiction and start confronting the hard, cold reality of the global economic system.
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At the height of the U.S.-Japan trade frictions of the 1980s, the Treasury Department proposed a set of negotiations under the rubric, Market Oriented Sector Specific . The acronym MOSS led to these being called the MOSS (think moss on a tree) Talks.
Some experienced negotiators at the time suggested that it was really just More Of the Same Old Stuff (also, of course, MOSS). In fact this was only a bit unfair because despite some eventual opening in some of the selected sectors most of the Japanese market long remained virtually impervious to penetration by non-Japanese companies.
President Obama's introduction last week of Mike Froman as his new U.S. Trade Representative and of Penny Pritzker as his new Secretary of Commerce brought this old play on words back to my mind. In his press conference, the president said: "Mike believes -- just as I believe and just as Penny believes -- that our workers are the most competitive in the world, so they deserve a level playing field."
For more than thirty years, I have been listening to presidents of both parties make almost that exact statement. They typically make it when they want Congress to give them trade negotiating authority for to ratify some so called free-trade deal they have just negotiated. Implicit in the statement is the notion that American workers and the companies by which they are employed are highly competitive and prevented from conquering the world of business and commerce only by unfair trade that the president is going to make fair demanding in free trade negotiations that our trading partners play fair and square.
If this is not the most misleading statement presidents make, I don't know what could be. For starters, it's simply not true that American workers and companies are always the most competitive. The playing field is pretty much as tilted for German workers and companies as for the Americans, yet Germany has the world's biggest trade surplus while the United States has its biggest deficit. Yes, Germany is a bigger exporter than China and has a bigger trade surplus. Yet, German wages are higher than U.S. wages, the German regulatory environment is stricter than that in America, and Germany is a welfare state that most Americans think is socialist. How is this possible you ask? The answer is that German workers and companies make things no one else makes and make them of a quality unrivaled by anyone else. That's what being competitive really means -- you win even though the field is tilted.
Nor do presidents intend to level the field, and, in any case, they wouldn't know how even if they actually intended to. Take the case of China joining the World Trade Organization (WTO) in 2001. The U.S. trade deficit with China had risen from $10 billion in 1990 to around $84 billion in 2000. The White House told the Congress that putting China in the WTO would open its markets and result in a flood of U.S. exports that would reduce this deficit and create millions of U.S. jobs. Congress duly signed off, and ten years later the U.S. trade deficit with China was $315 billion as millions of jobs were off-shored.
During this time, the Chinese yuan was managed by Beijing to be undervalued versus the dollar as a way of indirectly subsidizing Chinese exports while also indirectly protecting Chinese markets. In addition, the April 27 edition of The Economist details the wide range of large subsidies that helped make Chinese exports so competitive over the past decade. These measures were certainly tilting the playing field. Yet the Obama White House , like the Bush and Clinton White Houses before it, took no steps to offset this. Indeed, it did not even publicly acknowledge that the Chinese currency was being managed.
Nor is the purpose of the trade negotiations really that of leveling the playing field. Take the proposed Trans Pacific Partnership (TPP) free trade agreement that is currently the centerpiece of the Obama White House's trade policy. Of course, it calls for improvement around the edges such as better protection of intellectual property, further reduction of (already low) tariffs, and measures to ensure that state owned companies play like private, commercial firms. But when I asked about the purpose of the TPP at a White House meeting two years ago, the I answer given was that it is mainly to show America's commitment to Asia and to demonstrate that America is "back" in Asia. This means it is really all about geo-politics and little about level playing fields.
That is why the negotiators are not even talking about the two things that are the most powerful determinants of current trade flows -- strategic currency value management and financial investment incentives like tax holidays, free land, and capital grants that are used as bribes to induce off-shoring of production.
So next time you hear a president or other top official talk about how competitive American workers are and how they will always win if they can just get a level playing field, be sure you understand that they are unlikely actually to have the opportunity to play on such a field.
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Over the past two or three years a lot of ink has been spilled to explain that this the 21st century will be the Asian Century. Yet, in a Washington Post article last Sunday, Council on Foreign Relations President Richard Haass makes the argument that it's really going to be the second American Century.
I think Haass is on to something. In fact, I wrote a similar article entitled "American Renewal" that ran last week in the Australia's American Review magazine. Haass and I recognize that at first glance this may seem a bit of a bizarre notion in view of U.S. retreat from Iraq and Afghanistan, the crumbling U.S. infrastructure, the relative decline of American schools, America's mounting debt, and its low economic growth. Nevertheless, as Haass notes, we are probably already in the second decade of the next American Century.
For example, despite all the hoopla over the rise of China and India, the United States has by far the world's largest economy. At nominal exchange rates, it is twice as large as China's and although China will continue to grow, it will do so at a somewhat slower rate while the U.S. economy is likely to resume growing at a somewhat higher rate, meaning that the U.S. will remain the world's largest economy for a very long time and perhaps forever. Haass rightly, in my view, does this comparison at nominal exchange rates. If one uses purchasing power parity (ppp) exchange rates, China's economy is about three fourths the size of the U.S. economy and is forecast by the IMF and other analysts to surpass the U.S. economy in the next five to eight years. Even that may not happen, especially if adjustments are made for the environmental degradation, excess investment and capacity, and non-performing loans of the Chinese economy. But regardless of this, in terms of international buying and power, it is the nominal exchange rate, not the ppp rate, that counts.
The United States clearly has the world's most powerful armed forces and in any case there is no power in a position to challenge the United States. With all its problems, America looks pretty good when compared to the European countries of the EU now suffering economic stagnation, financial uncertainty, unemployment rates over 25 percent in some cases, and aging and shrinking populations. Nor is Japan with its rapidly aging and also shrinking population, its 200 percent of GDP national debt, and its two decades of deflation an attractive picture. Russia is Russia, potentially rich but hobbled by corruption and inept government and with a mostly commodities based economy. It is not a challenger for global influence to the United States. As Haass says, the other great powers are not great.
In addition, the United States is blessed with a growing and relatively younger population and it has just had a huge bonanza in the form of the development of huge reserves of inexpensive shale gas and oil. This means that America has become the most competitive location from which to produce a wide variety of goods and also that America has essentially become energy independent. Moreover, the combination of continued population growth and renewed productive capacity means America has the potential for renewed growth at a much higher rate.
So, that's the good news and the reasons why this century may well be the next American Century. Yet, there is a critical question. Will Americans benefit from this American Century. Or, would they be better off if the century were, in fact, to be the Asian or BRIC or Emerging Markets Century?
Despite America's many strengths and advantages, the average American citizen is not doing very well and doesn't feel very good about his or her future. According to a recent Allstate/National Journal poll, 59 percent of Americans fear falling out of the middle class. The statistics validate this fear. Over the past decade, the incomes of people in the bottom 93 percent of the income distribution have experienced stagnant or falling incomes. Only those in the top 7 percent have seen their incomes rise and really the only ones who have gotten big increases are those in the top 3 percent of the income distribution. Meanwhile, the deterioration of the infrastructure and of public services along with the evaporation of pensions and the rising costs of medical care have meant rising costs for all those whose incomes are falling or stagnating.
So while the average Chinese or Indian or Indonesian or Mexican has seen his/her living standard rise, the average American is watching his/her's fall. If that continues, what's the point of having an American Century. Maybe we should let the Asians have it.
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Japan's top leaders are tempting fate. They are waving a red flag at the bulls. And they are doing so at just the wrong time.
Over the past weekend, Deputy Prime Minister and Finance Minister Taro Aso and two other cabinet members visited Tokyo's Yasukuni Shrine. This followed an earlier visit by 168 members of the Diet (Japan's parliament) mostly from Prime Minister Shinzo Abe's Liberal Democratic Party.
The shrine unfortunately serves several conflicting purposes. In principle it is a memorial to the dead from all of Japan's wars -- a kind of Arlington Cemetery in U.S. terms. But it also enshrines several former officials and soldiers who were convicted as Class A war criminals after World War II. The shrine is also attached to a museum of World War II which portrays a highly nationalistic and even inflammatory version of the causes and course of the war. In addition, over the post war years, the shrine has become associated intellectually and emotionally with right wing causes and thinking in Japan. Some of this thinking denies the inhuman treatment of Nanking, the drafting by the Japanese army of Korean, Filipina, and other women into prostitution as so called "comfort women", and other wartime tragedies.
Because of this, the shrine and visits to it are not popular with countries like South Korea, China, the Philippines, Indonesia, and Australia that were occupied or in combat with Japan during the war. They see it as analogous to a scenario in which high-ranking Germans would make a pilgrimage to a shrine to the Nazis. Obviously, were such a shrine to exist and were Germans to visit it, there would be an enormous uproar in the countries that suffered and fought in the war against the Nazis.
Japanese officials, of course, argue that they are merely honoring the memory and service of the dead veterans. And no doubt, this is so in many cases. Nevertheless, no high ranking Japanese official can visit Yasukuni without sending the message, both to Japanese and to foreigners, that he or she sympathizes with the deniers and with the nationalistic right wing sentiments. Indeed, such a visit hints at denial of Japan's numerous apologies for its role in World War II. Japanese often are exasperated that their opponents in the war have never fully accepted the Japanese apologies. But an important reason for this hesitating acceptance is the continued subtle denial by the shrine visitors.
Visits at this moment are a particularly bad idea in view of the fact that Japan is engaged in a potentially explosive dispute with China over the control of the Senkaku islands, with Korea over control of the Takashima islands, and with North Korea over its nuclear and war like threats. Japan needs allies at this moment, not enemies. Yet the shrine visits have enraged the South Koreans, who cancelled a visit to Japan by their foreign minister, and the Chinese whose Ministry of Foreign Affairs issued a statement saying: "Only when the Japanese government faces history with the right attitude and can profoundly reflect on the history will it march toward the future and develop a friendly and cooperative relationship with its neighboring countries."
Prime Minister Abe is engaged in a momentous effort to revitalize the Japanese economy and, more broadly, the whole Japanese nation. He has needed and gotten the cooperation of the G-20 and of his neighbors in Korea, China, and Southeast Asia in accepting a major devaluation of the yen. He has requested and received acceptance of Japan as a new partner in the Trans Pacific Partnership (TPP) free trade agreement negotiations. He has asked and is receiving major U.S. support with regard to the threat North Korean missiles and possible nuclear bombs.
Why, in this situation, would he (he didn't visit the shrine but sent a potted tree offering) and his lieutenants do something they knew would gratuitously insult and enrage the very people with whom they need to cooperate? Of course, a lot of it is domestic politics and perhaps certain allowances should be made for that. At least that is what Abe and his team are telling the diplomats of the United States and of the other countries involved. But it is dangerous domestic politics.
Over the years, the United States has never publicly objected to these visits. Privately, some American diplomats have suggested that they are not a good idea, but the Japanese politicians have always been able to rely on the certainty that Washington would hold its nose and keep quiet.
One reason that Washington has been able to keep quiet is that the American public has no idea of what Yasukuni means. If it did, these visits would blow the U.S.-Japan alliance completely out of the water.
Since there is always the chance that the American public will become better informed, it would be wise for Washington to stop holding its nose and perhaps have a good sneeze.
For the White House to be welcoming Japan into the TPP talks and sending B2 bombers on warning flights over North Korea and telling the Chinese to back off on the Senkakus and urging the Koreans to cooperate more with Japan while Japan's top leaders are visiting Yasukuni is in a word -- ridiculous.
President Obama ought to get the word to Abe that there should be no more Yasukuni visits on his (Obama's) watch.
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In recent weeks there have been several articles debunking the early signs of a new trend toward the return of manufacturing to America as labor costs rise in China and U.S. energy costs fall as the result of development of shale gas and oil.
The most recent example was an April 8 column by Washington Post pundit Robert J. Samuelson who argued that "it's a mistake to romanticize manufacturing." He went on to make the point that hopes for a manufacturing renaissance that will take us back to the mass employment manufacturing of the past are misplaced. This is so, he claimed, because the advanced manufacturing in which the United States can be competitive is capital and technology intensive as in the production of computer chips rather than labor intensive as in the production of shoes and apparel. Most of the job of the future, he emphasized, will be in the services industries.
This may all be mostly true, but it misses the main point. Regardless of how many people are employed directly in manufacturing, it is indisputable as several major studies have shown that $1 of manufacturing activity creates $1.48 of additional activity in the economy. This is more than for a $1 spent in any other sector such as banking, retailing, restauranting, business consulting, etc. The economy gets more bang for the buck out of manufacturing than out of any other activity. So the indirect jobs created by manufacturing are numerous and important.
On top of that manufacturing pays for about two thirds of all non-government R&D and its unique economies of scale contribute disproportionately to increases in overall economic productivity and to disinflation. In addition, manufacturing supports generally higher wages than services industries. As Joel Popkin has demonstrated in numerous studies, manufacturing "is the seedbed of innovation", and innovation is, of course, what we are counting on to keep the U.S. economy competitive.
The critics say the widely held impression of decline in American manufacturing is false because output has continued to climb, and because U.S. manufacturing production, while a bit less than China's is two thirds higher than Japan's and triple Germany's. But given that the U.S. economy is about twice as big as those of China and Japan and three times as big as Germany's, one would expect U.S. output to be two to three times as high. While manufacturing as a percent of GDP tends to fall in all countries as their economies mature, it has fallen much more precipitately in the United States over the past thirty years ( 23 percent-9 percent) than in Japan (28 percent- 22 percent) or Germany (27 percent-22 percent). Indeed, Germany is an example of how capital and technology intensive manufacturing can help maintain high employment, high wages, and a trade surplus all at the same time. If the United States were doing what Germany is doing, there would be much less talk of a "post-American era."
Our problem is not romanticizing manufacturing. Rather, it's failing to correct and respond to structural impediments and market distorting policies that are eroding the U.S. productive base. We fail to do this because our analysts fail to understand the significance of the positive spillovers of manufacturing. When U.S. companies invest abroad because the United States fails to match the investment incentives being offered by foreign governments, America suffers unnecessary erosion of its productive and technological leadership.
Rationalizing that by arguing that it doesn't matter because our future is in services, is a grave mistake.
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Two articles with diametrically different messages caught my attention yesterday.
The New York Times reported that the government of India wants to replicate the country's success in software by also creating a homegrown industry for computer hardware, and especially for the computer chips that are the brains of the information age.
At the same time, Reuters reported that the high-powered, richly financed Club for Growth business lobby is stepping up its effort to shut down the U.S. Import/Export Bank only a year after the bank's charter was renewed.
As the I in the BRICS, India has three main reasons for wanting to have computer chips made in India. First, the country is a high tech powerhouse that has the potential to be a competitive producer and that feels the power of the logic of expanding its knowledge based industries. Second, it is clear that for India to stay on the high growth path and create jobs for the millions of new workers coming into the work force, it must expand its manufacturing industries. As Gaurav Verma of the U.S.-India Business Council says, "nobody disputes India's need to build up manufacturing. Not to do so would be fiscally irresponsible." Third, India is running a large trade deficit and electronic goods imports are growing so fast that they are expected to be greater than oil imports by 20202. For computer chips alone, last year's bill was $8.2 billion. For all electronics the bill is expected to grow from last year's $70 billion to about $300 billion by 2020. This is becoming unsustainable says Dr. Ajay Kumar of the Department of Electronics and Information Technology.
In the United States, the Export/Import Bank (ExIm) has long been an important supporter of U.S. high tech and capital goods exports. It is especially important in responding to and matching the favorable export financing made available by many export oriented governments around the world. For instance, it is unlikely that Boeing would control about half the world market for commercial aircraft in the face of competition from the European Airbus without the help of the ExIm Bank. Nor is it likely that Caterpillar would be the major player it is in the world market for heavy equipment without the ExIm Bank. And let's not forget that the United States has a chronic trade deficit of more than $500 billion.
Yet, despite this, and despite the fact that the bank is profitable and delivers $1.1 billion annually to the U.S. Treasury and that it supported 225,000 American jobs last year, and that 88 percent of its transactions last year benefited small business, and that it is quite small with a lending cap of only $150 billion, and that foreign ExIm banks are far larger and unlikely to disappear in the wake of any demise of the U.S. ExIm Bank, the Club for Growth is bent on getting rid of what it calls "a slush fund for market distorting subsidies that pick winners and losers in the private sector."
The Club for Growth's strategy is to block the re-nomination of Fred Hochberg to be President of the Bank. It calculates that without Hochberg the Bank's board will have no quorum and thus not be able to proceed with any projects. So the Club has called on Senate Minority Leader, Republican Mitch McConnell to block the appointment. In short, this is a de facto attempt to block growth of U.S. exports.
For its part, India is mandating that at least half of all laptops, computers, tablets, and printers procured by government sources be supplied by domestic sources. It is also offering as much as $2.75 billion in incentives for chip makers to establish a semiconductor manufacturing plant in India. Because the government accounts for about 40 percent of the country's electronics purchases, officials hope to use that purchasing power as leverage to jump start wide scale manufacturing activity.
So there you have it in a nutshell. India has a trade deficit along with industrial and technological potential and its government and businesses work together to see how they can develop the domestic production capability to extend technological leadership while cutting the trade deficit. America has a trade deficit along with industrial and technological potential and many of its richest people and top executives strive to prevent government from doing anything to promote the potential or to reduce the deficit.
I guess that's what makes a horse race.
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Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.