There was a lot of good stuff in the President's State of the Union address last night, but a lot of it is not going to happen unless the Obama administration stops contradicting itself.
Repairing and upgrading infrastructure and education, facilitating and investing in production of more and cheaper energy, fostering domestic manufacturing and the re-shoring of production and jobs, reforming how we do healthcare to cut costs by paying for results rather than procedures, stoking R&D and innovation, and fixing our broken immigration system are all important and largely (or should be) bipartisan undertakings.
But does the White House understand that it is operating in a global economy, have any idea of what that is, or of how other countries conduct themselves in that environment?
The President announced that he is launching talks to conclude a Trans Atlantic Free Trade Agreement (TAFTA) between the United States and the European Union. This is a worthy initiative that I, along with a few others, have been promoting for nearly twenty years. It's worthy because the EU is by far the world's largest economy and the economic relationship between the U.S. and the EU dwarfs any other. The United States sells three times as much to the EU as it does to China, for example. Furthermore, the EU's attitudes and policies on international trade and investment are very similar to our own and its markets most nearly match ours in terms of openness to outsiders. EU wages are, if anything, higher than ours, as are its environmental, health, and safety regulations. So there will be no race to the bottom in a TAFTA. Nor are the euro and the pound sterling manipulated currencies, and the EU anti-trust regime is fully as tough as that of the United States. I believe a TAFTA could add 2 to 4 percentage points to U.S. GDP. So far so good.
But then the President reiterated a line from his inauguration address which said that the Trans Pacific Partnership Free Trade Agreement that he is hoping to complete with Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, and Vietnam (and possibly Japan) by October will level the playing field and promote American exports and jobs. He essentially equated the two proposed deals.
But they are in no way comparable. For starters, the TPP is likely to undermine the North American Free Trade Agreement (NAFTA) and the Caribbean Area Free Trade Agreement (CAFTA) and result in the loss of more than a million jobs in Mexico and the Caribbean, along with nearly 200,000 jobs lost in the United States. This is because under NAFTA and CAFTA textile producers in the Caribbean and Mexico who use U.S.-made fiber and yarn receive duty free access to the American market. The only manufacturing industries in the Caribbean are based on this deal, as is much of Mexico's manufacturing industry. These deals were done in the 1990s in part to mitigate illegal immigration and illegal production and shipment of drugs to the United States. A TPP will remove the tariffs on textile imports from much of Asia and take large chunks of the U.S. market away from Caribbean and Mexican producers and give it to Vietnamese producers that are heavily controlled and backed by their government, according to studies by the Mary O'Rourke Partners Group of economic analysts.
But that's just a small part of the problem. The main part is that the TPP does not at all address the issue of trade-related currency manipulation in which governments actively adopt policies aimed at promoting their exports and reducing their imports by lowering the value of their currencies. A good recent example is that of Japan. Before being elected, the new Prime Minister Shinzo Abe called for devaluation of the yen. Upon election he immediately began introduction of policies and rhetoric aimed at reducing the value of the yen. Not surprisingly, the yen has devalued by nearly 30 percent over the past few weeks. That would far outweigh any removal of a 5 percent tariff that might be achieved in a TPP deal. Yet the TPP has nothing with which to combat this kind of currency policy.
And it gets a lot worse. On Monday, I received an urgent email from an old friend in Tokyo who is a former top economist for Goldman Sachs. He had just seen on Bloomberg a comment by Treasury Undersecretary Lael Brainard saying in answer to a question about Tokyo's recent actions that the administration supports Abe's policies to stimulate the Japanese economy. In other words, the Obama administration apparently approves of Abe's efforts to weaken the yen as a way of subsidizing Japanese exports, many of which come to America, a country that needs to reduce its trade deficit in order to keep economic growth and job creation going.
Asked my Tokyo friend: "Do these people have any brains? Who do they work for? Who?"
Well, they all work for the president, and he hasn't figured out yet that the TPP and fiddling with currency values to promote trade surpluses and promoting manufacturing in America don't go together. So it was a good speech, but a very mixed message.
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As the European Union slips inexorably further into crisis and perhaps recession, the negative impact on the United States is inevitably going to be substantial. At the same time, slowing growth in China, South America, India, and elsewhere will also have an important impact.
The whole world will now be reemphasizing export led growth and the favorite target market place will be that of the United States. Among the G-20 nations, only America will be without a comprehensive growth strategy. The likelihood is that the U.S. trade deficit will rise significantly while unemployment remains high. This is, of course, not necessarily a winning political formula for the U.S. presidential election.
Both President Obama and Republican candidate Romney need to articulate a serious growth program that goes beyond the standard talking points on stimulus and cuts in government spending. I'm going to help them by outlining here a few key ideas of what they might propose.
Given the high level of U.S. government debt and of the federal budget deficit, further stimulus is bound to be limited, whether it be as a result of tax cuts or of increased spending. Thus the main avenue to growth must be through reduction of the U.S. $800 billion trade deficit. This can come from a combination of importing less and exporting more. America can produce more of what it consumes and export more of what it produces. The program is very simple and straight forward.
The most important step will be for the candidates to articulate that their top national security priority, more important than Iran's nuclear program or the so-called Pivot to Asia, will be to produce and provide tradable good and services from an American base. Make it in America. Provide it from America. Those must be the touchstones of the new national strategy.
In recent months it has become clear that there is already a trickle of manufacturing and industrial activity coming back to the United States from Asia. Booz &Co. along with the Boston Consulting Group, have done analyses demonstrating that production in a wide variety of industries can increasingly be done competitively from an American base, at least for purposes of supplying the American market. To further stimulate that trend, U.S. corporate taxes should be made competitive with those of other leading countries. This means rates should be somewhere between 15 and 25 percent.
The United States is the only major country without a Value Added Tax (VAT). Because this tax is rebated on exports to the United States and added on to the price of U.S. exports to countries having a VAT, the tax currently acts as a subsidy for imports into the U.S. market and as a tariff on U.S. exports to foreign markets. This situation must be corrected by adoption of a VAT by the United States.
Washington needs to announce that it will selectively match the targeted investment incentives offered by the likes of Singapore, China, and France to attract investments in targeted industries like biotech and semiconductors. What I mean here is not that the U.S. has to proactively offer these things, but it needs to offset the offers of other countries that are aimed at drawing the production out of America. At the same time, the U.S. could propose negotiating disciplines in the WTO on such offers.
Similarly, Washington must have a policy of countering currency manipulation. For example, Japan recently intervened in currency markets to weaken the yen as an aid to Japanese manufacturers, and especially auto manufacturers. China, Brazil, Korea, and others routinely engage in such actions which tend to act to the disadvantage of U.S. based production. Again, U.S. counter-policies could be coupled with calls for negotiation of international disciplines on currency manipulation.
Jawbone, jawbone, jawbone. No executive should ever leave the president's presence or that of a presidential candidate without being asked when he or she is going to invest and produce more in America. When executives are in China, all they hear is the question of when they are going to put production and R&D into China in order to maintain a good image there. They need to hear the same refrain in America.
Investment in infrastructure, creation of an infrastructure bank, and dedication to keeping the United States at the cutting edge of infrastructure will be essential. For example, Korea's advanced high speed Internet infrastructure means that certain kinds of R&D can only be done there. The United States must be able to match this capability.
America must adopt labor-government-business cooperation similar to that of Germany, Scandinavia, and Japan. There should be regular consultations and discussions among these three key entities on how to make and keep America competitive. Joint setting of national objectives and undertakings to keep budgets, inflation, and investment on target will be extremely valuable.
Support for R&D and development of pre-competitive technology by government has always been a major pillar of U.S. competitiveness. The success of the Agricultural Extension Agencies, of the Defense Advanced Research Projects Agency (DARPA), and of Sematech and the National Science Foundation must be maintained and extended.
President Obama has set a target for doubling exports. Nothing wrong with that, but if exports double while imports triple, nothing will have been gained. Both Romney and Obama should announce that they will set targets for balancing trade. With no trade deficit, America would gain 4 to 5 million jobs with no need for debt funded stimulus programs.
This nine point program, if adopted, would assure U.S. economic vitality and leadership for a very long time to come.
ADEM ALTAN/AFP/Getty Images
This Black Friday is likely to be a particularly bleak one for patriotic-minded U.S. Christmas shoppers. From perennial bestsellers like the iPhone and Legos, to this year's new arrivals like the Kindle Fire and the MyKeepon musical robot, the most popular gifts this year all seem to be manufactured overseas. This may be the season that U.S. retailers pull themselves back in the black, but it looks like another grim winter for American manufacturing.
Or is it? You might not yet see the evidence on the shelves at Wal-Mart, but with a bit of good policy and good luck, U.S. manufacturing may well experience a renaissance over the next decade.
A recent report from Booz and Company, based on a sector-by-sector analysis of U.S. industry, concludes that, in principle, the American market could be supplied most economically by factories located in the United States in about 90 percent of all manufacturing industries. For the ten percent of industries like apparel and shoes that are truly labor-intensive, off-shore production is fully justified. On the other hand, U.S. manufacturers are already competitive in about 45 percent of manufacturing industries -- microprocessors and polysilicon, for example -- not only in the North American market but globally. As for the remaining 45 percent -- a category that includes such industries as machine tools and optical fiber -- Booz and Co. conclude that there's no reason U.S.-based manufacturers couldn't effectively compete to supply the U.S. market, if only corporate executives, labor, and the U.S. government worked together to optimize productivity and minimize costs.
One of the main obstacles in reaching this type of cooperation, may be overcoming the conventional wisdom that there's no way for companies to turn a profit by manufacturing in the United States. But as the following five examples of companies both large and small show, it's not only possible, it's already happening:
The company that produces more than 85 percent of the microprocessor chips that power the world's computers makes most of them in the United States. Making these chips is not labor intensive because it's mostly high-tech robots in sealed factories -- inexpensive Asian workers provide no particular advantage in their production.
The economies of scale, the high quality, and the high productivity generated by Intel's large U.S. facilities in New Mexico, Arizona, and Oregon and its highly-skilled and experienced work force make the United States the most competitive place in the world on an operating-cost basis to make these chips. Of course, there are important Asian microchip producers like Korea's mighty Samsung, but without special financial subsidies like tax holidays, free land, and capital grants their cost competitiveness is no better and often worse than that of U.S. based producers.
Just last week, it announced that it is moving production from of its compact machines from Japan back to the United States in order to be able better to serve the markets of North America, Europe, and the Middle East. This represents a kind of historic shift. I was living in Japan in the 1960s and 1970s when Cat began producing these machines there on the grounds that Japan-based production was more cost effective.
Caterpillar executives say the demand for small tractors and semi-hydraulic excavators, once primarily came from job sites in Japan's cramped urban centers, but the majority of the customers are now in North America and Europe. The new facility is expected to create as many as 1,000 new jobs. The company also opened a new plant in Winston-Salem, North Carolina, this week.
This French manufacturer produces industrial gases like liquid oxygen, carbon dioxide, and liquid nitrogen that are used in the steel, oil, and natural gas industries. Just two weeks ago, it started up its new factory in Rancho Cucamonga, California, to better supply increasing demand for its products in the southwest United States. This factory will double the company's production capacity in America, along with its U.S. workforce.
The U.S. Auto Industry
Cars, of course, are not products you never think of. In fact, you think of them all the time -- and for the past 40 years you probably thought of them as being better and less expensively made abroad for export to the United States. Now, however, America has suddenly become the place where all auto companies, both U.S. and foreign, want to make cars. For example, Ford Motor Company is bringing production of its Fusion model back to Flat Rock, Michigan, from Mexico despite the fact that its Mexican workers are paid $3.35/hour compared to the more than $33/hour earned by its Flat Rock workers. Honda is investing more than $300 million to expand production of light trucks and engines at its Alabama factory. Chrysler is investing $1.7 billion to develop a new Jeep and upgrade its Toledo, Ohio, production facilities that will employ 1,100 new workers. General Motors is expanding its former Saturn assembly plant near Knoxville, Tennessee, to make the Chevrolet Equinox. This will bring 1,900 new jobs to the state. GM is also expanding production of the Chevy Volt. It plans to make 60,000 of them next year at its venerable Hamtramck plant in Detroit; 15,000 will be exported.
Bob's Space Racers
The Daytona Beach company, an industry leader in arcade gaming with business in every state and 118 countries, is bringing production of the Whac-A-Mole game back from China. Why? "The costs are more equal now, so we're able to manufacture some of those products in the United States," says CFO Mike Lane. "Labor costs in China are increasing. Shipping across the ocean is expensive. Plus, we have better quality control in the U.S."
Lane and his colleagues found that the travel and verification costs of manufacturing outweighed the advantages of cheap labor. Now, Whac-a-Mole is being brought back to the United States where it was first developed over 40 years ago.
* * *
So the force may be with U.S. manufacturing after all. But for the "re-shoring" wave to really build momentum, the government needs vigorously to offset the currency manipulation and match the financial investment incentives that lure U.S. companies toward manufacturing abroad. For example, Washington should take steps to impose countervailing duties on imports that are being indirectly subsidized by currency manipulators, who buy dollars on a steady basis in order to drive up the exchange rate of the dollar -- thereby making U.S. imports cheaper and exports more expensive than they ought to be, based on market forces. And Washington should also coordinate with state economic development offices to and arrange to match the free land, capital grants, and tax holidays that countries like China, Singapore, and France use to lure investment and production that should remain in or go to the United States based on the dictates of market forces.
Maybe the Obama administration and U.S. economists and business leaders will wake up to this potential in the coming year. Now that would be something to really be thankful for.
In the 1960s, mutual fund magnate Bernie Cornfeld used a key question to winnow prospective new employees. It was: "Do you sincerely want to be rich?" Cornfled's view was that anybody could get rich if they really wanted to. The reason there weren't more rich people, in his view, was that most people weren't willing to do what it takes to become rich and thus didn't really want to be.
If we alter the question just a little for today's situation and ask if Washington, by which I mean the president and Congress, really want more jobs for Americans, the answer must be no.
Let me give you just two quick examples of why I say that. A few days ago I was in Singapore meeting with, among others, some old friends from Singapore's Economic Development Board. This is the government body in charge of promoting exports, attracting foreign investment and technology to Singapore, and of generally planning and executing the city-state's economic strategy. As always, I was impressed with the comprehensive strategic thinking of these people and of their single-minded pursuit of investment, technology, and jobs that could be brought to or developed in Singapore.
I went from these meetings to have a drink with a senior U.S. Commerce Department official who happened to be in the neighborhood. Now remember that one of the much-publicized Obama administration initiatives of the past couple of years has been the export doubling program of the Commerce Department's Foreign Commercial Service. The idea was that every $1 billion of exports generates about 15,000 jobs and that doubling exports would therefore generate lots of jobs and drive unemployment down. It was and is a good idea. So you can imagine my surprise when the official explained that, although not yet announced, the Commerce Department is planning to reduce the staff of the Foreign Commercial Service. I guess Obama and his new, inexperienced commerce secretary think the service will do more with less, but the reality is that it will do less with less. And this was the plan before the recent debt ceiling deal. In the wake of that, the likelihood is that the service will get even less and perhaps do nothing.
From Singapore, I proceeded to Tel Aviv, where I have involved in an evaluation of the work of several U.S.-Israel bi-national foundations for promoting science, agricultural research, and industrial research and development. Created in the 1970s with a total endowment paid equally by both governments of about $300 million, these foundations have been making grants to Israeli and U.S. scientists, researchers, and corporations for the past thirty five years. In that time, they have been associated with several Nobel Prizes, the development and commercialization of an astonishingly wide variety of new technologies, products, and processes, and the creation of tens of thousands, if not hundreds of thousands, of U.S. (as well as Israeli) jobs.
The problem for the foundations at the moment is that they have not had their endowments topped up since the early 1980s. They have therefore been requesting that both governments renew and increase their contribution commitments. Now we're not talking real money here. No trillions or billions. Not even hundreds of millions. Just a few millions or even thousands. Crumbs off the table, really.
Well, fractious and combative as it is, the Israeli government sincerely wants to be a technology leader and to create jobs and has therefore put its money where its mouth is. It has committed not only to maintaining the old funding but to increasing it, contingent on the U.S. government doing the same.
Yes, you guessed it. There's the rub. No one in Washington is even considering a replenishment of or increase in the endowment, because, truth be told, Washington does not sincerely want to create new jobs.
JEWEL SAMAD/AFP/Getty Images
As I have been urging for some time, it now appears that President Obama will appoint Google Chairman Eric Schmidt as the new secretary of Commerce to replace Gary Locke, who is leaving to become the new U.S. Ambassador in Beijing.
Under Locke and his recent predecessors, the Commerce Department has been virtually invisible, with leaders who had little knowledge of, or interest in its potential for being the key to revitalization of the U.S. economy. Indeed, a few former secretaries of Commerce have even scoffed at their own department as little more than an incoherent grab bag of unrelated agencies like the weather bureau and the U.S. Patent Office. (With such attitudes, one wondered why these secretaries even bothered to take the job.)
Fortunately, they have been wrong. Far from being a hopeless backwater, Commerce may be the last best hope for the U.S. economy.
Consider that U.S. official unemployment is currently just below 10 percent and that total real unemployment is probably closer to 15-16 percent including those working part time who would like to work full time and those who are so discouraged they have just stopped looking for work. Consider also that despite this level of unemployment, the United States is running a long term unsustainable trade deficit of around $600 billion and will borrow that much from China, Japan, and other countries to fund consumption of goods it no longer makes. Consider further that this situation is likely to prove politically toxic and that the usual remedies of fiscal stimulus and reduction of interest rates have already been fully applied with no possibility for further doses. Finally, consider that disruption of the global supply chain as the nuclear and earthquake disasters in Japan knocked out the production facilities for large portions of the world supply of key components demonstrated the dangers to the U.S. and world economies of highly concentrated production centers.
There is only one solution. The United States needs a strategy to become a producer again. It needs to make and provide more of the goods and services it consumes and export more of the goods and services it generates. In other words, it needs to foster investment in U.S.-based production, and it needs to funnel that investment into sectors in which the United States is likely to be able to hold its own in international competition. In short, the United States needs an industry sector oriented economic strategy similar to those of Germany, Sweden, Britain, Japan, South Korea, Singapore, and China.
Developing such a strategy is precisely the job of the Commerce Department. It is a job that has been long neglected because the macroeconomists who dominate U.S. policymaking have disdained as insignificant any concerns about the structure of the economy and the global supply chain. But now, the combination of America's lagging performance in the wake of the full application of the macro-economic prescriptions and the shortages arising from the impact of Japan's twin disasters on the global supply chain have demonstrated that Schmidt may be arriving at Commerce at precisely the moment when it is clear that the department's job must be done and done well.
He should begin by taking two crucial steps. The first is to reconstitute the department's industry analysis capability. When I was there in the 1980s, Commerce industry experts had an intimate knowledge of the status, strengths, and weaknesses of every significant U.S. industry and of their foreign competitors as well. Now, if I want to know something about U.S. industries, I find the information provided by Japan's Ministry of Economics Trade and Industry to be the best source. Or take my recent blog post on the iPhone's supply chain. The data were largely developed by the Asian Development Bank. Schmidt shouldn't have to rely on the Japanese or the Asian Development Bank for the analysis on which to base his new policy ideas.
The second step should be to undertake a series of meetings with the CEOs of all significant companies, foreign and domestic, making products in the United States. Of course, there is nothing wrong with service-providing companies, but Schmidt will have to get real here and he'll have to make Obama get real. The job-killing U.S. trade deficit in goods is so large (nearly $700 billion) that there is just no way for services exports -- about a third of U.S. exports -- to reduce it significantly. Moreover, whereas each 100 manufacturing jobs result in the creation of 291 additional jobs for suppliers, services, etc., 100 personal/business services jobs result in the creation of only 153 additional jobs (Economic Policy Institute, Employment Multipliers, 2003). So Schmidt and the administration will need to go where the jobs are.
In these meetings, Schmidt should ask the CEOs why they are not investing more in production in the United States and what it would take to induce them to do so. He should also make clear to them that the U.S. government is very serious about driving investment in America and that companies wanting U.S. government assistance for protection of intellectual property and non-discriminatory treatment for their investments in China and elsewhere should be making a serious effort to invest in America also.
There is, of course, much more that Schmidt will have to do, and I'll turn to that in later posts. But if he just takes these two steps, he'll be off to a flying start and he'll get the Commerce Department back on the public radar screen.
Brendan Smialowski-Pool/Getty Images
President Obama will consult with 20 CEOs of major U.S. companies today to get their advice on how to stimulate U.S. economic growth and create more American jobs.
The premise of these kinds of meetings is that the heads of American headquartered companies like GE, Google, PepsiCo, and Motorola have a special concern for the fate of the U.S. economy and useful advice on how to fix it. But do they? Are these really American companies in any way other than that they happen to be incorporated in Delaware of some other U.S. state, and do these CEOs have or even can they have the best interests of the American economy at heart?
Remember that most of these companies sell and produce far more outside the United States than inside. They often have many more employees outside the United States than inside and a large proportion of their shareholders are also not American. They must deal in most cases with more than 100 presidents and prime ministers of countries in which they have major interests. In the case of the European Union they must deal with officials in Brussels who are responsible for an economy that is about a third larger than the United States. In Beijing and New Delhi they must deal with governments that are currently driving the development of economies that are almost surely going to become larger than the U.S. economy in the next twenty to forty years.
Also remember that these companies have greater financial power and greater production capacity than all but a handful of countries. They are quasi-sovereign entities and their CEOs are in many respects more akin to powerful heads of state than to your average everyday businessman. It is not a criticism of them to point out that their interests may or may not be congruent with America's interests. Motorola and Cisco, for example, do a large portion of their production in China. They benefit from China's undervalued yuan that allows them to have artificially low production costs. Obama badly needs China to stop manipulating its currency to be undervalued if he wants to realize his goal of doubling U.S. exports. But a halt to China's currency manipulation is not necessarily in the interests of the companies that do a lot of their production there. So what will the CEOs say to Obama about currency manipulation?
A particularly troubling aspect of the global business situation is the affect of the asymmetry of global political organization. In democratic Washington, for instance, the CEOs of these companies are major political players. They have their PACs, legions of lawyers and lobbyists, and ready access to the highest levels of government. Moreover, they can take the U.S. government to court anytime and win. In authoritarian Beijing, on the other hand, not only are the CEOs not political players, they need to pay careful attention to which way the winds are blowing. So in a funny way, they may have to be more responsive to the wishes of the authoritarian governments than to those of the democracies. And certainly it is easier for them to lay off workers and close facilities in the U.S. than it is in most other countries in which they operate including the EU and Japan.
This is not to say that Obama should not be meeting with them. Some CEOs like GE's Jeffrey Immelt seem to have had some second thoughts about off-shoring their production and have even brought some production back to the U.S. from abroad. So it will no doubt be informative for Obama to listen to what they all have to say. But he must do so with a clear understanding of the fact that his problems are not necessarily their problems and indeed may be the source of some of their success.
It would really help if the U.S. government had a clear articulation of the U.S. national economic interest. But it does not, and this is all the more reason for Obama to be non-committal about what he hears.
Indeed, rather than listening too much, the President ought to use this occasion to act like Chinese, Singaporean, Israeli, and French leaders and tell the CEOs that they really need to invest in America. He could remind them that when they need help in protecting their intellectual property and in protesting discriminatory policies abroad, it is not to the Chinese or E.U. or South Korean or other authorities to whom they turn for help. Rather it is to Washington. He could also remind them that more of their innovation comes out of U.S. laboratories and universities than anywhere else and that to keep it going more investment and U.S. based production is also necessary. He should make it clear that he'll be watching their investment announcements and that while he will strive to make America more attractive for their investments, he also expects the companies to do their best to make it or provide the service in America.
After all, what America makes (including services provision) makes America.
Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.
JIM WATSON/AFP/Getty Images
Speaking in Winston-Salem, North Carolina on Monday, President Barack Obama lamented America's stubbornly high unemployment and promised to outline for the gathered students a "vision that will keep our economy strong and growing and competitive in the 21st century."
There was applause as the students sat on the edges of their chairs in anticipation. Unfortunately, what followed only proved that the president should have gone to his eye doctor instead of the Winston-Salem. It was at best, a case of partial vision.
It began with a "recognition" that in the past few decades revolutions in technology and communications and the integration into the global economy of two billion new people in India and China had touched off fierce competition among nations for the industries and jobs of the future to replace the auto mechanics and machinists that Forsyth Technical Community College, where he was speaking, had been founded many years ago to produce. It continued with the argument that the winners of the competition would be the countries with the most educated workers, the most serious commitments to research, the best roads, bridges, high speed trains and airports, the fastest Internet connections, and the most innovation.
The president emphasized that the most important competition the United States faces is not the competition between Republicans and Democrats, but the competition between America and its economic competitors around the world. "That's the competition we've got to spend time thinking about," he stressed.
He went on to reassure the audience that America will win this competition because it has the world's best universities, smartest scientists, best research facilities, and most entrepreneurial people. Indeed, entrepreneurialism is "in our DNA" he said.
But then the vision became a bit cloudy. Despite the reassurances of American superiority, the president said the country is in danger of, indeed is, falling behind -- in high school graduation rates, the quality of math and science education, in the proportion of science and engineering degrees we hand out, in attracting research and development facilities compared to India and China, in R&D spending, and in Internet speed and connections.
Are you a little confused by how we could be falling so badly behind if we have the best universities, best research facilities, smartest scientists, and most entrepreneurial people? All I can tell you is that the president says we are facing in "Sputnik Moment", calling to mind the shock America felt in 1957 when the Russians launched the first earth satellite. To respond to this challenge, he emphasized that we must set the goal of "Made in America."
Hey, nothing wrong with that. At this point, I was cheering. He's the first president in my memory who has dared to say that we need to compete by actually making things. So I give the first half of the vision an A.
But then Obama turned to how we're going to come back and regain leadership by increasing education and R&D spending, improving our infrastructure, and doubling our exports by negotiating more free trade agreements like the one just concluded with Korea.
Aside from the Korea deal (which I'll address in a moment),these are all good things to do and we should do them. But doing them will not by itself reverse the decline in our competitiveness. Actually, the Korea deal illustrates both why this is true and why the president's vision is still impaired. South Korea's workforce is not better educated than America's. Nor does it spend more on R&D, nor is its labor inexpensive like that of China, and nor is it nearly as entrepreneurial. Yet the United States a growing trade deficit with South Korea and is far behind it in areas like liquid crystal displays, various kinds of semiconductors, cell phones, and much more.
What the Koreans do is target development of key industries with special financing and regulations and manage their currency to be undervalued versus the dollar as a kind of protection of the domestic market cum subsidy of exports, impede foreign penetration of domestic markets through a wide variety of formal and informal non-tariff barriers, fail to enforce intellectual property rights of foreign enterprises operating in South Korea, and make foreign investment in Korea extremely difficult as a practical matter.
I am not saying these things to attack South Korea. If these policies work, and they obviously do, South Korea has every right to keep them in place. But obviously Korea is engaging in a different kind of globalization than we are. And equally obviously, the president doesn't recognize that. Thus the president expects that this new free trade deal is going to increase U.S. exports to Korea and create 70,000 jobs in the U.S. But any deal that allows currencies to be managed in such a way as to stimulate exports and inhibit imports - to mention just one factor -- is not going to result in surging U.S. exports or in surging U.S. job creation.
The White House eye doctor needs to prescribe glasses that will allow the president to see the other half of the playing field and to recognize that he must play with a full deck of cards. More education and R&D? By all means, bring them on. But he also needs to respond to the industrial targeting, exchange rate, investment, and getting realistic about the globalization policies and practices of our economic competitors.
Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.
Napoleon always said he liked lucky generals. He would have loved Barack Obama. The president is so lucky that he now has the South Koreans doing the dirty work of saving him from committing political suicide by signing a Free Trade Agreement (FTA) that would likely further increase both the U.S. trade deficit and the U.S. unemployment rate.
Reports from Seoul yesterday said the deal was essentially done and that Obama and South Korean President Lee Myung-bak would meet their self-imposed deadline by inking the deal today (Thursday). But no, the Koreans, who have been relentlessly promoting this deal as essential to both Korea's future economic well-being and its national security, suddenly said they couldn't agree to a small increase in imports of U.S. beef or a slight relaxation of emissions rules for imports of small numbers of foreign auto imports.
Since, like China, South Korea already manipulates its currency and imposes a myriad of subtle bureaucratic regulations and informal agreements that make the Korean market one of the most closed in the world, one might wonder why Seoul couldn't agree to these two U.S. requests which would in no way result in any significant increase in Korean imports from the United States. But Obama should really thank his lucky stars for South Korea's economic paranoia because it may save him from his administration's own worst instincts.
I know we're all supposed to be free traders and that opposition to anything labeled free trade is strictly taboo. But really, does anyone truly believe that we have anything like free trade with South Korea? This is a country that, as a matter of policy encourages the infringement of foreign intellectual property, and whose courts routinely annul the Korean patents of foreign based companies.
Yes, the proposed deal would significantly reduce Korean tariffs and facilitate foreign investment in Korea and contains strong language on the protection of intellectual property. But if the courts won't enforce the language what is the point? And tariffs are not the real barriers to foreign penetration of the Korean market, especially since the Korean government can and does manipulate its currency to offset the effect of any tariff reductions. As for facilitating foreign investment in Korea, why do we especially want to do that when we need investment in the United States? Moreover, the proposed deal on investment as presently constituted actually allows the U.S. branches of Korean companies to take disputes over U.S. regulatory rulings and impacts out of the American legal system by appealing to the World Bank and the International Court.
Isn't that something? The United States has consistently refused to join the International Criminal Court on grounds of protecting national sovereignty, but was just on the verge of signing a trade deal that would enable foreign companies to evade the sovereignty of the U.S. legal system in certain disputes. I wonder if the Republicans who have been promoting the deal understand that.
But sovereignty is not really the main point; that would be jobs. Here, the deal fails utterly. Of course, there are lots of studies by the various think tanks around Washington. Not surprisingly they only prove that while figures don't lie, liars figure.
If you are for the deal, you can easily find a computer model that will confirm your view and vice versa. So let me put it in the words of one of the Korean negotiators whom I know and to whom I posed the question of whether, honestly between friends, he thought the deal would significantly increase U.S. exports to Korea or U.S. employment. His answer was an immediate "no." And no one who knows anything about doing business in Korea believes otherwise.
So let's hope Obama's lucky streak keeps holding, at least until he gets out of South Korea.
Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.
TIM SLOAN/AFP/Getty Image
As the G-20 talks get underway, we're thrilled to have Clyde Prestowitz guest-blogging for us over the next few days. Clyde is the president of the Economic Strategy Institute here in D.C. He served as counselor to the secretary of Commerce during the Reagan administration and as vice chairman of the President's Committee on Trade and Investment in the Pacific.
Be sure to check out his most recent book, The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era as well as his piece, Lie of the Tiger, from the November print issue of FP. -JK
First, Barack Obama was shellacked in last week's congressional elections. Then, the U.S. president was garlanded in India and Indonesia. Now he's in Korea, where he's about to be waterboarded by the G-20.
Oh sure, the G-20 will come up with some paper-over language that will allow everyone to sign on to some vague agreement that it might be a good idea to achieve global rebalancing at some undetermined time in the next century. But this is just what the Japanese would call tatemae -- the packaging or superficial appearance of things. The honne -- the truth or actuality -- is that whether he knows it or not, the U.S. president has arrived in Seoul to preside over the end of the Flat World.
In fact, the Obama administration is demonstrating a lot of schizophrenia about this. In India, Obama couldn't stop spouting the conventional wisdom about how international trade is always a win-win proposition and how those who express concern about the offshoring of U.S. services jobs to India are just bad old protectionists.
At the same time, however, Treasury Secretary Tim Geithner is calling for some kind of deal for the G-20 governments to take concrete actions to reduce their trade surpluses or deficits. To be sure, Geithner has quickly backpedaled from his original proposal that governments would set hard numerical targets for the allowable limits of surpluses and deficits at 4 percent of GDP. His first fallback position was that the numbers would be only voluntary targets or reference points. When that elicited a new round of incoming fire he retreated further to the current proposal for agreement that each country will take the measures it thinks necessary to reduce excessive surpluses and deficits. Hardly much of a deal at all.
Yet even this is a revolution. No matter how watered down, Geithner's proposal is a call for managed trade. It is an implicit admission that contrary to 50 years of the preaching of economists, trade deficits matter. Even bilateral trade deficits can matter if they are big enough because they distort capital flows and exacerbate unemployment in the deficit countries. Further, it is an admission that unfettered, laissez-faire free trade is not self-adjusting and therefore not really win-win.
This implicit admission by Geithner has been manifested even more strongly (but still implicitly) by some of our leading free-trade economists and pundits. Thus, Paul Krugman, a Nobel Prize winner and long a champion of conventional free trade has called for tariffs on imports from China. So has Washington Post columnist and eternal free trader Robert Samuelson, and even the Financial Times' economics columnist Martin Wolf has suggested that some offsetting response to China's currency manipulation might be necessary.
But Obama isn't going to get agreement to any of that in Seoul. None of the other countries want to face the fact that the United States cannot be Uncle Sugar and the buyer of last resort forever. In fact, Obama has asked both the Germans and the Chinese to help out a bit by consuming more and exporting less. The Germans told him bluntly to get lost and the Chinese told him somewhat more politely to get lost. So the honne is that the Germans, because they're Germans, and the rest of Europe, because it is in terrible financial shape and can't borrow any more, are bent on creating jobs by dint of export-led growth. Essentially, they are saying they are going to create jobs by taking U.S. jobs. The Asians are saying and doing the same thing. Neither Asia nor Europe is likely to take steps that will achieve significant rebalancing in any reasonable period of time. That, of course, means no new jobs for Americans.
The big question is whether or not Obama will respond to that refusal by taxing foreign capital inflows, imposing countervailing duties on subsidized imports, matching the tax holidays and other investment incentives used by China and others to induce off-shoring of U.S. production, and challenging the mercantilist practices of many Asian countries in the World Trade Organization (WTO). These are all measures that he could take himself in an effort unilaterally to reduce the U.S. trade and current account balances and thereby create jobs for Americans.
If he does, he is sure to be harshly criticized by the apostles of the conventional wisdom. But if he doesn't he is sure to be toast in two years.
TIM SLOAN/AFP/Getty Images
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.