In response to my recent call for American ASEAN experts to be less focused on promoting a U.S.-ASEAN free trade agreement and more focused on having the ASEAN countries actually buy more from the United States, I received several queries about what exactly the United States has to sell aside from military hardware and systems.
This is an old question in the long running debate over the U.S. trade deficit and unfair trade in the Asia-Pacific region. Typically the discussion goes as follows. American commentators, business executives, and government officials claim the some market is unfairly closed or that exchange rates are being unfairly manipulated to the disadvantage of U.S. exports. This, they say, is exacerbating the already unsustainable U.S. trade deficit and will result in some dire consequence unless the offending countries stop cheating and start playing by the rules. The response from Asia is denial of any foul play and an assertion that American business doesn't try hard enough capped by the question, "aside from weapons and airplanes, what does American make that anyone in Asia could possibly buy?"
This has been an excellent debating technique for Asian officials and commentators because it has diverted attention from Asian policies to well known and glaring American weaknesses. In effect, this question has said: "Look, why don't you just forget about our policies and practices. The truth is that you have nothing to sell that we want to buy, and, therefore, even if we played exactly as you request there would be no change in the trade flows or in your trade deficit."
While it was always an exaggeration of U.S. weaknesses, this argument contained enough truth that it was long hard to counter. Today, however, that is much less the case. Let's start with weapons and aircraft. Even its harshest critics have always acknowledged that the United States is very competitive in the weapons and aircraft markets. Yet, even its closest allies have striven to import only what was absolutely necessary from the United States while having most of the arms and aircraft made in their own factories within their own territories. Take the recent decision by Japan to buy the U.S. F-35 as its next generation fighter plane. Japan is not going to import that plane off the shelf from an American factory. Rather it is negotiating to have as much of the plane as possible made in Japan despite the fact that making it in Japan will dramatically increase the cost.
As for commercial aircraft, press reports this week noted that Airbus will take a larger share of global aircraft sales this year than Boeing. This strong Airbus showing reflects the success of a long running European industrial policy that has been aimed not only at avoiding as much as possible the procurement of U.S. made aircraft but also at displacing them in the world markets. Virtually every Asian economy including those of Japan, Korea, and China has some effort underway to promote the production of commercial jet aircraft or of aircraft parts, and procurement both of U.S. brand military and commercial aircraft is often made conditional on at least partial production of the plane within the home territory of the procuring body.
So a good first reply to the question of what the United States has to sell would be - arms and aircraft, if that would only be fully permitted.
But now the even better reply is that the United States is the most competitive locations for production and provision of a broad range of goods and services. Take autos as an example. Honda has just announced that it may increase its production in the United States by 40 percent and begin to use the United States as an export platform for some models. This is because the strong yen has made U.S. based production more competitive than Japan based production. Similarly, Mercedes Benz, BMW, Hyundai, and other global auto makers are added production capacity in the United States not only to supply the U.S. market but also for export.
This morning's New York Times reports that GE is returning production of some appliances to Louisville, Kentucky and a recent study by Booz & Co. emphasizes that about 90 percent of U.S. manufacturing industries are quite competitive in global markets. One of the most competitive is semiconductors which were the basis of the whole rise of Silicon Valley. Yet, as in the case of aircraft, a number of governments are promoting and subsidizing indigenous semiconductor production as part of efforts to displace the leadership of the U.S. based production.
So the answer today to the question, is that the United States has plenty to sell if the strategic industrial policies aimed at displacing such sales are abandoned or modified. And it is the lack of focus on such policies that constitutes my opposition to proposals for free trade agreements like that suggested between ASEAN and the United States. Free trade agreements that do not result in more trade in items in which it is well know that countries are competitive is not really free trade. Rather it is a charade.
My call is for less charade and more real trade, meaning actual sales and delivery.
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If you want to understand the truly upside-down nature of the thinking of Washington's foreign policy elite on Asia, take a look at the just released report and press commentary by the U.S.-ASEAN Strategy Commission of the Center for Strategic and International Studies (CSIS).
Like all of these think tank commissions, this one is studded with former high ranking officials now consulting for a variety of global corporations both American and foreign. Particularly prominent in their remarks were former U.S. Trade Representative Carla Hills and former Defense Secretary William Cohen. Hills urged negotiation of that philosopher's stone of modern international relations, a free trade agreement, in this case between the United States and ASEAN. Breaking down barriers to trade and capital flows would encourage further investment in the region by U.S. corporations, she said.
In light of the fact that the ASEAN region is drowning in investment while the United States is starving for it, it's not clear why Washington should want to encourage further investment in ASEAN, but maybe Hills thinks the deal would encourage a two way flow of investment that would also be beneficial to the United States.
If that is the case, however, the commission's proposals do not include any recommendations on exchange rate manipulation, reciprocity on investment incentives, or other tax and regulatory tools often employed by the ASEAN countries in ways that tend to promote their trade surpluses and the U.S. trade deficit with its consequent impact on U.S. unemployment.
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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.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.