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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"When the center of the global economy shifts, logically, the world intellectual center must shift as well. This institute will be a new think tank for the new Asian Century."
Thus spoke HSBC CEO Stuart Gulliver last night at Hong Kong's Conrad Hotel, where the inauguration of the new Fung Global Institute was celebrated by 200 global movers and shakers, including former Federal Reserve Chairman Paul Volcker, former Hong Kong Chief Executive Tung Chee Hwa, and Institute founders and Li and Fung Corporation Chairman and CEO respectively Victor and William Fung.
As the dinner speaker, Volcker backed Gulliver's sentiment and called on Hong Kong and China to lead the way in overcoming U.S. resistance to adoption of the Volcker Rule (banks with implicit or explicit government guarantees because they hold insured accounts or are too big to fail would be prohibited from doing proprietary trading) by setting the example with immediate adoption in their own markets. He emphasized that the global financial system is sitting on a knife edge without a coherent and consistent set of international or intersecting national regulations on dealing with what is now a $700 trillion global market in derivative instruments that no one understands. In the face of dithering and caviling in the West, maybe, suggested Volcker, the East could start talking sense.
Of course, as Chairman Victor Fung emphasized in his own opening remarks, Asia is a vast, diverse space and no single institute can be its sole voice. But he voiced the intent for the institute to provide Asian perspectives on the key issues facing not only Asian but all global leaders. For that purpose, he presented an all star cast of fellows, advisers, and staffers. These include Nobel prize winning economist Michael Spence, institute President and Peoples' Bank of China adviser Andrew Sheng, former Chairman of the China Bank Regulatory Commission Liu Mingkang, and former World Bank chief economist for China Louis Kuijs.
In that spirit of presenting Asian perspectives to the world, the current crisis in Europe was the focus of much of the inaugural discussion. Commenting on the major challenges facing Asia, Gulliver placed the euro/EU problem first on his list saying that "the key now is the eurozone and calling on the Europeans to establish a Europe wide bank deposit insurance guarantee in euros along with a euro-bond and a fiscal concordance. However, as evidence of the differences in Asian perspectives, former Singapore Foreign Minister George Yeo took a much more relaxed position, arguing that more integration cannot be the answer for Europe and that it should perhaps not strive too hard to sustain what may well be unsustainable. Attractively out of the box in concept, this idea was quickly countered by Spence and others who emphasized that a collapse of the EU would have dire consequences for Asia and America because it is the biggest export market for both regions.
There was, however, unanimity of perspectives in one very important and perhaps defining respect. At a moment when the former head of a private equity firm (Mitt Romney) -- a firm dedicated to maximizing relatively short term profits for shareholders as its sole business objective -- is running to become president of the United States, Victor Fung emphasized that "any individual business has no right to exist if its objectives do not coincide with those of the society it serves." He further called for business to promote full global employment, social justice, and the interests of stakeholders.
That is certainly a different perspective -- a strongly Asian perspective -- from the dominant shareholder value/fiduciary obligation philosophy of U.S. business leaders and thinkers. The importance of that difference was suggested by Fung at the end of his remarks when he warned of a clash of civilizations if dialogue and debate cannot reconcile strongly differing perspectives.
Avoiding such a clash and promoting a truly equitable, sustainable, and prosperous global economy is the gargantuan task the Fung Global Institute has set itself. I sincerely wish it luck.
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.
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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.
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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.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.