Tag: buy american

21st Century U.S. Trade Policy Should be Pro-Market, not Pro-Business, Pro-Labor, or Pro-Lobbyist

The difference between the trade policy we have today and the trade policy we should have is like the difference between crony capitalism and free-market capitalism. The sausage grinder that is U.S. trade policy serves politicians and rewards lobbyists and gate-keeper bureaucrats, who have the gall to presume entitlement to limiting Americans’ options and picking winners and losers.

In a country that exalts freedom, the default trade policy should be free trade. But it’s not. Why?

The public has been trained to accept that special interests—companies seeking exemptions from competition; unions demanding that citizens ”Buy American”; investors and intellectual property holders demanding the U.S. public assume part of its business risks; enviros insisting on measures that punish developing countries for being poor—are rightly entitled to negotiate, abridge, impair, or sacrifice those freedoms in the name of Team USA.

So how are we free if decisions about how, with whom, and how much we transact with foreigners are decided by parties in Washington, who profit from denying us that freedom?

Trade policy should be about maximizing the freedom of Americans to choose, and distinctly not about bestowing certain advantages on particular companies, industries, or special interests. Trade policy should be about maximizing opportunities for Americans as consumers, workers, and investors, and not about impeding those opportunities.

In a globalized world where businesses are mobile and, ultimately, untethered to a homeland, what is the point of policymakers going to bat for U.S. producers? Usually, policies adopted to assist particular companies or industries handicap or subvert companies and industries upstream or downstream in the supply chain, or in other sectors. What even defines a U.S. producer anymore? GM builds more vehicles in China than it does in the United States.  Should Washington and Beijing both claim GM as national treasures and craft policy to serve its needs?

No. Policy should be neutral with respect to the goals of particular companies and industries, and designed to attract investment and human capital, and to maximize opportunities for Americans to partake of the global economy. Trade policy should be about ensuring certainty and eliminating policy-induced frictions in supply chains. As I wrote in this article (21st Century Economy Deserves Better Than 16th Century Trade Policies), which expounds upon the thoughts in this post:

This 21st century economic reality demands better than trade policies rooted in 16th century mercantilist dogma. It demands policies that are welcoming of imports and foreign investment, and that minimise regulations or administrative frictions that are based on misconceptions about some vague or ill-defined “national interest”.

American Manufacturing Continues to Thrive in a Global Economy

University of Michigan economist and American Enterprise Institute scholar Mark Perry has an excellent oped in today’s Wall Street Journal [$] about how U.S. manufacturing is thriving.  It can’t be emphasized enough how important it is to present such illuminating, factual, compelling analyses to a public that is starved for the truth and routinely subject to lies, half-baked assertions, and irresponsibly outlandish claims about the state of American manufacturing.

The truth matters because U.S. trade and economic policies—your pocketbook—hang in the balance.

For more data, facts, and background about the true state of U.S. manufacturing, please see this Cato policy analysis and these opeds (one, two, three).

Fixing the Economy Demands More Than a Stroll across Lafayette Park

President Obama’s visit with the Chamber of Commerce this week has infuriated the anti-business Left.  But short of expropriation and nationalization, what doesn’t? 

Robert Reich and NPR and the scribes at the Huffington Post just don’t get it.  Their man may be in the White House, but business holds the keys to the kingdom.  Whether the president’s priority is job creation or reelection, nothing matters more than sustained economic growth. And without business having confidence that policy in the United States will become more hospitable and predictable, investment and job creation will remain tepid.

The president doesn’t have nearly the leverage assumed in the delusions of groups like Public Citizen, which wrote: “What America needs is not olive branches to giant corporations but controls over the companies that sank the economy.”  Back here in reality, businesses have options.  Many can choose to produce and operate in other countries, where the economic environment may be more favorable.  In that regard, globalization has produced a veritable Galt’s Gulch, which serves as an important check on bad economic policy.  Governments are now competing with each other to attract the financial, physical, and human capital necessary to nourish high value-added, innovation-driven, 21st century economies.  Gratuitously punitive anti-business policies will only chase away the companies that the president exhorts to invest and hire.

According to a survey of 13,000 business executives worldwide, conducted by the World Economic Forum, 52 countries have less burdensome regulations than the United States.  Add to that the fact that the United States has the highest corporate tax rate among all OECD countries and it becomes less mysterious why U.S. businesses shift more operations abroad.

As I wrote in a December 2009 Cato paper:

Governments are competing for investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and administrative frictions.

This global competition in policy is a positive development.  But we are kidding ourselves if we think that we don’t have to compete and earn our share with good policies.  The decisions we make now with respect to our policies on immigration, education, energy, trade, entitlements, taxes, and the role of government in managing the economy will determine the health, competitiveness, and relative significance of the U.S. economy in the decades ahead.

The president is beginning to get it – though grudgingly.  He acknowledges the burdens of excessive and superfluous regulations and bureaucracy (remember his SOTU story about the jurisdictions entangled in the salmon’s journey from salt water to fresh water to the smoker?).  The president has hinted that he would like to see the corporate tax rate lowered.  He knows that businesses have options to invest, produce, and hire abroad—and that oftentimes U.S. policy chases them there.  But, so far, rather than push policies to encourage domestic investment, production, and hiring, the president has done the opposite, while demonizing businesses that follow the incentives to go abroad.

The president’s position during his exchange at the Chamber of Commerce was that he has made concessions to business by moving toward the center on tax and trade policy, and that now it is time for business to show good faith by investing and hiring.  But Obama’s small steps toward the center come after two years of sprinting to the left on economic policy.  After ObamaCare, Dodd-Frank, taxpayer bailouts, unorthodox and legally-questionable bankruptcy procedures, subsidies for select industries, Buy American and other regulations governing how and with whom “stimulus” dollars could be spent, and the administration’s tightening embrace of industrial policy, businesses want a more quiet, less intrusive, less antagonistic, predictable policy environment before they will feel comfortable playing the role Obama wants them to play.

Until that happens, the president shouldn’t expect torrents of investment and hiring from the business community.

President Obama Fails to Understand Trade

At the beginning of the Obama administration, I had the audacity to hope that the new president would defy conventional wisdom and become a proponent of trade and a good spokesman for its benefits. Scott Lincicome and I even wrote a 20,000-plus word Cato analysis explaining why the economic, geopolitical, and domestic political environment offered the president a unique opportunity to steer his party back to its pro-trade roots.

The thrust of our analysis was that, despite the campaign rhetoric, the president understood the economic benefits of trade and that he would see it as an escape route from recession and a path to political success; that the president’s visibility and new cache with his trade-skeptical political party—and the fact that he wasn’t George W. Bush—made him well-suited to the task of challenging and extinguishing lingering myths about the alleged ravages of trade, while explaining its many benefits; and, that the president would recognize that pro-trade policies should be part of the current Democratic Party platform, if for no other reason than the fact that restrictions governments place on trade harm lower-income Americans and the world’s poor more than they hurt anyone else. (Protectionism is regressive taxation, which is presumably anathema to Democratic Party creed.)

Alas, our study, “Audaciously Hopeful: How President Obama Can Restore the Pro-Trade Consensus,” was just a little too. It fell on deaf ears. It was ignored. In fact, it’s almost as if the past two years of trade policy were conducted to spite the recommendations in that paper.

From this administration, we’ve seen completed bilateral trade agreements sent to an off-site storage warehouse; the imposition of taxes on imported tires; “Buy American” provisions; prohibitions on Mexican trucks; demonization by the president of companies that outsource; defiance of multilateral rules governing use of the antidumping law; and, a “Boardwalk Empire”-style deal to prospectively compensate Brazilian farmers for the lower revenues they should expect on account of the lavish subsidies bestowed by U.S. taxpayers on U.S. cotton producers in lieu of reducing—or better still, halting—cotton subsidies altogether. Yes, the hallmark accomplishment of this administration’s trade policy so far is a deal that requires American taxpayers to subsidize Brazilian cotton producers for the right to continue subsidizing U.S. cotton producers.

Despite all that, I remained audacious (or gullible) enough to hold a glimmer of hope that the president would finally see the wisdom in our advice—given the new political landscape.  That glimmer was snuffed out with publication of an oped in the New York Times this past Saturday, in which President Obama betrays profound misunderstanding of trade and its purpose.  The president portrays trade as an enterprise that is won or lost at the negotiating table, where only the most savvy or most committed negotiators can succeed in bringing home the spoils.  The president promises to fight hard to get Americans their fair shake from this dog-eat-dog process, while actual producers, consumers, workers, and investors are relegated to tertiary roles.

The central dysfunction between Americans and trade is the assumption—reinforced in the president’s op-ed—that exports are good, imports are bad, the trade account is the scoreboard, and our trade deficit means that we are losing at trade. That dysfunction resides comfortably within a zero-sum worldview, which the president touts in a purposeful cadence throughout the oped. In the penultimate sentence, the president writes:

Finally, at the Asia-Pacific Economic Cooperation meeting in Japan, I will continue seeking new markets in Asia for American exports. We want to expand our trade relationships in the region, including through the Trans-Pacific Partnership, to make sure that we’re not ceding markets, exports and the jobs they support to other nations.

By opining about trade without understanding that its real benefits are manifest in imports (here’s Don Boudreax’s elaboration of that process), the president is simply reinforcing myths that will continue to confuse and divide American.  As long as politicians insist that our trade account is a scoreboard and that a surplus is a trade policy success metric, Americans will continue to be skeptical about trade.

Democrats Ignore 80% of Workers in Service Sector

In a bid to revive their sagging election prospects, congressional Democrats have hit on the theme of promoting domestic U.S. manufacturing. As a front-page story in the Washington Post reports today, the party has adopted the bumper-sticker slogan, “Make It in America.”

I’m all for making things in America, when it makes economic sense to do so. But the Democratic plan opens a window for all sorts of government intervention, including trade barriers, higher taxes on U.S.-owned affiliates abroad, and subsidies for “clean energy” and make-work infrastructure projects.

The campaign relies on two major but faulty assumptions: That U.S. manufacturing is in deep trouble, and that creating more manufacturing jobs is the key to prosperity. Neither assumption is true.

As I explained in a Washington Times column yesterday:

Despite worries about “de-industrialization,” America remains a global manufacturing power. Our nation leads the world in manufacturing “value-added,” the value of what we produce domestically after subtracting imported components. The volume of domestic manufacturing output, according to the Federal Reserve Board, has rebounded by 8 percent from the recession lows of a year ago. Even after the Great Recession, U.S. manufacturing output remains 50 percent higher than what it was two decades ago in the era before NAFTA and the WTO.

Manufacturing jobs have been in decline for 30 years, not because of declining production, but because remaining workers are so much more productive.

Again, I’m all for manufacturing jobs supported by a free market, but members of Congress need to wake up to the reality that America today is a middle-class service economy. As I wrote in the column yesterday:

More than 80 percent of Americans earn their living in the service sector, including a broad swath of the middle class gainfully employed in education, health care, finance, and business and professional occupations.

It is one of the big lies of the trade debate that manufacturing jobs are being replaced by low-paying service jobs. Since the early 1990s, two-thirds of the net new jobs created have been in service sectors where the average pay is higher than in manufacturing. Members of Congress who belittle the service sector are ignoring the interests of a large majority of their constituents.

Congress and the president should focus on economic policies that promote overall economic growth, not policies that favor one sector of the economy over all the others.

Is Buying an iPod Un-American?

We own three iPods at my house, including a recently purchased iPod Touch. Since many of the iPod parts are made abroad, is my family guilty of allowing our consumer spending to “leak” abroad, depriving the American economy of the consumer stimulus we are told it so desperately needs? If you believe the “Buy American” lectures and legislation coming out of Washington, the answer must be yes.

Our friends at ReasonTV have just posted a brilliant video short, “Is Your iPod Unpatriotic?” With government requiring its contractors to buy American-made steel, iron, and manufactured products, is it only a matter of time before the iPod—“Assembled in China,” of all places—comes under scrutiny? You can view the video here:

In my upcoming Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I talk about how American companies are moving to the upper regions of the “smiley curve.” The smiley curve is a way of thinking about global supply chains where Americans reap the most value at the beginning and the end of the production process while China and other low-wage countries perform the low-value assembly in the middle. In the book, I hold up our family’s iPods as an example of the unappreciated benefits of a more globalized American economy:

The lesson of the smiley curve was brought home to me after a recent Christmas when I was admiring my two teen-age sons’ new iPod Nanos. Inscribed on the back was the telling label, “Designed by Apple in California. Assembled in China.” To the skeptics of trade, an imported Nano only adds to our disturbingly large bilateral trade deficit with China in “advanced technology products,” but here in the palm of a teenager’s hand was a perfect symbol of the win-win nature of our trade with China.

Assembling iPods obviously creates jobs for Chinese workers, jobs that probably pay higher-than-average wages in that country even though they labor in the lowest regions of the smiley curve. But Americans benefit even more from the deal. A team of economists from the Paul Merage School of Business at the University of California-Irvine applied the smiley curve to a typical $299 iPod and found just what you might suspect: Americans reap most of the value from its production. Although assembled in China, an American company supplies the processing chips, a Korean company the memory chip, and Japanese companies the hard drive and display screen. According to the authors, “The value added to the product through assembly in China is probably a few dollars at most.”

The biggest winner? Apple and its distributors. Standing atop the value chain, Apple reaps $80 in profit for each unit sold—an amount higher than the cost of any single component. Its distributors, on the opposite high end of the smiley curve, make another $75. And of course, American owners of the more than 100 million iPods sold since 2001—my teen-age sons included—pocket far more enjoyment from the devices than the Chinese workers who assembled them.

To learn a whole lot more about how American middle-class families benefit from trade and globalization, you can now pre-order the book at Amazon.com.

Buy American, Destroy American Jobs

The “buy America” provision in the misnamed stimulus bill was supposed to protect jobs in the U.S.  Alas, by encouraging foreign protectionism, the measure is likely to end up destroying American jobs.

Indeed, the provision has all the earmarks of a grand political fiasco.  Reports the Financial Times:

Confusion reins. For fear of missing out on contracts, many companies are demanding that all their suppliers are Buy American-compliant regardless of any exemptions.

“Those companies that can comply are of course thrilled and are trumpeting that in their marketing. Those that cannot are in agony and are losing business and cutting workers,” says David Ralston, a government procurement lawyer at Foley & Lardner. “The many companies that find themselves in the gray areas are calling their lawyers.”

Canada’s government has been an early and vocal lobbyist against the measures, sending officials to Washington to warn that a trade war is brewing. Canadian municipalities threatened to attach “do not Buy American” provisions to their own public projects after manufacturers were cut out of US stimulus projects, but have agreed to hold off while the national government tries to resolve the problem.

Canada wants to broker a bilateral trade agreement on government contracts which would extend all the way down to the level of local authority. The US trade representative says it is open to the idea.

While this would quieten the Canadians, it could spark cries of protest from the US’s other trading partners. The British ambassador has given several speeches in recent weeks chastising the US over Buy American and the way it is being implemented. The Europeans are watching closely. But could the US write bilateral deals with them all? Buy American’s supporters in Congress would surely kick back.

The Chamber of Commerce is proposing a compromise. It has called on the administration to tell municipalities to act as if they were signatories to the federal government’s agreements. “I think there is enough flexibility for OMB [the Office of Management and Budget] to make that change. I don’t have a crystal ball but for multiple reasons it would make sense for them to do it,” says Chris Braddock, the Chamber’s procurement expert.

On Monday all groups with a stake in the debate submitted their written comments to the OMB, the White House department handling the stimulus. The administration must now write the final rules on how to implement Buy American.

The U.S. has gained enormously from the expansion of trade in recent years.  We all will lose if Washington now encourages a global retreat from free markets.