Topic: International Economics and Development

A Second Industrial Revolution?

Peter Goodman has a fine article in Monday’s Washington Post about the resilience and tenacity of the manufacturing sector in the United States – even in the storied ghost towns that dot the once-bustling textile regions of North Carolina.  Like my recent paper on the topic, Goodman points out that U.S. manufacturing is thriving:

The United States makes more manufactured goods today than at any time in history, as measured by the dollar value of production adjusted for inflation – three times as much as in the mid-1950s, the supposed heyday of American industry. Between 1977 and 2005, the value of American manufacturing swelled from $1.3 trillion to an all-time record $4.5 trillion, according to the Bureau of Economic Analysis.

And he reinforces a key point of my paper that has yet to penetrate the pessimistic political discourse:

With less than 5 percent of the world’s population, the United States is responsible for almost one-fourth of global manufacturing, a share that has changed little in decades. The United States is the largest manufacturing economy by far. Japan, the only serious rival for that title, has been losing ground. China has been growing but represents only about one-tenth of world manufacturing.

The major difference between my paper and Goodman’s story is that the former takes a birds-eye view of the manufacturing sector, presenting an impersonal, data-driven assessment of the state of U.S. manufacturing.  Goodman’s story focuses on a particular biotechnology company that occupies a former textile mill, producing a drug for liver ailments from a local pond weed.  The story is emblematic of the metamorphosis throughout the North Carolina and U.S. manufacturing sectors:

North Carolina encapsulates the forces remaking American manufacturing. Between 2002 and 2005, the state lost 72,000 manufacturing jobs, about three-fourths in textiles, furniture-making and electronics, according to the North Carolina Commission on Workforce Development. At the same time, the state has become a rising powerhouse in lucrative new manufacturing sectors such as biotechnology, pharmaceuticals and sophisticated textiles.

During the most recent decade, U.S. manufacturing has become increasingly oriented toward the middle and upper ends of the value-added spectrum.  Opportunities abound for workers with skills or the willingness and wherewithal to acquire them.  In fact, the title of the National Association of Manufacturers tenth annual Labor Day Report on the state of U.S. manufacturing is “Rising Incomes Cushion Economy,” and its subtitle is “Finding Highly Skilled Workers Remains a Challenge for Manufacturers.”  It seems to me that rising wages should make more workers willing to get the skills, and the need to find highly-skilled workers should induce manufacturers to assist on the wherewithal front.

U.S. Manufacturing Sector Needs No Protection from Congress

Protectionist measures currently being considered on Capitol Hill would damage America’s manufacturing base and fail to take into account that the nation’s manufacturing sector is in fact booming. In “Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade,” Cato scholar Daniel J. Ikenson argues, “Justification for [protectionist] bills is predicated on the belief that manufacturing is in decline and that the failure of U.S. trade policy to address unfair competition is to blame. But those premises are wrong. The totality of evidence points to a robust manufacturing sector that has thrived on account of greater international trade.”

The Privatization Revolution Reaches the Kibbutz

A fascinating headline in the New York Times today:

The Kibbutz Sheds Socialism and Gains Popularity  

It seems that one of the proudest accomplishments of socialism – one that never degenerated into totalitarianism! – the Israeli kibbutz, began to decline in the 1980s as even small-scale socialism proved not to work very well. People left the kibbutzim, and they seemed doomed. But now, as the Times puts it, “most are undergoing a process of privatization,” though just as in China and other reforming socialist societies, they prefer not to use such a word. Nevertheless, the Times says,

On most kibbutzim, food and laundry services are now privatized; on many, houses may be transferred to individual members, and newcomers can buy in. While the major assets of the kibbutzim are still collectively owned, the communities are now largely run by professional managers rather than by popular vote. And, most important, not everyone is paid the same.

Once again, people are lining up to get in.

One difference between libertarianism and socialism is that a libertarian society allows for voluntary experiments in socialism, while a socialist society can hardly accommodate people who prefer to live in a libertarian community. In a free society, if kibbutzim or other experiments in communal living can make a go of it, more power to them. And if the original design doesn’t quite work, then adjustments can be made. And the rest of us benefit by having more patterns and models available to choose from.

French Government Proposes Global Financial Regulation to Counter “Typical Excesses” of American Capitalism

Joined by Germany (gee, what a surprise), France is calling for more regulation of financial markets. But politicians are not hopelessly stupid. They understand that they will drive even more money offshore or underground if they increase the relative burden of government in France. So they want other nations to agree to the same misguided policies. The International Herald Tribune reports:

France said Wednesday that the recent turmoil in credit markets had strengthened its case for tougher regulation of global financial markets and that it would press ahead with proposals at a fall meeting of Group of 7 finance ministers. …Lagarde said during an interview that she had not yet discussed the initiative with the United States or Britain, members of the G-7 who have been reluctant to ponder any regulation of financial markets in the past. But she said that France and Germany, two countries she described as being “at the heart” of the initiative, were determined to use the current crisis as a catalyst for a stricter global rule book. …”There is a growing case for better state involvement on a coordinated basis in various areas, one of which is stock markets and financial markets,” Lagarde added. …Economists and investors expressed skepticism as to how governments could enforce more transparency in markets that trade in such a vast variety of financial products, arguing that the correction in markets was a more effective way of forcing banks and investors to reassess and reprice the risk in their portfolios. …Lagarde…has blamed the crisis on the “typical excesses” of American capitalism. She said that a gambling culture in the markets was simply more widespread on the other side of the Atlantic.

More Thoughts on Trade Enforcement

In addition to the sock safeguard action against Honduras, the U.S. government recently requested arbitration over alleged violations by Canada of the 2006 Softwood Lumber Agreement.  (We’ve written about this long-running dispute here, here, and elsewhere). Under the SLA, Canada is required to restrict the volume of its exports or impose an export tax (or some combination of the two) when the prevailing monthly price falls below U.S. $355 per million board feet.

The deal, which the Canadians signed with guns to their heads, was agreed during a period of a robust housing market and relatively high lumber prices.  With the decline of the U.S. housing market, lumber prices have gone south, and the stipulation that Canada intervene in the lumber market has kicked in.

Enforcement in this case, then, means that the housing market slump will endure longer than it has to.  Builders will be less capable of offsetting rising mortgage rates with lower priced homes, as the cost of their most important input remains artificially high.

Even the cost of nails should be expected to rise and for the same reason –  enforcement.  On Tuesday, the U.S. International Trade Commission determined preliminarily that imports of certain steel nails from China and the United Arab Emirates (co-winners of the 2006 Congressional Pinata of the Year Award) are being sold at less than fair value in the United States and causing material injury to domestic producers.   Additional duties are likely to be formalized by the end of the year. 

Thus, the administration’s indulgence of Congress’s demands for more trade enforcement will have the noble effect of making life more difficult, in particular, for Americans at the lower end of the income spectrum, who will need to devote more of their limited resources to housing and socks.  More often than not, trade enforcement is just another term for regressive taxation.

Denmark’s Meager Tax-Cut Package

The good news is that Danish politicians have announced that taxes will be reduced. This is welcome news in a nation with the world’s highest income tax rate. Indeed, the tax burden is so onerous that even the OECD suggested it might not be a good idea to subject 40 percent of workers to marginal tax rates of more than 70 percent. Unfortunately, the tax cuts that have been proposed are akin to putting a band-aid on a compound fracture. Instead of reducing the top tax rate, the government merely intends to adjust the income level where the top bracket takes effect. While this surely is better than nothing, the government also is raising taxes on energy and increasing an already bloated welfare system. Tax-news.com reports on Denmark’s less-than-exciting reforms:

The Danish government has announced its intention to cut taxes by DKK10 billion (EUR1.34 billion) per year in 2008 and 2009 in a bid to stimulate the labour market, and improve incentives to work. Under the proposed reforms, announced by the government on Tuesday, the income ceiling for the middle and top income tax brackets will be raised to DKK353,000 per year from DKK304,100, and to DKK381,300 per year from DKK365,000, respectively. …In the same announcement, the Danish government also promised that a broad economic plan for the next eight years would not raise any taxes between now and 2015. The economic package also promises DKK50 billion in extra spending to improve Denmark’s welfare system between 2009 and 2018. …To help offset the tax cuts, the government also announced that green taxes on energy consumption would increase from 2008 to match inflation. This would increase taxes on heating, water and electricity.

Sockin’ it to Honduras

A constant refrain from Democrats in Congress is that the Bush administration has been lax about enforcing the terms of U.S. trade agreements. Such a conclusion reveals a true naivete about trade diplomacy. The U.S. Trade Representative maintains ongoing dialogues with our trade partners during which many trade irritants are addressed and resolved without need of resort to the stick.

But Congress wants to see more of the stick, and more of the stick it shall see. Apparently our poor, but industrious Honduran neighbors have been shipping too many socks stateside. U.S. imports of cotton, wool, and man-made fiber socks from Honduras rose from 10.9 million dozen pairs in 2005 to 15.2 million dozen pairs in 2006, an increase of nearly 50 percent. In 2007 through June, imports from Honduras are up about 60 percent from the same period in 2006.

Under the terms of the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), the U.S. government can impose special safeguards in the form of new a tariff if a textile or apparel product:

“is being imported into the United States in such increased quantities, in absolute terms or relative to the domestic market for that article, and under such conditions as to cause serious damage, or actual threat thereof, to a domestic industry producing an article that is like, or directly competitive with, the imported article.”

The Committee for the Implementation of the Textile Agreements (CITA), an agency within the Commerce Department, initiated proceedings for such a safeguard last week. If it makes an affirmative finding, duties of 13.5 percent will be imposed later in the year.

Despite the surge in sock imports from Honduras, the country still accounts for only about 4 percent of U.S. consumption. How can such a miniscule presence account for “serious damage” or even the threat thereof to the domestic industry?

The safeguard rule is a farce, and its application to a country which depends heavily on its few manufacturing industries, and where two-thirds of the citizens live in poverty, explains a lot about why international regard for
America is in decline.