Topic: Trade and Immigration

The Myth of a Manufacturing Renaissance

By
Daniel J. Ikenson

Have you heard all the banter about a U.S. manufacturing renaissance? Numerous media reports in recent months have breathlessly described a return of manufacturing investment from foreign shores, mostly attributing the trend to rising wages in China and the natural gas boom in the United States, both of which have rendered manufacturing state-side more competitive. Today’s Washington Post includes a whole feature section titled “U.S. Manufacturing: A Special Report,” devoted entirely to the proposition that the manufacturing sector is back!

The myth of manufacturing decline begets the myth of manufacturing renaissance. This new mantra raises a question: How can there be a manufacturing renaissance if there was never a manufacturing “Dark Ages”?

Contrary to countless tales of its demise, U.S. manufacturing has always been strong relative to its own past and relative to other countries’ manufacturing sectors. With the exception of a handful of post-WWII recession years, U.S. manufacturing has achieved new records, year after year, with respect to output, value-added, revenues, return on investment, exports, imports, profits (usually), and numerous other metrics appropriate for evaluating the performance of the sector. The notion of U.S. manufacturing decline is simply one of the most pervasive economic myths of our time, sold to you by those who might benefit from manufacturing-friendly industrial policies with the abiding assistance of a media that sometimes struggles to distill fact from K Street speak.

The myth of U.S. manufacturing decline has long been advanced by policymakers and interested parties as a predicate for industrial policy or trade barriers.  “Because U.S. manufacturing has fallen behind,” the argument goes, “we need to match the efforts of other governments in supporting our factories,” or “because U.S. manufacturing has been hobbled by predatory foreigners we need to erect tariffs to level the playing field,” or “because our industrial base is in ruins, U.S. national security is threatened without subsidies to rebuild manufacturing.”

The assertion that “U.S. manufacturing is in decline” is usually presented as holy writ, without allowance for examination or dissent, before those dubious policy solutions are pitched as our only salvation. Fortunately, the more open-minded and genuinely inquisitive insist upon closely evaluating premises before considering the “therefore-we-musts.” 

As the nearby chart confirms, U.S. manufacturing value-added (the metric most comparable to GDP, which equals the value of manufactured output minus the cost of intermediate goods), in both nominal and real terms, has been trending upward since the end of the World War II. Nominal manufacturing value-added declined on a year-to-year basis only eight times in the past 64 years. Manufacturing value-added took a hit during the Great Recession, as did the rest of the economy, but it plainly defies the data to suggest that U.S. manufacturing is – or has been at anytime – in decline.

As a share of the U.S. economy (the green bars on the chart), manufacturing has declined from a 1953 peak of 28 percent to 11.5 percent in 2011. But that is testament to the growth of U.S. services sectors, not to a decline in manufacturing, which (as you see) has been growing nearly continuously in absolute terms.

Yet some insist that these particular figures don’t tell the real story, which can be found in the manufacturing employment figures. Ah, well. Manufacturing employment has certainly been on a downward trajectory for three decades, after peaking at 19.4 million workers in 1979. Despite increases of about 500,000 workers over the past couple of years, manufacturing employment stands at about 11.8 million today. But manufacturing employment is not a barometer of the health of the sector. If the objective of economics is to make the best use of scarce resources, U.S. manufacturing – with its historic productivity gains in recent decades – has done an excellent job. It is not a reflection of manufacturing weakness that those scarce resources (apparently not so scarce) have not been redeployed elsewhere in the economy. Nevertheless, most of the “manufacturing-in-decline” narrative is the result of conflating the meanings of manufacturing value-added and manufacturing employment.

What the media are today characterizing as a manufacturing renaissance is better understood as a surge. Things aren’t being turned around; they are accelerating in the same direction.

Plenty of manufacturing and manufacturing-related activities have been occurring and growing in the United States for several years. Rising wages in China and the domestic gas boom change the mix of relatively viable manufacturing activities, but they are just two of dozens of considerations that factor into thousands upon thousands of decisions about where to develop, test, manufacture, assemble, package, sell, and perform every other function in a products supply chain from its conception to its consumption. A confluence of considerations from worker skills, total labor costs, degree of risk aversion, desire to produce within a tariff wall, interest in influencing political decisions, infrastructure quality, proximity to lucrative markets, proximity to supply chain locations, the stability of the political and business climates, corruption, the rule of law, access to capital, taxes, regulations, and dozens more all factor into the ultimate decision about where to perform a specific manufacturing activity.

The implication that the shrinking disparity in U.S. and Chinese wages or the growing disparity between U.S. and world natural gas prices recently have surpassed magic benchmarks that will open the flood gates to foreign and returning domestic investment is an oversimplification that erroneously homogenizes manufacturing. In fact, the sector is diverse in its requirements, and thus in the weighting of factors that affect its location decisions. Every business – even in the same industry – considers different factors and weights them differently.

What matters, though, is that direct investment in the U.S. economy – whether from foreign or domestic companies – is something to celebrate. Attracting investment in manufacturing and in other sectors is essential for economic growth. Unlike previous decades when the United States was easily the destination of choice for direct investment, nowadays there is much greater competition, particularly from emerging economies. In fact, the U.S. share of the world’s foreign direct investment stock has dropped significantly from 41 percent in 1999 to 17 percent in 2011.

So rather than observe the migration of some activities back to the United States and assume that a trend is in the making, a better use of the media’s resources would be to take inventory of the factors that encourage direct investment in the United States and spotlight for the public how U.S. policies can encourage, and not deter, an investment renaissance in United States.

Topics: 
Regulatory Studies, Trade and Immigration

What to Do about OPEC?

By
Jerry Taylor

Cato hosted a policy forum last week (which you can watch in its entirety if you missed it the first time around) to discuss a new paper released by Security America’s Energy Future (SAFE).  The paper – written by long-time friends Andy Morriss and Roger Meiners – argues that there is a consensus among academics who have studied OPEC.  The consensus?  The cartel is responsible for less crude oil on the market than would otherwise be the case (which means higher prices than would otherwise be the case) and for the bulk of the price volatility we find in crude oil and, thus, gasoline markets.  “The international market for oil is not a free market” they conclude.  “The global oil market deviates in important ways from the competitive model and that these market anomalies have significant economic impacts and so are relevant for policy makers.”

While Morriss and Meiners would thus seem to invite politicians to act, they offered no agenda of their own.  That’s where SAFE comes in.  FedEx’s Fred Smith, who co-chairs SAFE’s Energy Security Leadership Council, argued at the forum that the federal government needs to respond to OPEC’s machinations by (1) achieving energy independence for North America (a goal I’ve been quite skeptical about in the past), (2) establishing tough energy efficiency standards for a whole host of goods, but most particularly, for U.S. automobiles via CAFÉ standards (an agenda that most economists would reject in favor of accurate price signals), and (3) subsidizing R&D in order to find alternatives to oil in transportation markets.  SAFE discusses this agenda more robustly in their “National Energy Strategy for Energy Security, 2013”.

SMU’s James Smith – one of the most prominent energy economists who works in this field – was on-hand to offer what I think was a compelling rebuttal to the central arguments forwarded by the Morriss and Meiners study.

Read the rest of this post »

Topics: 
Energy and Environment, International Economics and Development, Trade and Immigration

Trade Pessimism Reigns Supreme

By
Simon Lester

The Economist magazine has an article worrying that the proposed US-EU trade talks – discussed in this Cato paper and at this recent event – are floundering.  They say, “[r]ight now, the pact is in trouble, beset by small-mindedness and mutual suspicion.”  All is not lost, though: “Time, then, for a big push on both sides; this pact can still be saved.”

Now, I can see why people get concerned about trade negotiations.  Many of them drag on for years, and the prospects for completing large-scale negotiations look dim these day.  But there’s something that should be kept in mind about the US-EU talks:  They haven’t even started yet!  The negotiations won’t start until July, and it’s still only April.  So everyone needs to relax a bit.

Having said that, I can see why people would express concern.  The pre-negotiation jockeying suggests there will be serious difficulties.  For example, France wants “cultural sectors,” like TV, radio and film, exempted.  On this point, the Economist notes:

European governments recently sent trade officials to Brussels to a first meeting on their offer to America. Led by the French, envoys from southern and eastern Europe called for a long list of red lines. These covered the usual stuff: agriculture, public services and “audio-visual” content (eg, bungs for French cinéastes, airtime quotas to keep Flemish hip-hop on the radio). That appals Team Obama, though not because Americans are blameless. From financial services to air passenger services, America maintains lots of barriers to trade. The real fear is that if Europe starts setting out red lines, trade sceptics in America will draw their own.

There is no doubt that this kind of economic nationalist thinking gets in the way of trade liberalization.  Instead of recognizing the benefits of opening the domestic market to imports, too many countries try to “protect” their economy from foreign competition.  The reality is that the economy benefits from this foreign competition, and governments should be fighting to see who can liberalize the most.

Unfortunately, based on what they see as rational domestic political calculations, governments do not think or act this way.  They try to use trade negotiations to open up export markets, while maintaining import protection.  Not surprisingly, this undermines the potential benefits of the negotiations, and makes it very hard to get deals done.

In order for the proposed US-EU pact to avoid stalling out, as some other trade negotiations have, some realism could be helpful.  We shouldn’t expect a trade deal to lead to complete and total free trade.  At best, it will simply make some progress towards more liberalization.  And if it can do that, that’s a good thing.

To make real progress, though, trade negotiators need to change their mindset.  Protection from foreign competition is not something to be maintained through special exceptions in trade deals; rather, protection is bad for the economy as a whole (despite any benefits to particular interest groups), making us all worse off.  If some day trade officials can recognize this basic economic truth, trade negotiations will become much easier!

Topics: 
International Economics and Development, Trade and Immigration

Hollywood, Destroyer of Nations?

By
K. William Watson

In an attempt to continue an existing scheme of protectionist quotas for theaters and television stations, European filmmakers have admitted that no one likes their movies.  Right now, European countries like France require that a certain portion of movies shown to the public be of domestic or European origin.  The possibility that a U.S.-EU trade agreement could end these quotas has prompted some European filmmakers to start an online petition acclaiming the virtues of cultural diversity.

The best part of the petition is the filmmakers’ claim that European civilization will fail without them:

The liberalisation of the audiovisual and film sector will lead to the destruction of all of what until now protected, promoted and helped develop European cultures… .

Those who, in the name of Europe, will have accepted this resignation will be forever guilty in the eyes of history. Cultural diversity must not be just another bargaining tool. It must remain an ambition, a legitimate demand, and a commitment.

It is not too late!

Let me paraphrase: If Europeans are allowed to consume our competitor’s product, Europe will cease to exist.  I’m sure other domestic industries wish they could get away with claiming to be the guardian of national identity, though I’d be impressed if they could make it with a straight face.  Maybe the U.S. automobile industry should give it a try.

Topics: 
Trade and Immigration

The Path to National Identification

By
Jim Harper

In my 2008 paper, “Electronic Employment Eligibility Verification: Franz Kafka’s Solution to Illegal Immigration,” I wrote about where “internal enforcement” of immigration law leads: “to a national, cradle-to-grave, biometric tracking system.” More recently, I wrote “Internal Enforcement, E-Verify, and the Road to a National ID” in the Cato Journal. The “Gang of Eight” immigration proposal includes a large step on that path to national identification.

National ID provisions in the 2007 immigration bill were arguably its downfall. Scrapping the national ID provisions in the current bill would improve it, allowing our country to adopt more sensible immigration policies without suffering a costly attack on American citizens’ liberties.

Title III of the “Gang of Eight” bill is entitled “Interior Enforcement.” It begins by reiterating the current prohibition on hiring unauthorized aliens. (What seems to many a natural duty of employers was an invention that dates back only as far as 1986, when Congress passed the Immigration Reform and Control Act. Prior to that time, employers were free to hire workers based on the skills and willingness they presented, and not their documents. But since that time, Congress has treated the nation’s employers as deputy immigration agents.)

The bill details the circumstances under which employers may be both civilly and criminally liable under the law and provides for a “good faith defense” and “good faith compliance” that employers may hope to use as shelter. The bill restates (with modifications) the existing requirements for checking workers’ papers, saying that employers must “attest, under penalty of perjury” that they have “verified the identity and employment authorization status” of the people they employ, using prescribed documents or combination of documents. Cards that meet the requirements of the REAL ID Act are specifically cited as proof of identity and authorization to work.

In addition, the bill would create a new “identity authentication mechanism,” requiring employers to use that as well. It would take one of two forms. One is a “photo tool” that enables employers to match photos on covered identity documents to photos “maintained by a U.S. Citizenship and Immigration Services database.” If the photo tool is not available, employers must use a system the bill would instruct the Department of Homeland Security develop. The system would “provide a means of identity authentication in a manner that provides a high level of certainty as to the identity of such individual, using immigration and identifying information that may include review of identity documents or background screening verification techniques using publicly available information.”

The bill next turns to expanding the E-Verify system, requiring its use by various employers on various schedules. The federal government and federal contractors would have to use E-Verify as required already or within 90 days. A year after the DHS publishes implementing regulations, the Secretary of Homeland Security could require anyone touching “critical infrastructure” (defined here) to use E-Verify. She could require immigration law violators to use E-Verify anytime she likes.

Read the rest of this post »

Topics: 
Telecom, Internet & Information Policy, Trade and Immigration

American Sugar Alliance Looks Brazilian Gift Horse in the Mouth

By
Sallie James

The American Sugar Alliance, the main lobby group for American sugar growers, released a report last week alleging that the subsidies given to Brazilian sugar growers are depressing the world price of sugar perhaps by 25 to 30 percent. But instead of thanking the Brazilian taxpayers for their gift of cheap sugar, apparently the ASA are suggesting that U.S. trade negotiators “add it to their agenda”, implying that they should challenge the subsidies using the World Trade Organization’s dispute settlement mechanism. From Inside U.S. Trade [$]:  

The American Sugar Alliance (ASA) this week released a report estimating that Brazil subsidizes its sugar industry so grossly that it may be depressing the world price for the commodity by as much as 25 to 30 percent. ASA is hoping the report will give further ammunition to its claim that eliminating the U.S. sugar program would be devastating to U.S. producers, even as sweetener users continue a fight to unravel the program through a variety of avenues. The report, authored by sugar and ethanol industry analyst Patrick Chatenay, estimates that Brazilian sugar producers benefit from as much as $2.5 billion in direct and indirect subsidies annually. Factored into that number are benefits accruing to the industry from the “economies-of-scale” for sugar production, which are driven by the heavily subsidized ethanol sector, the report argues. Jack Roney, ASA’s director of economics and policy analysis, said in a conference call with reporters that the $2.5 billion annual estimate may even be conservative. “This report underscores the importance of maintaining the current U.S. sugar policy, which was designed to fleece consumers and deny them access to cheap sugar shield consumers from foreign market manipulation and ensure an continuous flow of rents to sugar producers affordable, homegrown supply of a food staple,” he said. [Emphasis and snarky commentary added.]

I mean, really. This is getting awfully tiresome. The sugar lobby for years have been complaining that we need the sugar program, which keeps prices high for producers by keeping imports strictly controlled, in order to enable “reliable” (i.e., managed) access to sugar. Now they think sugar is too available (i.e., cheap)? For sure, if I was a Brazilian taxpayer, I would baulk at the thought of subsidising (if that in fact is the situation) the sugar addictions of my richer neighbours to my north, but as a consumer? Muito obrigado! The sugar lobby’s talking points are getting ever more creative. But none of them are valid. 

Topics: 
Tax and Budget Policy, Trade and Immigration

Immigration: Government Can Only Regulate Legal Markets

By
Alex Nowrasteh

Details about the Boston bombers are surfacing by the minute, but many opponents of immigration reform are already using it as an excuse to oppose reform. There is no reason to assume that continuing the status quo immigration policy will prevent future terrorist attacks.

Legalizing the peaceful and otherwise law-abiding unauthorized immigrants here will allow law enforcement to focus on legitimate national security and crime threats. It is more costly for the government to weed out criminals and national security threats when there is such a large and relatively peaceful unauthorized immigrant population. Shrinking the size of that immigrant black market quickly and cheaply through responsible legalization, and allowing more immigration of workers in the future, will channel scarce government resources toward legitimate security and criminal screenings and away from enforcing economic protectionism. Every minute that a government official currently spends raiding workplaces and checking whether immigrants will affect the wages of technology workers or Washington lawyers is a waste.

Removing peaceful people from the immigration black market and channeling future immigrants into a legal system—after security, criminal, and health checks—is likely to increase safety, not diminish it. The number of permitted immigrants should be determined based on the demands of the market, not the whims of politcs. The government should shed its economic protectionist role in immigration enforcement and instead devote its resources to weeding out the terrorist and criminal needles in an otherwise peaceful and productive haystack.

Topics: 
Trade and Immigration

Pages