ManufactureThis was all a-titter this morning to note that John McCain’s list of essential reading includes Adam Smith’s ‘The Wealth of Nations.’  Published in 1776, Smith’s landmark treatise espouses the virtues of an “invisible hand” in guiding market forces.  Essentially, according to Smith, commerce works best in an open, “free market” setting.

 Smith’s work has held up for more than two centuries and is cited as inspiring, among other things, the low-tax, deregulatory policies of the Reagan Revolution.

In ‘The Wealth of Nations,’ Smith touts a policy of free trade—ie. open commerce between nations—because of the benefits of something that later came to be called “comparative advantage.”  ManufactureThis has discussed the topic previously, and suffice it to say that comparative advantage suggests that countries trade best when they produce the goods for which they’re most materially or geographically suited.

The reason ManufactureThis chuckles at John McCain’s wholehearted embrace of ‘The Wealth of Nations’ is because the book disdains both mercantilism and any deliberate distortions of the free market.  Commerce works best, according to Smith, when it is left free and unfettered—when good and services price themselves, for example, according to the laws of supply and demand.

But what would Smith think of China’s 21st Century disregard of the free market?  Beijing wantonly intervenes in world currency markets in order to prop up its own exports and punish imports via artificially boosted prices.  China also boosts its domestic industries with an array of hidden subsidies that run counter to the accepted system of world trade law.

China’s self-serving practices not only defy all that Smith proposed, but they have taken a heavy toll on U.S. industry.  America has lost 1.8 million jobs across all sectors to China since Beijing signed on to the World Trade Organization.  Those lost jobs represent American companies that have lost ground to a country that is both cheating its way to the top and deliberately shifting the balance of international markets.

If John McCain has given Mr. Smith’s book a thorough read, he should recognize that Beijing is charting a reckless course, and one that the U.S. should not be forced to suffer at the expense of domestic industry.  As such, McCain should use ‘The Wealth of Nations’ as the impetus to support strong action against China for all of its illegal trade practices.  To not do so would be to run counter to more than 200 years of accepted wisdom.

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“Follow the Money”… “It’s the economy”… “Always save for a rainy day”… “IT’S THE ECONOMY.” 

Poll after poll shows that, in the recent presidential primaries, Americans have been voting based on their thinning wallets.  And as AAM’s Town Hall meetings have made clear, voters are looking for candidates who will take strong action to strengthen American manufacturing—and save their factory jobs.

AAM Senior Analyst Kerri Houston discussed the projected impact of ongoing manufacturing losses in today’s Worldnet Daily.  Specifically, she cited a new AMM study that found the 24 “Super Tuesday” states have lost approximately 1,568,600 manufacturing jobs in the past seven years.  This is an especially troubling trend because manufacturing is the top contributor to the economies of 15 of these states.

In a further sign that jobs and the economy should be top-of-mind for voters on Super Tuesday, these 24 states have also lost a total of 914,400 jobs across all sectors between 2001 and 2006 as a direct result of the U.S. trade deficit with China, according to the Economic Policy Institute. 

It begins to seem very clear that, indeed, “It’s the Economy.”

A copy of AAM’s Super Tuesday alert, with a full breakout of job losses by state, is available here. 

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President Bush focused on the economy in his final State of the Union speech last night.  Among his many items was a call for Congress to extend Trade Adjustment Assistance (TAA) for displaced U.S. manufacturing workers.

ManufactureThis suggests that there might be a different way to look at the question of downsized factory workers.  Instead of recognizing manufacturing job losses as a “done deal,” why not fight to retain these jobs in the first place.

A 2007 study by the Economic Policy Institute (EPI) found that 1.8 million U.S. jobs have been lost to China since 2002. 

Upon joining the WTO, Beijing promised to halt illegal trade practices such as currency manipulation.  To date, the Chinese continue to manipulate their currency as well as to subsidize manufacturing and dump exports on the world market.  The result is a continuing, predatory attack on domestic U.S. manufacturing that has led to record factory job losses.

ManufactureThis asks a simple question then: instead of throwing in the towel, and planning for the retraining of U.S. factory workers, why couldn’t President Bush announce plans to enforce existing U.S. trade law?  Why not take tough action against countries like China for their illegal practices?  Concerted action could help to keep manufacturing jobs in the U.S. instead of sacrificing them.

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AAM’s report on China’s energy subsidies for their steel industry is discussed in today’s Hartford Business Journal.

Hurricanes Katrina and Rita wreaked havoc on the U.S. labor force in 2005, and bore much of the responsibility for the 1,795,341 workers displaced that year in a total of 16,466 mass layoffs.

Unfortunately, the U.S. workplace is again feeling the harsh effects of a perfect storm.  But this time, the battering they’ve been subjected to stems in part from poorly conceived U.S. trade and manufacturing policies.

According to new figures from the Bureau of Labor Statistics (BLS), mass layoffs in 2007 nearly equaled the record highs of 2005.  A total of 15,493 mass layoffs involving 1,598,875 workers were recorded.

What’s especially troubling about these layoffs is the lack of any overriding environmental disaster to explain such a hard shift in the U.S. workplace.  What we’re left with is more of the same—a U.S. manufacturing sector continuously losing out to subsidized imports from overseas.  BLS figures show that in 2007, manufacturing accounted for 38 percent of all workers downsized in mass layoffs, or 610,215 workers.  Not only is that the most of any sector, but it’s also an increase of 26,941 from the previous year’s 583,274 idled factory workers.

America’s manufacturing sector is facing its own crisis.  As China and other trading partners continue to practice illegal currency manipulation and to utilize subsidies and dumping prohibited by world trade law, America’s home manufacturers are being undercut.  The results:  more offshoring in search of production platforms with low wages and little or no labor and environmental standards, and, diminished prospects for manufacturers who choose to keep production in the U.S. 

This chain of U.S. layoffs is having an adverse effect on the greater U.S. economy.  Laid-off workers contribute less to city and state tax rolls, but require greater public assistance.  And the low-cost products coming in from China are not without their own flaws, as 2007’s product scares have shown.  But China’s wanton disregard of environmental standards offers its own blowback: according to the EPA, one-fourth of all of California’s air pollution now comes from China.

We’re courting a perfect storm of our own making.  The U.S. Congress and the Executive Branch are not enforcing and strengthening U.S. trade laws that would tackle illegal foreign competition.  By defaulting on their duty, Washington has allowed U.S. trade flows to become dangerously unbalanced.  And so we see the mass layoffs of 2007—a worrisome portent of things to come if we don’t change course.

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Worries about the economy seem to be having a significant effect on presidential campaigns, according to the Washington Post’s Alec MacGillis.  Yesterday, MacGillis noted that Barack Obama has undergone a rhetorical shift of late, moving from a theme of post-Iraq reconciliation to more hard-hitting talk of “economic anxiety.”  

Obama is not the only candidate to undergo such a transformation, however.  As the primary campaign has unfolded, each candidate has in turn discovered “the economy.”  And whether it’s Hillary Clinton’s call for a NAFTA “timeout” or Mitt Romney promising to save every Michigan job, the candidates recognize that they won’t reach the White House without credible talk on looming unemployment and burgeoning debt.

For months, ManufactureThis has been saying that Americans are worried about their jobs.  We’ve noted this time and again as we’ve crisscrossed the country to hold our “Keep it Made in America” Town Hall meetings.

At one of our Town Halls in South Carolina a few weeks ago we saw firsthand a poignant snapshot of just exactly why the U.S. economy seems to be switching on the hazard lights.  Manufacturing is the number one contributor to the South Carolina’s economy—the workhorse that provides $25 billion per year to Gross State Product.  Unfortunately, South Carolina has lost more than 91,000 manufacturing jobs since 2000.  And so there’s an inherent problem.  Manufacturing is the key engine of the state’s economy, and is depended on to provide high paying employment and to boosts its citizens into the middle class.  And yet it’s hemorrhaging jobs. 

It’s a problem playing out across the country: good paying jobs replaced by hourly work at Wal-Mart and McDonald’s.  And so, while it’s nice that candidates are noticing the problem, their rhetoric needs to be followed up with action.

Rather than Barack Obama and Hillary Clinton clashing over interpretations of Ronald Reagan’s legacy, they need to be haggling over who will take the strongest action to confront China’s illegal trade practices and who will stand up for American manufacturing.
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As ManufactureThis recently noted, the New York Times published a poorly researched endorsement of free trade and current U.S. policy last week.  Authored by professor Steven Landsburg, the editorial suggested that free trade was helping the U.S. economy even if some Americans were falling down the wage scale as a result.

  AAM’s Scott Paul wrote a rebuttal, which the New York Times published on Sunday.  Apparently, Scott wasn’t the only one who found Landsburg’s “Get over it” piece to be both shortsighted and insulting.  The Times was inundated with responses and decided to publish several of the letters.  The ensuing tempest actually became news in itself, with the Korean wire service Yonhap spotting worrisome hints in the letters of roadblocks to a projected U.S.-South Korea Free Trade Agreement.

But the fun didn’t stop there.  A professor from a highly regarded Mid-Atlantic college subsequently criticized Scott Paul’s letter:
“I read with interest your letter in today’s New York Times.  As a professor of international trade I was acutely interested in any study that could show a 50:1 advantage to keeping jobs at home.  Even the most cursory look at the study’s methodology (pages 21-25) reveals grave flaws.  I expect better work from my undergraduates and am frankly surprised that you would go out of your way to draw attention to this research.”

Now, ManufactureThis welcomes an exchange of ideas, and appreciates civilized discourse.  But we’re sometimes a bit irritated by pompous criticism.  So, we took off the gloves and sent a colorful reply to the good professor—which we share with our readers as an antidote to the winter blues:

The great thing about research is that it sometimes allows one to step outside the glass bubble—to put down the textbooks and take a look at the actual, physical world.  So, regarding the study you asked about, we asked some academicians to take a look beyond the campus ivy and see what’s actually taking place in U.S. industry.  What they found was that the net benefits to the U.S. economy of addressing dumping and illegal subsidies outweighed the suggested benefits of lower-cost goods by a 50:1 ratio.

A link to the informational page and entire report can be found at.

Glad to hear from you, and as I understand it, [college name deleted at the insistence of our editors] is one of a number of schools where the professors have spent years working the line at a factory, conducting R&D, and reckoning with the predatory trade practices adopted by China and our other, well-intentioned trading partners.  I’m extremely thankful that free trade advocates, like many of these educators, are incensed by the protectionism utilized by these countries.  How can we have free markets and a free exchange of trade when other countries so wantonly distort the free market?

ManufactureThis does, of course, welcome further debate and discussion.

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Innovation, innovation, innovation…

A recent Newsweek piece shows why German manufacturers aren’t afraid of China’s industrial juggernaut.  By focusing on innovation and “reindustrialization,” Germany has seen a tremendous resurgence in its manufacturing exports.

What exactly have the Germans done? 

According to Newsweek, there has been an “unprecedented surge of equipment-buying in emerging economies, as countries from China and Russia to the Middle East build factories, upgrade transportation and improve infrastructure—a trend economists expect will last years, if not decades.”

German manufacturers have taken note, and now they’re focused on selling quality start-up equipment to these young countries.  Newsweek notes that developing and transitioning countries have accounted for more than a third of German export growth since 1995, and in 2006 Germany even managed to run an €11 billion trade surplus with these countries.

That’s not a bad way to go when dealing with “mercantilist” China.  It also suggests a path for U.S. manufacturers to follow.  The Germans have established their products as being of high-quality and have simultaneously worked to rein in costs.  The result is a new specialization that they’ve been able to exploit.

Of course, it helps that they’ve invested heavily in new technology.  Automakers like BMW and car-component specialists like Bosch churn out an estimated two thirds of the global auto industry’s innovations.  And German manufacturers (which represent 90 percent of the nation’s R&D spending, compared with 75% in the U.S.) are introducing new products at a rate typically seen in the IT sector.

Because of this focus on reinvesting in domestic production, German firms aren’t shipping their work offshore. 

They also have the advantage of a government that supports and sustains its homegrown manufacturing.  Germany is one of a number of EU countries that employ VAT tax rebates to subsidize exports.  And, as ManufactureThis has previously reported, EU countries are aggrieved by China’s currency manipulation and are threatening to take strong action.

By contrast, U.S. manufacturers are facing heavy obstacles, including subsidized foreign production, rising healthcare costs, and energy issues.  But the suggestion is there—to focus on new technology and focus on the importance of domestic production in order to ensure a healthy manufacturing base.

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It’s funny what folks can do when they put their minds to it.  And it’s even more amazing what the U.S. Congress can do when voters speak their mind.

A Reuters article today notes that the “Bush administration and Congress moved closer on Thursday to battles over free trade agreements with Colombia and South Korea and bills to curb the huge trade deficit with China.” 

With polls showing the economy as a top voter concern, it’s no wonder that Congress is finally paying attention.  Unfortunately, U.S. Trade Representative Sue Schwab is not enthusiastic about Congressional action to address China’s illegal currency manipulation.  According to Schwab, “This is not a good time for Congress to be seeking quick fixes for complex international economic challenges.”

It seems that Schwab doesn’t feel Congress is sufficiently skilled to meddle in the realm of international trade.  No matter that Article 1, Section 8 of the U.S. Constitution specifically empowers the Legislative Branch to “regulate Commerce with foreign nations.”  But Schwab is preoccupied with ensuring smooth U.S.-China relations, and worries that “legislation aimed at China could backfire on the United States.”
 
What the honorable Office of the USTR overlooks is that Congressional response to China’s 14-odd years of currency rigging—a practice deemed illegal by the WTO—is not a sudden effort or “quick fix.”  There’s a broad bipartisan consensus that action needs to be taken.

The overarching picture is not complex:  China is cheating.  Congress is owning up to its “We the people” mandate and taking action to ensure that U.S. businesses and workers have the same opportunity to compete as our trading partners. 

Regrettably, USTR favors the status quo, with 1.8 million jobs lost to China and a burgeoning bilateral trade deficit.  But as Harry Truman once noted, “The American people can always spot a counterfeit.  Sometimes it just takes time.”

In this case, Congress has seen through the Executive Branch’s China apologies and is finally turning on the griddle.  As AAM’s Horace Cooper is wont to say, “Some times you have to break a few eggs to make an omelet.”  It’s Congress’ turn to get tough.

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 AAM Senior Analyst Kerri Houston has been giving radio interviews throughout the country, discussing the importance of manufacturing and the need to enforce U.S. trade law.  As the primary elections approach, we hope the candidates start to get the message– that manufacturing matters.

Yesterday, Kerri discussed jobs, the economy, and U.S.-China relations in a Better Process Industry Report.  Listen to it here.

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