In this past Sunday’s New York Times, former White House economic advisor Gregory Mankiw published an op-ed entitled ‘What if the Candidates Pandered to Economists?’  Mankiw happens to be the fellow who, in 2004, said that outsourcing is “probably a plus for the economy in the long run”—a comment that did not endear him to U.S. workers.

Well, Mankiw is back on the scene, this time suggesting the repeal of U.S. antidumping laws.  He falsely alleges that such laws “are little more than an excuse for special interests to shield themselves from competition.” 

Curiously, Mankiw never mentions “China” in his piece, a country whose dumping, subsidies, and illegal currency manipulation have drawn criticism from the EU, Japan, and World Trade Organization (WTO), as well as U.S. lawmakers.  One has to question which “special interests” are being shielded from competition when China is allowed to continue breaching the accepted rules of world trade.

ManufactureThis would be happy to discuss this further with Professor Mankiw.
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  As ManufactureThis returns from a colorful July 4th weekend, we take note of some recent news regarding the U.S. flag.  Apparently, the U.S. imports roughly $5.3 million worth of American flags each year—with most of them coming from China.

More than one U.S. lawmaker has found the idea of foreign-made flags a bit incongruous.  Not only have a host of Chinese products been found to contain shoddy materials and lead paint, but the notion of a repressive, communist state assembling flags  for the democratic United States seems a bit illogical.

Earlier this year, West Virginia House of Delegates member Jack Yost sponsored House Bill 4150, which would require that any U.S. or West Virginia flags purchased with state funds be made in American.  His bill was signed into law on March 28, 2008.

Last week, Yost was interviewed on CNN’s Lou Dobbs to discuss the bill.  A retired Steelworker and army reserve veteran, Yost said that he was motivated to introduce the bill after seeing foreign-made flags used at a veterans memorial ceremony.  As he explained on CNN, “I lost all of my pension that was promised to me and my health care that was promised to me, as did thousands of other steelworkers. And as a veteran, I feel that it is unpatriotic and disrespectful to put a foreign-made product on a veterans’ memorial.”

Yost and thousands of other Steelworkers lost pensions when their former employers went out of business due to predatory competition from China.  And if $5.3 million in imported flags seems small change, consider that the U.S. racked up a $256 billion trade deficit with China in 2007.  Dumping, subsidies, and illegal currency manipulation have given China an unfair advantage over U.S. producers and so, as long as Beijing continues to cheat at the rules of world trade, it makes little sense to wave flags made in China.
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Yesterday, the House Homeland Security Committee voted unanimously to approved H.R. 5935, a bill requiring certain federal agencies to use American-made steel for public works projects.  Sponsored by Rep. Pete Visclosky (D-IN), the bill (known as the “America Steel First Act of 2008”) requires construction projects executed by the departments of Defense, Homeland Security, and Transportation to use 100 percent American steel unless an exception applies.

As ManufactureThis noted last fall, pipe made in China has been used in the construction of a border fence between the United States and Mexico. In response, Rep. Visclosky introduced the bill, explaining, “The American Steel First Act will combat unfair steel imports by requiring the increased use of domestic steel products in federal projects.  It will give our steel industry a boost, create much-needed American jobs, and save lives.”

  In April AAM field coordinator Mickey Bolt testified on this very subject before the Congressional Steel Caucus.  In his prepared testimony, he noted:
“While the American steel pipe and tube industry was closing down…DHS was using American taxpayers’ money to purchase pipe from Chinese manufacturers, securing the future of pipe workers in China, not the U.S.  This is wrong. In my view, the application of the Buy American Act was passed with the intent that American taxpayers’ money should be used to support American industries and American workers — and not to support subsidized industries in China.  The pipe that was used in the construction of the border fence should have been produced by U. S. manufacturers and by USW members, instead of being outsourced to China.  This example highlights the problem of giant contractors only being concerned with securing the cheapest goods to maximize profits, regardless of the quality of the product, or whether it was domestically produced.”

As ManufactureThis  earlier this week, dumped Chinese steel has adversely affected U.S. steel pipe producers.  Legislation requiring that national security work be sourced from reliable domestic producers seems a logical step toward retaining a strong American defense industrial base.  ManufactureThis commends the Homeland Security Committee for recognizing this.

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  This morning, the Wall Street Journal’s Michael Phillips discussed an interesting aspect of world trade flows, namely that $361 billion worth of foreign investment in the U.S. in 2007 came from “emerging-market nations.”  That’s nearly 40% of the $920 billion that foreign investors spent last year on U.S. stocks, bonds, and government securities.

What’s striking about this “emerging market” investment is that it runs counter to long-accepted notions of international trade flows.  As Phillips pointed out, “In economic textbooks, capital is supposed to flow from slow-growing, rich countries that have a lot of it to fast-growing, poor countries that don’t. Certainly that was the case before World War I, when Europeans exploited the natural wealth of their colonies. Now the textbooks are being turned upside down.”

While some of the $920 billion in total foreign investment comes through Britain from oil-rich Persian Gulf states, many billions of dollars also flow from China, Mexico, Brazil, Russia, Singapore, Malaysia, South Korea, and other developing nations.
Essentially, the United States is now attracting investment from Third World countries.  Phillips cites Bank of America strategist Joseph Quinlan, who says of the Unites States, “Not only are we addicted to other people’s money, but the money we’re addicted to is from the poor countries.”

There’s a reason for this, however.  China alone accounts for 21% of foreign investment in the U.S., according to Phillips.  China also accounts for more than one-third of the $700 billion U.S. trade deficit in 2007.  And so, Beijing has used much of its $256 billion trade surplus to buy U.S. assets.

This is one result of current U.S. trade policy—namely that we are importing far more than we are exporting.  As a result, and with no unified vision regarding the importance of domestic manufacturing, dollars are accumulating overseas.  Foreign investors find themselves in the envious position of needing to spend that money.

Phillips worries that the U.S. will find itself “not only dependent on money from the developing world, but in large part dependent on money from governments in the developing world — and undemocratic ones.”  What’s troubling is that “there’s no guarantee that the benevolence will last and, at some point, governments in places like Beijing may decide to exercise the leverage that their riches imply.”

As ManufactureThis is wont to say, a prudent course of action would be to seek more balanced trade.  Because China is brazenly flouting world trade law, step one would be for Congress and the Administration to begin strongly enforcing existing U.S. trade law to see that illegal currency manipulation, dumping, and subsidies don’t result in a continuing, vast outflow of U.S. dollars.

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  Well, some people thought this week’s Strategic Economic Dialogue (SED) with China was a smashing success.  A smiling Treasury Secretary Henry Paulson was quoted in USA Today as saying the talks succeeded in “creating a foundation” for future achievement, while Chinese Vice Premier Wang Qishan deemed the meetings “highly successful.”

But laying the groundwork for some hypothetical future success really just means changing the bucket under a leaking pipe.  It doesn’t necessarily fix the plumbing.  As AAM Director Scott Paul said in the same USA Today article what’s needed is a “more robust approach from Washington”—one that specifically puts China on notice regarding continued violations of world trade law.

Ironically, the shuffling of paper that constituted the bulk of this week’s meeting did little to quiet Congressional discontent.  Sen. Debbie Stabenow (D-MI) had already co-authored a letter to Secretary Paulson signed by 10 other Senators that urged action on China’s undervalued Yuan in order to ensure that its value is “determined by markets, not government interventions.”  The various Senators believe that if China “plays by the same rules, our manufacturers can compete and thrive in the global economy.”

Stabenow and company concluded by noting that U.S. manufacturers cannot “afford further delay in addressing the misaligned [Yuan].”  The distortions caused by this currency manipulation have directly contributed tomoer than 1.8 million U.S. jobs lost since 2001.

In a “China Index” released yesterday, Sen. Sherrod Brown (D-OH) noted more problems from unbalanced trade with China.  Chief among these were the 581,000 manufacturing jobs that the U.S. has lost just since the first SED meeting in December 2006—which means that more than 4% of U.S. factory jobs have evaporated in less than a year and a half.

It’s not just lost jobs that concern Sen. Brown, though.  His index also noted 457 Chinese products recalled in the same brief period, a reminder that China’s unregulated production poses more than job worries for American consumers.

Nero fiddled while Rome burned, and ManufactureThis frets that cheery chit-chat and endless dialogues with China merely extend an unhappy status quo.  As Scott Paul noted in a Bloomberg article this morning, yet another bureaucratic SED meeting simply “squandered another opportunity to make U.S.-China trade more balanced and market-driven.”  It’s action that’s needed, not words.
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As the Bush Administration concludes the fourth round of Strategic Economic Dialogue (SED) talks with China, Sen. Sherrod Brown (D-OH) has released a “China Index.”  Among the facts cited was the $27 billion in energy subsidies for Chinese steel producers first uncovered by AAM earlier this year in a report by Dr. Usha Haley. 

Sen. Brown’s China Index is included below. 

Regarding the outcome of this latest SED, AAM Director Scott Paul noted that the Bush Administration “squandered another opportunity to make U.S.-China trade more balanced and market-driven.  On issues like currency misalignment, energy subsidies, and widespread dumping, another six months have passed without action.  As a result, our monthly trade deficit with China is once again growing, more jobs are disappearing, and China continues to accumulate massive foreign currency reserves.”

CHINA INDEX

4                       Number of Strategic Economic Dialogue sessions
5                       Percent estimated trade deficit as a share of GDP (est.)
12                     Age of workers subject to forced labor under “work and study programs,” according to a State Department report
25                     Percentage estimate of California air pollution that comes from China, according to the EPA
35                     Percent estimated subsidy on Chinese exports to the United States
50                    Percent increase in Chinese steel production since 2006 because of government subsidies
57                     Percent share of Chinese government-owned steel enterprises
79                    Months since China joined the WTO
457                  Number of recalled “Made in China” products by CPSC since the first SED
581,000         Decrease in American manufacturing jobs since December 2006
25 billion        Increase in U.S. trade deficit with China since first SED
27 billion        Amount of energy subsidies the Chinese government has provided the steel industry since 2000, undercutting competition
Relentless      Term used in 2006 report by USTR to describe its efforts “to ensure China’s full implementation of specific WTO commitments…”
Rampant       Term used in 2005 report by USTR to describe China’s counterfeit and piracy problems

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  This morning, the New York Times reported that China is now actively lecturing the United States for its lack of “market regulation” in the mortgage crisis and for its failure to “halt the dollar’s unchecked depreciation” that has caused “soaring oil and food prices.”

This constructive criticism offers a rather fun way to start the fourth round of the Strategic Economic Dialogue (SED), which is taking place today and tomorrow in Annapolis. 

There’s rich irony in the Chinese lecturing the U.S.  As AAM Director Scott Paul pointed out on CNBC yesterday, the Chinese continue to brazenly flout world trade law, no matter how great the resulting distortions of the international market.

  With that said, ManufactureThis thought it might be fun to offer a brief preview of this week’s SED talks.  Specifically, Treasury Secretary Henry Paulson said the meetings would focus on five areas.  Below are those five sections, with a helpful reminder about why these issues actually matter to the world community:

“Managing financial and macroeconomic cycles.”
China utilizes numerous questionable subsidies to artificially boost production, including $27 billion in energy subsidies since 2000 for its steel producers.  If Secretary Paulson and his Chinese counterparts want to equitably manage “macroeconomic cycles,” they would start by ensuring that China does not continue to dump steel on the world market.  

“Developing human capital.”
China’s human rights abuses are notorious, as are the woefully inadequate labor conditions in many factories, including slave labor.  Rather than token efforts, Beijing must stop bashing heads in Tibet and begin to reform the institutionalized child labor (and other unacceptable practices) so rampant throughout its rural provinces.

“The benefits of trade and open markets.”
Despite a minor appreciation of the Yuan since 2005, Beijing continues to undervalue its currency by as much as 40%.  Such massive intervention in world currency markets is clearly one-sided—the exact opposite of a free, open trade.  With the EU and Japan joining U.S. calls for a significant rise in the Yuan, Beijing must commit to lifting its currency peg, or else face sanctions.

“Enhancing investment.”
China has been reluctant to open its market to foreign financial services, and has only approved one foreign securities joint venture—for Credit Suisse.  It’s hard to call this enhanced investment equitable.  Unless U.S. financial firms are given greater access to China’s market, sanctions must again be considered.

“Advancing joint opportunities for cooperation in energy and the environment.”
While the Environmental Protection Agency estimates that 25% of all California air pollution comes from China, the U.S. is considering sweeping measures to cut greenhouse emissions.  If Beijing honestly shares in such concerns it will demonstrate movement to share in such efforts.

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  As the latest Strategic Economic Dialogue (SED) approaches next week, China complained in Geneva on Monday that the United States has recently let the dollar depreciate, upsetting the global economy with higher oil prices.

Ironically, the United States functions as an open, free-market economy.  The dollar’s decline has come because nervous investors, eyeing ever grater U.S. trade deficits, have lost confidence in the sharpness of U.S. assets.  Thus, the “invisible hand” of the market is moving the dollar to a lower point.  Despite Beijing’s assertions, the U.S. government has not specifically maneuvered the dollar’s fall.

However, China’s currency, the Yuan has been specifically manipulated in recent years.  Since 1994, Beijing has deliberately undervalued their currency in order to promote exports.  Thus the irony of China lecturing the U.S. for higher oil prices due to a weakened dollar.

Funny that China is expressing concern over rising gas prices.  While U.S. manufacturers are undoubtedly feeling the pinch, Chinese manufacturers are enjoying a comparatively easier ride.  That’s because they receive huge government energy subsidies that lower the costs of production.

Take Chinese steel as but one example.  A recent study commissioned by AAM found that since 2000, the Chinese government has exponentially boosted the country’s steel output by providing more than $27.11 billion in subsidies for thermal and coking coal, electricity, and natural gas.  In that time, China has moved from a net steel importer to the world’s largest steel exporter.

It remains to be seen what the WTO thinks of these subsidies.  But with a Chinese delegation coming to the U.S. next week to hector the Administration about falling currency and rising oil, one can’t help but shake their head at Beijing’s gall.  Treasury Secretary Paulson should point a stern finger at China and simply ask them to explain their energy subsidies.  China’s concerns seem a bit hypocritical by comparison.

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As AAM Executive Director Scott Paul noted this morning, the monthly U.S. trade deficit reached $60.9 billion in April 2008, the highest level in 13 months.  In a brief statement he said:

  “As the trade deficit rises, manufacturing jobs continue to decline.  We hope this will serve as a wake up call for Congress and the Administration to stop unfair foreign trade practices like currency manipulation, dumping and subsidies, and reform our trade policies to ensure that we are shipping more products—and not jobs—overseas.  Senators Obama and McCain should make reducing the trade deficit and reforming our trade policies a priority in 2009.  This is an issue that matters to voters in battleground states throughout the industrial heartland of our nation.”

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  The latest monthly U.S. jobs report showed a loss of 49,000 jobs in May—with more than half of those (26,000) coming in the manufacturing sector alone.  After five straight months of job losses, and a seemingly endless freefall for manufacturing jobs, it seems palpable that something is amiss in the U.S. machine.

But what specifically is ailing us?  A rather obvious start would be the continuing loss of good-paying manufacturing jobs.  As one of the historical engines of growth for the U.S. economy, manufacturing is clearly linked to the success or failure of the U.S.  As was said many times in the 20th Century, “So goes General Motors, so goes America.”

The problem for manufacturing, though, is that U.S. trade policy has taken the wrong course.  This is the candid admission of Robert Cassidy, the former assistant U.S. Trade Representative for both Asia and China.  Cassidy was the lead negotiator for China’s 1999 Market Access Agreement, which paved the way for China’s accession to the World Trade Organization (WTO). 

Essentially, Cassidy was one of the chief architects of the plan that steered the U.S. into more global waters.  And now, he’s regretful, asking “whether the agreements we negotiated really lived up to our expectations.”  A “sober reflection” has led him to conclude that they “did not.”

So what went wrong?

According to Cassidy: “We failed to address the underlying fundamental market distortions that skew the benefits toward the few while leaving the rest of the economy less well off… The premise on which our trade agreements are negotiated is at best flawed, if not broken.” 

But what does that mean in practical terms?  Since China entered the WTO in 2001, the U.S. trade deficit with China has tripled, from $83 billion to $256 billion.  That massive increase in imports has also directly contributed to 1.8 million lost U.S. jobs, according to the Economic Policy Institute (EPI).

  As Cassidy explains it, upon joining the WTO, “China made unilateral concessions to reduce and, in some cases, eliminate barriers to entry for US goods and services.”  These concessions were projected to raise “US exports of goods to China… thus creating jobs in the higher-paying export sector.”  But in actual fact, U.S. exports to China have only grown “from a very low level.”

Cassidy notes that the real beneficiaries of increased U.S. trade are the multinational companies that have moved to China and the financial institutions that have financed them.  As he acknowledges, “Sourcing from China…has allowed companies to cut costs and increase profits, as reflected in increased corporate profits.”

Cassidy sees serious downsides as a result:
-“It is doubtful that the US economy or its workers are better off.”
-“US manufacturing jobs have declined by more than 2.5 million since China joined the WTO in 2001.”
-“Wages have been stagnant and real disposable income for three-quarters of US households has been stable or declining.”

Even more disconcerting according to Cassidy is that “the problem extends to nearly all trade agreements since they are based on the flawed premise that free trade benefits the economy. The premise is flawed and broken since free trade does not exist in a ‘free market’ petri dish where all other factors are neutral.”

The bottom line is that countries like China have “adopted an export-led development strategy, the centerpiece of which is a currency that is undervalued by 20-80%, with the consensus leaning toward 40%.”  China also has “internal barriers to trade” that “restrict US exports.”

The bigger question is why, if our trading partners have embraced export-led strategies, why doesn’t the U.S.?  With our mushrooming trade deficit ($709 billion in 2007), it’s clear that the U.S. has, in effect, settled on an outsourcing-focused strategy. 

Cassidy concludes by suggesting that “the next administration has to take a hard look at the trade agreements currently on the table…and ask: Who benefits? The answers should lead to a fundamental reassessment of what needs to be included in those trade agreements so that the benefits flow to broader and more equitable segments of the economy.”

  ManufactureThis couldn’t have said it better.  But we thought we’d let one of the people who set us on this path tell us where we’re going, and why we need to change course.

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