During the Bush years several trade agreements were passed and U.S. manufacturing output declined by about 11% while jobs shrank by over one-third. Despite all the talk of “re-shoring,” at least through 2012, real manufacturing output was still below 2007 levels. Washington tells us this is primarily due to mechanization and increased productivity. But if that were true wouldn’t America’s retail stores be filled with American products? Contrary to popular belief much of these declines were due to loss of U.S. competitive advantage in global markets.
Was this loss “natural?” More importantly was it good for the U.S. economy?
The conventional Washington view is that losing manufacturing to foreign competition is usually a good thing because it benefits consumers and enables America to concentrate on its “true” competitive advantage. But this view only reflects consumers benefiting from cheaper goods; it ignores the negative impact from closed factories, job losses, increased safety net costs and increased crime due to pain for a larger number of unemployed workers.
They say that we shouldn’t blame high U.S. corporate tax rates for this because we should have lost the industry anyway, and after all, we don’t even compete with other nations. No need to worry about unfair, predatory foreign trade practices. It’s all just free trade and welfare-enhancing “Ricardian” comparative advantage working its way out.
In fact, however, America lost manufacturing output because other nations had instituted unfair trade practices, U.S. firms had investment horizons that were too short-term and federal trade and tax policies put American corporations at a distinct disadvantage as long as they operated in the U.S.
This is not to say that globalization is inherently harmful for a high-wage nation like the United States. In theory it is not, for it means that low-wage nations specialize in commodity-based production that used to be in high-wage nations, while the latter specialize in higher value-added production and industries, especially knowledge- and technology-intensive industries. But this positive outcome is not preordained.
Many argue that the U.S. lost a large share of its manufacturing base because of high wages and benefits to American workers and blame unions for this. If this were true, how did Germany and Japan, both with higher wages and benefits for manufacturers, manage to retain its manufacturing base in spite of Chinese mercantilism?
Washington should slow down and even reverse the loss of manufacturing from unfair trade practices from abroad that is not “natural” and could be avoided without resorting to trade protectionism. There are several reasons:
First, most manufacturing is globally traded. Because these industries face market competition that is global in nature in a way that local-serving industries (e.g., retail or health care) do not, their success is by no means assured. And in the long run it means either a lower value of the currency or that the nation accumulates a trade deficit which must be paid off by later generations in the form of reduced consumption.
Second, for much of manufacturing, especially advanced technology manufacturing, knowledge and production capabilities lost from trade negatively affect other industries as well.
Third, wealth generation comes from manufacturing, mining, farming and ranching to provide families with the income to enjoy a reasonable life style and the American dream. Currently, reduced national income (net exports) requires that our governments at all levels must shrink to fit our shrinking national economy.
Finally, some manufacturing sectors are vital to national security and their loss hampers our ability to defend our national interests.
This suggests that policy responses to globalization are not reflexively oppositional as many on the “left” see it or reflexively positive as many on the “right” see it. Rather, policymakers need to differentiate between industries that move offshore or lose market share for natural reasons and those that die from unnatural, preventable reasons.
For the former, the appropriate policy response is to help workers and affected community’s transition to new jobs and industries. For the latter, we need two broad policy approaches. The first is to make policy changes, as Reagan did against Japan in the 1980’s, which respond to foreign nations that refuse to reduce protectionist practices. The second is to take steps to make the U.S. economy more globally competitive like supporting manufacturing research, reducing effective corporate tax rates and boosting workforce training.
The bottom line is that it’s time for a more sophisticated and less black and white approach to trade, globalization and manufacturing. Only time will tell if Washington can get there.
Frank Shannon served in the U.S. Army, was an engineering/operations manager for AT&T for 27 years, was the owner of a small manufacturing business for 23 years and retired to Mesquite in 2013.