Sunday, December 20, 2009

New US Manufacturing Framework: the Good, the Bad and the Nonsensical

Last week, the White House released its "Framework For Revitalizing American Manufacturing" (PDF) - a step-by-step guide to how the Obama Administration plans to improve the US manufacturing sector. Amazingly enough, the Framework isn't completely awful.  That said, it certainly has some serious problems and even one glaring omission that renders the whole thing a bit silly.  Here's the quick rundown of the good, the bad and the nonsensical:

The Good. Although the Framework has, as I'll discuss below, some serious flaws, it also has a couple redeeming aspects.  First and foremost, it is very honest about the current state of the US manufacturing sector and its workers, and as such debunks some of the biggest protectionist myths out there today, including:
  • Contrary to the conventional wisdom that China is "eating our lunch," the US manufacturing sector remains robust and can be internationally competitive in certain sectors. ("The U.S. manufacturing sector is today the world’s largest; indeed, by itself it would represent the 9th largest economy in the world.... Due to dramatic increases in the productivity of manufacturing labor, combined with the very real advantages that operating in America provides, there are certain activities where U.S manufacturing is highly competitive.")
  • Declines in US manufacturing employment are primarily due to productivity gains and changing consumer tastes, not import competition. ("Manufacturing workers have paradoxically often been victims of their sector’s own success, as rapid productivity growth has meant that goods can be produced with fewer workers, contributing to a several decades-long trend of declining employment. This trend has been compounded by the shift of consumer spending from manufactured goods like TVs and cars to services like tourism, dining out and healthcare as well as increased consumption of manufacturing goods made elsewhere.")
  • The US manufacturing sector cannot competitively produce certain goods that are better suited for developing countries with huge pools of cheap labor. ("We must recognize that we are unlikely to be able, nor should we aspire, to compete for all manufacturing jobs worldwide. Manufacturing activities that are likely to remain highly labor intensive, or that require proximity to raw materials not found here, are unlikely to be good candidates for being made in America.")
Normally, a statement of these basic economic realities wouldn't be cause for much celebration, but considering that Candidate Obama routinely bemoaned the tragic state of US manufacturing and blamed trade agreements like NAFTA for the loss of millions of US manufacturing jobs (and that his fellow Democrats in Congress still do), this is a very welcome development.  It's also excellent rebuttal-fodder for the next time a fearmongering politician claims that free trade is to blame for US manufacturing woes.

Second, the Framework embraces exports and recognizes the benefits that free trade agreements, including pending FTAs, the WTO's Doha Round, and the new Trans-Pacific Partnership (TPP) framework, can provide the US economy.  Although this is only rhetoric, it's still nice to see free trade repeatedly mentioned as a key part of the US manufacturing sector's current and future success.

The Bad.  While the Framework's US manufacturing analysis is sound, its economics are anything but.  Indeed, the strategy is a mercantilist's dream - obsessing about exports without ever recognizing the immense value that an open US market provides American manufacturers (more on that below).  There are programs proposed for (i) opening foreign markets; (ii) enforcing trade agreements; (iii) reviewing export controls; (iv) promoting exports; (v) encouraging trade finance; (vi) protecting IPR; (vii) reducing the trade deficit; and (viii) expanding trade adjustment assistance (TAA).  There's a good rundown of all of these programs here; each focuses on boosting exports with no regard for the other, equally important, side of the equation - imports.  Indeed, the addition of TAA makes it pretty clear that the Framework's authors hold the old, debunked belief  that "exports are good, imports are bad, and the trade deficit is the scorecard." Now, I've written a lot about the idiocy of such mercantilism, and of any policies that obsess over the trade deficit or fail to embrace the realities of multinational supply chains in today's globalized economy, so I'm not going to do it again here.  But you get the idea - these are proposals you'd expect from the 18th century, not the 21st.  And that's pretty pathetic.

The Framework also parrots the longtime Democrat mantra about "ending tax breaks for companies that ship jobs overseas."  Yet as I've noted repeatedly, such anti-outsourcing crusades ignore basic economics (i.e., outsourcing is actually good for the US economy), and they would be utterly impossible to actually implement.  So this prong of the Framework is nothing more than political pandering.

The Nonsensical.  In the end, the Framework's mercantilist obsession renders the document somewhat ridiculous.  Without any focus on (or even mention of) the importance to American manufacturers of an open US market for imports of goods and services, the Framework's key points simply can't be reconciled.  For example, the Framework fully recognizes that (i) US manufacturers are ill-suited to produce labor-intensive goods like basic input materials (e.g., textiles or steel) or products (e.g., auto parts), (ii) production costs are key to maintaining and improving the US manufacturing sector's global competitiveness, and (iii) expanding exports of internationally-competitive goods is critical to the future of the US manufacturing sector.  Yet it never mentions the immensely important role that access to low-cost imports of these inputs plays in keeping US manufacturers internationally competitive.  Right now, over 50 percent of all imports are capital goods and equipment - items used by downstream US manufacturers to produce world class goods at internationally competitive prices.  Without these inputs - which, as the Framework makes clear, simply can't be made domestically - US manufacturers can't compete in export markets, and the White House's entire export strategy is rendered impotent and nonsensical.

Indeed, it seems as though the Framework's authors intentionally ignored the key role that imports play in the modern US manufacturing process. Consider the main "Cost Drivers" identified by the Framework in the "Manufacturing Process": labor, technology and business practices, equipment, location, transportation, market access, and regulation/taxation. Notice anything missing? Yep: conspicuously absent from the list of cost drivers is the sourcing of raw materials and inputs, despite that fact that even the most rudimentary business textbook would list these things as critically important cost drivers, particularly for manufacturers of the advanced products that the Framework seeks to champion (high tech, green tech, etc). Indeed, even the "equipment" cost driver relates to cost of capital, rather than access to low-cost equipment (whether imported or made domestically). It's almost as if the term "import" was forcibly scrubbed from the document.  Considering the White House's economic team - folks like Summers, Roemer, Geithner and Goolsby - how is such a glaring omission even possible?

Well, whatever the reason, the Manufacturing Framework's ignorance of the realities of modern manufacturing and global supply chains eliminates any chance of the document being viewed as a serious effort.  Instead it appears to be nothing more than a political tool to appease certain domestic interest groups, rather than a new course for the US manufacturing sector in the 21st century.

(Final note: of course, I also have major problems with the Framework's underlying message that almighty Government must play a big role in the future of US manufacturing, but that's another gripe for another time.)


RickRussellTX said...

Would it be a fair statement to say, "imports are good, exports are good, the trade deficit is still a scorecard?"

It seems to me that the only formula for long-term internal economic stability is to consistently turn raw materials and low-grade goods into high-grade goods for both export and internal consumption. The source of those raw materials/low-grade goods could be domestic or imported; it doesn't really matter as the bulk of the economic wealth is added by turning them into high-quality, saleable, manufactured goods.

I guess my question is, can we truly gain economic wealth if the trade balance shows cash flowing out year after year? If we're buying high and selling low, it seems that we can't possibly enjoy long-term success.

Scott said...

Actually, Rick, I wouldn't agree with that either. I think the best saying would be "imports are good, and exports are good." And I'd leave at that.

The trade balance is merely the sum of US exports and imports of goods and services. It's a statistic that indicates trade flows and consumption (at home and abroad), and nothing more. As such, the deficit is neither a "good thing" or a "bad thing"; it's just a "thing," and it should be treated as such.

As a rule of thumb, when you hear a politician or economist obsessing about the trade deficit, you should be very, very suspicious.

For a good rundown of all of this, I recommend:



RickRussellTX said...

I was all set to type in a laundry list of objections, but decided that not one of them was really valid.

From the 40000-foot macroeconomic view, money is only going to move across national lines when it makes economic sense to do so. US consumers and companies aren't going to buy imported products unless it is economically beneficial for them to do so -- that is, they gain more utility per dollar from those import products versus domestic products.

Scott said...

Exactly. And the thing the US should do is not discourage import transactions but make sure that the US remains the world's best investment destination. As such, those dollars "moving across national lines" can be reinvested here at home (increasing employment, productivity and keeping interest rates low). Unfortunately, with one of the highest corporate tax rates in the world, a host of new regulations on investment, employment, etc etc, and intentional and unintentional actions by the FedGov that weaken the Dollar, we're doing a pretty poor job of convincing the world that America is open for business and investment.