Wednesday, February 22, 2012

NEWSFLASH: Administration Still Clueless About Global Competitiveness

Last week, I detailed why the Obama Administration's fiscal policies were utterly clueless when it came to improving US businesses' global competitiveness.  Those criticisms remain valid, and perhaps even more so, now that the White House has released its big corporate tax "reform" plan (to see why, go here, here, here, here and here - for starters).  Thus, I'm going to ignore the President's campaign talking points tax "plan" and focus on another critical aspect of US companies' international competitiveness that the President and his advisers completely ignore: import liberalization and global supply chains.

Now, this isn't the first time that I've exposed the administration's blind spot when it comes to the clear connection between duty-free access to imports and US companies' ability to compete and "win" in the global economy.  (And I'm certainly not the only one.)  But a new piece by trade gadfly Greg Rushford really hits this point home by repeatedly documenting the abject silliness (and economic ignorance) that is the President's mercantilist obsession with exports (and concomitant disregard for imports).  In the piece, Rushford follows President Obama's recent "Made In America" road trip - in which he trumpets various companies' export successes - and then explains the dirty little secret behind that success: imports and even - gasp! - outsourcing.

First, President Obama on February 15th traveled to a Master Lock factory in Milwaukee to proclaim that "[w]e need an economy that is built to last, that is built on American manufacturing, and American know-how, and American-made energy, and skills for American workers, and the renewal of American values of hard work and fair play and shared responsibility."  What he failed to mention, however, is how Master Lock actually does business:
In Milwaukee, Master Lock now employs more than 400 workers, some 100 of them having been brought back from its Chinese facilities. The company also has about 700 more workers in Nogales, Mexico. Together, the Milwaukee and Nogales plants account for perhaps 55 percent of the company's lock production, with the remainder still in China, according to press reports....
And while praising Master Lock's manufacturing exports, President Obama failed to mention how the company's product is, you know, actually manufactured:
While at first glance, a padlock seems like a pretty simple thing to make, Master Lock's unionized Milwaukee work force has reason to know otherwise. Master Lock's vice president for global supply chains, Bob Rice, wrote a memo to the company's Asian suppliers last year, listing as examples 20 different products the company needed to import from China, each with its own SKU number.

Locks have parts that come from just about anywhere: keys, cylinders assemblies, ball bearings, plated shackle stop pins, anti-saw pins, screws, cylinder external assemblies, cases and cylinder retainer blocks. In 1995, the last year for which publicly available documentation is available for U.S. Customs' records, Master Lock made nine of 11 such components in Milwaukee. But the lock case and cylinder retainer block were needed from Taiwan --- and those two parts represented an estimated 25- 35% of the total cost of the finished padlock.

More recently, in 2010 Master Lock made U.S. Customs officials work a bit to determine where one padlock model was really made. The padlock was made of ten different components from various countries, with the principal components being a lock body made in Milwaukee and a shackle from China. All the components were then assembled in Mexico. Customs determined that the finished padlock should be marketed as a product of Mexico --- but that "Mexican" padlock also employed workers from Milwaukee to the Middle Kingdom.

Sometimes, Master Lock imports parts from Mexico, like unfinished padlock lock bodies and shackle assemblies that are then finished in Milwaukee, where the cylinder locks are attached. Those padlocks are labeled Made in USA --- but again, there's more to the American success story. Workers of the World: you have really become united....
Odd that Obama left these important facts out, huh?  It's almost as if he doesn't care about using the loudest microphone in the world to spread economic ignorance.  But I digress...

Rushford then follows President Obama to a Boeing plant in Everett, Washington to show that the company's production of the new 787 Dreamliner "is a great example of how we can bring jobs and manufacturing back to America."  Obama added that his administration wanted "to make it easier for companies like Boeing to sell their products all over the world, because more exports mean more jobs."  However:
The president didn't admit what every economist would immediately recognize: to export those Dreamliners, Boeing's workers need access to raw materials and components from all over the world.

Dreamliners may be Made in America, but with essential imports sourced from so many other places that it's difficult to know where to begin. There's the Integrated Surveillance System Processor and an Integrated Navigation Radio, from Canada. There's also a Valve Control Unit from Germany --- passengers can thank that for keeping their cabin air pressure within tolerable limits. And there's a turbine engine exhaust nozzle, brought in from Mexico from titanium sheets made in China. Those are just the first three telling examples that show up from a glance through US Customs records --- with each import necessary to the American workers in places like Everton.

That doesn't even get to the big-ticket items: the Rolls-Royce Trent 1000 engine, the testing in wind tunnels in the UK and France; the Mitsubishi Heavy Industries' wing; Italian horizontal stabilizers, doors from France, and other critical components from Sweden, India, South Korea --- it's a very long list. The Dreamliner is as cosmopolitan as the American people. Boeing's American workers should love imports, because their jobs depend upon them.
Finally, Rushford explains that it's not just US manufacturing companies that benefit from import liberalization and global supply chains.  Services firms, like those who helped build Miller Park in Milwaukee, also reap major dividends:
Miller Park was built by American (union) workers, with tons and tons of domestic materials. But that's not the whole story. The subcontractor for the stadium's renowned retractable steel roof was Mitsubishi Heavy Industries, Ltd. Mitsubishi bought high-strength steel from Luxembourg, which was shipped to Mitsubishi fabrication yards in China and Japan. The finished steel components were then shipped to the Port of Los Angeles, where they were unloaded by American longshoremen and then driven by Teamsters to Milwaukee.
Other steel that went into Miller Park came up the Mississippi River from the Port of New Orleans, according to sources at that port. And Haven Steel Products, Inc., headquartered in Kansas City, made the steel for the stadium's bowl that supports the roof. Other key work was done by Wisconsin Electrical Power Co.,not to mention the intrepid workers who put in the all-important beer-supply pipes.

Arup, the United Kingdom's experienced design firm, was responsible for most of the engineering design for Miller Park, working also with design teams from Dallas, Los Angeles, and Milwaukee. Arup, headquartered in London, has sent its consultants and engineers just about everywhere in recent decades: including New York's Tappan Zee Bridge, the 2nd Ave. Subway; Japan's Kansai International Airport, and the Sydney Opera House. Miller Park, like the others, was truly Made in the World....
Back when President Obama announced his National Export Initiative in 2010, I first highlighted the administration's odd habit of trumpeting US exporters who just so happen to rely on imports.  Rushford's piece makes clear that the White House hasn't kicked that habit and remains as economically uninformed as ever (well, at least publicly).

And just in case you think that Rushford and I are cherry-picking, think again.  The 2012 Economic Report of the President - quietly released last week - shows that the Obama administration's complete disregard for import liberalization is very much intentional.  That report's section on International Trade and Finance goes to great lengths to (i) praise goods and services exports (particularly the increase in US exports since their post-crash nadir in 2009); (ii) denigrate goods and services imports (for, example by lamenting the trade deficit and lauding opportunities to decrease exports of services imports); and (iii) not mention - even once! - the demonstrably positive effects of import liberalization on US firms' global competitiveness (despite spending several pages on ways to improve such competitiveness).  This complete disregard for import liberalization is, in my estimation, a new low (previously set by the President's 2010 Trade Policy Agenda) and a serious step backwards from the administration's much-improved 2011 Agenda.

If the President and his economic team can't even mention such an obvious and critical aspect of American businesses' ability to compete in today's global economy, then why on earth should we trust them on related issues like tax reform?

Oh, right, we shouldn't.

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