Pining Away for an America of Protectionism, Socks, Ironing Boards and Poverty

When I first read this recent Yahoo Finance article on "10 American Industries Still Hanging On" by Donn Fresard, Matthew Mallon, and Justin Rohrlich, I really thought it was a parody.  On further review, however, I'm pretty sure that the piece, which laments the demise of American manufacturing and praises a few plucky upstarts clinging to survival against a pernicious onslaught of foreign competition, is real.  And you'll never guess how many of the highlighted companies manage to "survive."   Yep, good ol' fashioned protectionism:

For most of the last century, the United States dominated global manufacturing -- no country could compete with America's output.

In recent years, however, the news about domestic manufacturing has been discouraging, if not devastating. Industry surveys have shown a decline in most sectors as the US continues to lose its factories to cheaper labor markets overseas, and especially to China.

In 2010, the last remaining American flatware factory shut its doors. So did the nation's last sardine cannery. Recent years have seen the shuttering of America's last coat hanger factory, last button down shirt factory, and the entire sheetrock-producing town of Empire, Nevada -- which fell victim to the desiccated US housing market.

Surprisingly, however, there remains a handful of heroic holdouts. Bloodied, battered, but not yet down for the count, there are still pockets of US manufacturing scrappy enough to keep the lights on in the face of overseas competition. Here's a look at 10 survivors worth celebrating....

SPARKLERS: Few products say summer in America like the sparkler. But without Diamond Sparkler of Youngstown, Ohio, it would be a cold winter for domestic sparkler production. Diamond has been in Youngstown since 1985, when Phantom Fireworks operator B.J. Alan bought Chicago's Acme sparkler manufacturer and brought its operations to Ohio. At that point, cheaper Chinese sparklers had snuffed out all but three US producers. By 1999, Diamond would be the lone holdout that hadn't shifted to imports. Not because it found a way to profits, however. Besides a brief tariff-related windfall, Diamond Sparkler never been a moneymaker for its parent firm, whose owner said he bought the division because he couldn't "envision something as American as sparklers, with its association with the (Fourth) of July, not being made in this country."...

SOCKS: To get an idea of what's happened to the American sock industry, take a look at Fort Payne, Alabama. Until a few years ago, the town of about 14,000 billed itself as the "Sock Capital of the World." They weren't spinning a yarn, either: As late as 2007, according to the Hosiery Association, if an American put on a pair of socks, the odds were about 1 in 8 they'd be rolling a product of Fort Payne/DeKalb County onto their hooves. Most of the area's workforce was employed in its sock mills, which then numbered 125 to 150. Today only 20 remain, providing roughly 600 jobs, down from 8,000 just a decade ago....

What started pulling out the thread was -- you guessed it -- globalization. An influx of cheaper hosiery, imported from the likes of China, Pakistan, and Honduras, started around the turn of the 2000s. It flipped the American sock industry on its head faster than argyle came back and again went out of style. Domestically made socks went from three-quarters of US sales to one-quarter between 1999 and 2006.

Thanks to a quirk of national politics, Fort Payne caught a break in 2005, when then-President Bush needed to swing a single vote in Congress to get his Central American Free Trade Agreement out of deadlock. The city's congressman, Robert Aderholt, was a holdout against the deal, and he took the opportunity to hold the bill hostage with a single demand: Restore the tariffs, which had been lifted in 1984, against socks seamed in Honduras. The White House complied, and the duty returned at the end of 2007. The move had little effect in the long run, and sock factories are still fleeing Fort Payne for Honduras.

IRONING BOARDS: The fact that there's only one ironing board manufacturing plant left in the Unites States has nothing to do with changing tastes in laundry after-care, or the viral spread of track-suits and t-shirts, and everything to do with retail consolidation and globalization.

Located in Seymour Indiana, HPI Seymour, owned by Chicago-based Home Products International, has been around since 1942, when it started as a tool-and-engineering shop. In the 1950s it switched to ironing-board only mode, successfully marketing a range of high-end ironing boards around the world.

But today the plant, which employs 200 people (down from 400 in 2000) and pumps out 720 boards an hour, is fighting the same stiff winds that have wiped out so much of U.S. manufacturing, despite a market that sees some 7 million ironing boards sold every year. Big chains like Wal-Mart (WMT) and Target (TGT) are still customers and anti-dumping tariffs as high as 157% against its rapacious Chinese competitors have kept the lines rolling at the plant so far. But with the chains increasingly sourcing cheaper and cheaper products from Asia, and with the tariffs coming under pressure from observers who wonder if artificially high ironing board costs for 7 million consumers are worth 200 jobs in Indiana, HPI Seymour's 69-year-old history is probably nearing its end.

PENCILS: Without tariffs against Chinese imports, you might as well erase pencil manufacturing from the ledger of American industry. And even since the US government took anti-dumping action against Chinese exporters in 1993, China's dominance of the industry here has barely slowed: American companies in 2008 produced only 14% of pencils sold stateside, whittled down by half from just four years prior.

Newell Rubbermaid's Sanford, have closed plants that employed hundreds in the past few years as they shifted production to Mexico and elsewhere. Other companies largely retreated into specialty graphite utensils, like colored and drawing pencils. "The yellow pencil basically became a Chinese commodity," Jim Weissenborn, whose family has owned General Pencil for 150 years, explained to Bloomberg news in June. "We've had to become a very boutique type of business in order to survive."

SNEAKERS: New Balance is the only major player in athletic footwear that still operates American factories, and it's hanging on by a shoestring as free-trade negotiations with Vietnam loom. The privately held Boston company has 1,000 US workers in its five New England plants, whose $10-and-up hourly wages are a quaint holdover in an industry that imports 99 percent of its product. "The company already could make more money by going overseas, and they know it," 35-year-old floor leader Scott Boulette told the Washington Post. "So we hustle."

But all the elbow grease in Norridgewock, Maine, won't keep New Balance competitive if an expected agreement with Vietnam eliminates the tariff on imported shoes, typically around 20%. The region's legislators are trying to carve out an exemption to keep New Balance's factories open. The firm's competitors like Nike and Reebok, though, seeing an opportunity for higher profits on imports and, displaying little sympathy for the scrappy northeastern holdouts, have banded together to fight the duty – or "shoe tax," as they call it. "For products that are no longer produced here and haven't been produced here for decades, there's no sense for consumers to be paying it." said Nate Herman, of the industry's lobbying group....

Sigh.  Where to begin?  Well, first let's start with the little fact that the American manufacturing sector as a whole is actually doing quite well, as these two charts (recently mentioned here) make perfectly clear:

Source: BEA

Second, let's recall that lots of American manufacturers, particularly those like Caterpillar who use low-cost imported inputs and depend on foreign demand, remain very successful.   Indeed, IndustryWeek's recently-released "2011 IW 50 Best Manufacturing Companies" lists plenty of American manufacturers who are dominating, even in this tough economy.  And although some of these companies utilize foreign facilities, many of them, like #1 ranked hard-drive manufacturer Western Digital out of California, have significant US production facilities and are hiring.  And considering that most high-tech goods are duty free because of the Information Technology Agreement, we can be pretty darn sure that Western Digital didn't make it to the top of the IW list by lobbying for government protection from foreign competition.

Odd that the authors didn't think to mention these globally-dominant firms, eh?

Third, the authors fail to mention that many manufacturers are returning to the United States because cheap labor couldn't trump the myriad benefits of domestic production.  Meanwhile, many US companies depend on  exports and foreign demand, particularly in this anemic US economic recovery, to keep their domestic doors open.  In short, "American" manufacturers are coming back to the states, and the very "globalization" that the authors repeatedly deride is actually a boon to the US economy.

Finally, the article above makes clear that many of the companies that the authors praise only exist here in the United States because of ridiculously high tariffs.  Thus, their "success" is government-induced and comes at the expense of American families and businesses who have been forced by the US government to pay higher prices for shoes, socks and other basic goods.  And even with massive government protection, the companies still can't compete.  Thus, we've all been forced to subsidize (through higher prices) failing US companies that will never, ever be competitive again.

By contrast, many of the globally-dominant companies listed in the IW 50 (or the broader IW 500) don't require government tariffs or subsidies.  But these companies aren't manufacturing basic, labor-intensive things like socks and pencils; they're mainly in high-end, high-tech, capital-intensive industries like aerospace, IT, pharmaceuticals, chemicals, biotech and heavy machinery.  And they're doing it very, very well.

I don't mean to disparage America's sock/pencil-makers, but the basic and obvious reality is that US companies have an extremely difficult - if not impossible - time competing on the lower-end of the manufacturing spectrum (even with massive government assistance).  At the same time, they're succeeding at the industrial top-end where education, technology and productivity - things at which the United States still excels - are more important than things like cheap manual labor.  And, of course, they're also succeeding through globalization and, yes, even outsourcing (see, e.g., Apple).  So to glorify the uncompetitive industries and the government protectionism that keeps them (barely) alive, while ignoring the successful American firms that don't need state assistance is more than just misleading and nonsensical, it's also harmful - if the authors somehow convince Americans to embrace protectionism and uncompetitive, inefficient American industries, we'd all be worse off.

As Cafe Hayek's Russ Roberts eloquently put it today in response to a trite NYT op-ed on the same subject: "Making stuff the cheapest way is the road to prosperity. Trying to find expensive ways to make stuff (because it once was a good idea but no longer is) is the road to poverty."

Why do Fresard, Mallon, and Rohrlich want us to run down that road?

Crushing the Ridiculous "GOP is Stalling US Trade Policy" Meme Once and For All

US trade policy is a mess right now.  Preference programs and worker retraining programs have expired and pending FTAs with Korea, Colombia and Panama - completed and signed more than four years ago - remain unratified.  And, of course, when the stench of failure wafts into the room, Washington's fingers quickly start pointing.  Thus, several "news" outlets have picked up on a new White House (and congressional Democrat) talking point accusing House Republicans of essentially holding the US trade agenda "hostage" by refusing to consider only the US-Korea FTA (or any other trade legislation) until USTR provides concrete assurances as to when the Colombia and Panama FTAs also will be submitted to Congress.  But does this particular blame-game withstand even the slightest of scrutiny?

Short answer: No.

In a great new op-ed AEI's Phil Levy looks at the history of the FTAs in Congress and thereby provides a thorough evisceration of the silly notion that Republicans are holding things up:

This story can perplex anyone who has not followed the issue over its long history: Republicans favor free trade, so they are blocking the Korea FTA, and the White House is holding out on setting a firm deadline for the Colombia and Panama FTAs, while the secretaries of State and Treasury say these should be done by the end of the year. What’s going on?

The story goes back four years to 2007, when Democrats claimed control of both the House and the Senate. The Bush administration had negotiated and signed four FTAs: Peru (April 2006), Colombia (November 2006), Panama (June 2007), and South Korea (June 2007). Congressional Democrats roundly criticized these agreements and demanded a new approach.

White House negotiators sat down with congressional leaders and reached an accord on May 10, 2007 (the date became memorialized as the agreement’s name). President Bush committed, among other concessions, to expand the coverage of labor and environmental issues in U.S. FTAs. In turn, the Bush team thought it had secured a promise that all four pending FTAs would come up for a vote.

The labor and environmental provisions of the agreements were revised, per White House promises, but only the Peru FTA came up for a vote (and was approved). It turned out to be one-and-done. When the Bush administration submitted the Colombia FTA, then-House Speaker Nancy Pelosi commanded a rewrite of the rules governing FTAs and blocked a vote.

Since then, U.S. trade policy has been dormant. President Obama, both in office and as a candidate, said that he approves of the idea of free trade agreements, but that these pending deals are flawed and need mending. Such criticism never delved into particulars. The audience was left to imagine what the flaws might be and to speculate about the magnitude of the required fixes.

This long period of nebulous discontent with the pending FTAs seemed to draw to a close last year. In June 2010, President Obama announced that he would conclude a revision of the South Korea FTA at a previously scheduled November summit in Seoul. Trade aficionados eagerly anticipated the unveiling. What would these revolutionary reworkings of trade agreements look like? What kind of momentous changes had the Obama trade team been secretly cooking up over the years?

Oddly, the June announcement was not followed promptly by a list of demands for revising the Korea FTA. As late as October 2010, the Koreans were still complaining that they had not received a formal U.S. proposal. The delay ended up embarrassing President Obama, as agreement was not reached in time and he was compelled to stand up in Seoul and declare that he and his counterpart had failed. Only on December 3 did the two sides finally settle, after what totaled less than two months of serious talks....

It is worth remembering that, in economic terms, the U.S. trade relationship with Korea is substantially bigger and more complex than those with Colombia or Panama. The brevity of actual negotiation with Korea and the limited nature of the changes suggest that the administration’s delay on the other agreements has been due more to political concerns and a lack of resolve than to substantive criticism.

The experience with the May 10 agreement and repeated empty promises of future progress have made Republicans wary of another one-and-done, in which Korea would pass but then the trade agenda would stall once more. Calls for broader trade progress have been bipartisan. This week, 67 of the 87 freshman Republicans in the House signed a letter calling on the president to move forward with all three pending FTAs by July 1, when Europe’s FTA with Korea comes into force. Senate Finance Committee Chairman Max Baucus (D-Montana) issued a statement: “The administration needs to quickly resolve all outstanding issues so Congress can approve all three free trade agreements as soon as possible this year and help create more jobs here at home.”

Perhaps as a result of pressure in the current standoff, Washington Trade Daily reports that U.S. Trade Representative Ron Kirk will now present specific demands and a timeline for Panama and Colombia at a March 9 Senate Finance hearing. If so, the list of particulars will arrive only four years, three months, and 15 days after the Colombia agreement was signed.

Who has been stalling whom?

Excellent stuff.  I'd only add one other point - and something that's obvious to anyone who understands how FTAs are implemented in the United States: under US law, the President, and he alone, determines when Congress will consider an FTA's official implementing legislation.  Thus, President Obama alone controls the agreements' timing and has controlled it for the past 26 months.  So when he and his party had complete run of Washington, they could've implemented only the KORUS (as the White House now wants), but, with an eye on the 2010 elections, they did absolutely nothing instead.  Now, the President has a little less control of Washington, but he has an extremely trade-supportive (and rightly-suspicious) GOP that wants little more than to get all of these deals done as soon as humanly possible.  And yet the FTAs still collect dust, despite the indisputable fact that all three long-delayed agreements could easily pass both chambers tomorrow with bipartisan (and overwhelming Republican) support.

So, yes, this is a hostage situation, but it's the White House, not the GOP who's holding all of the hostages.  After 26 months of stalling, the President now wants to release only one hostage and still restrain the other two (in order to appease the political gods).  House Republicans aren't willing to leave those other FTAs hanging, so they're using the tiny amount of leverage that they have - the knowledge that the President doesn't want his "special hostage" (KORUS) to die - in an attempt to save all three hostages.  So the fate of the KORUS is still in the President's hands - where it has been since his inauguration - and he alone decides if the agreement lives or dies.  But he now has to make that decision on the Republicans' terms.

Put another way, the President is still driving the KORUS bus; the GOP is just giving him an acceptable roadmap to getting it, and the rest of the US trade agenda, home.

Hopefully, the President will finally get behind the wheel and start driving.

Wednesday Quick Hits

Lots of great stuff out there for your reading pleasure:

• Cato's Dan Griswold helpfully explains why all those allegedly "conservative/libertarian" arguments against FTAs are bunk.  (More on that here.)

• A ton of former USTRs and other US officials, from both parties, urge President Obama to get off his butt and submit all pending FTAs to Congress asap.

• Magic bean economics, Carolina-style: if your stimulus* can't create those mythical green jobs, then just spend $1 million more to reclassify existing jobs.  Problem "solved"!

• Aw, poor little crony capitalists: ethanol's apparently on the outs in Washington; I'll believe it when I see it.

• The Obama administration released its 2011 trade policy agenda yesterday; in response, the world let out a collective yawn and tried not to snicker when USTR Kirk said that his "Administration has blazed a new trail on trade." (I'll be providing an exciting review in the next few days.  Stay tuned!)

• Cato's Dan Ikenson is boycotting ABC and Disney because the once-venerable World News Tonight has made a conscious decision to air a week of jingoistic, fearmongering garbage.  (Of course, you already knew that.)

• The Koch brothers fight back against the Left's slander/libel, and in the process show that ethical, well-run businesses don't need or want protective tariffs.

• If the GAO's new report on redundant government programs, and the insane amounts of waste that they create, doesn't make you a libertarian (or at least a hardcore fiscal conservative), then I don't know what will.  Seriously.

• Cafe Hayek's Don Boudreaux has declared intellectual war on Ian Fletcher, the self-avowed protectionist, HuffPo blogger and new senior "economist" at something ironically called the "Coalition for a Prosperous America."  As exhibits one, two, three, four, five and six demonstrate, the results of this skirmish are as lopsided as you imagined.

• New Cato Study: the United States effective corporate tax rate is really, REALLY high.

Enjoy.

American Manufacturing Decline: Media/Politician-Driven Myth vs. Undeniable Reality

One of this blog's most prominent themes is the identification and destruction of protectionist myths that, despite being totally and utterly fallacious, remain firmly planted in the American psyche due to constant manipulation repetition by lazy media and certain opportunistic politicians.  Perhaps the biggest myth of all is the unfounded assertion that the American manufacturing sector is in tatters, due mainly to a hyper-competitive China that has eaten our collective lunch.  For anyone paying attention (or living here or in places like it), this assertion is a complete joke.  Yet the myth doesn't just endure; it thrives.

Case in point...

All next week, the braintrust at ABC will run on its evening news program a new segment called "Made in America," in which they will (a) bemoan the current state of American manufacturing; and (b) challenge Americans to devote their daily lives to buying only American-made stuff (Ford Pintos for everyone!).  They've kicked off this hackneyed festival of inanity new segment with a website where you can do all sorts of awesome stuff like surf an interactive map to find where certain items are made in America, or meet American families who make American stuff, or take an (American!) quiz to find out "what classic brands are no longer made in America."  (I also think there's a chat room where you can just type "AMERICA" over and over and over, but I couldn't find the link right now.)  ABC News also ran an introductory segment on Thursday's program lamenting the sad fact that all the kitschy, low-quality souvenirs that you buy in Washington, DC are - gasp! - made in China, Taiwan and, well, everywhere but the USA.



I forced myself - Clockwork Orange-style - to watch this segment, and to read the accompanying story, and it is just as awful and misleading as you'd expect.  If you'd like to spare yourself the misery, here's a completely unbiased and accurate summary:

The cheap American flag pins and other hideous souvenirs sold in our nation's capital are made in China/Mexico/Taiwan/etc and not in the dear ol' U.S. of A.  This is obviously disgraceful for lots of jingoistic reasons that we can't say on the air, but - wink wink - you true American patriots get the idea.  America's souvenir-making impotence is undeniably indicative of our nation's overall manufacturing demise.  If only there were something we could do to save America and its good, hardworking workers from the Great Red Souvenir-making Menace.  If only there were a second-rate evening news program that could save us all.  ABC to the rescue.  We'll be right back.

The video segment also notes that a push to Americanize DC's foreign-occupied souvenir industry has emerged from a "US Senator."  The story's print version illuminates that this "Senator" is none other than self-avowed socialist (gee, I wonder why they left that out of the TV version?) Bernie Sanders of Vermont who wrote an angry letter to the Smithsonian saying, among other things:

It appears that a museum owned by the people of the United States, celebrating the history of the United States, cannot find companies in this country employing American workers that are able to manufacture statues of our founding fathers, or our current president...  That is pretty pathetic!  I was not aware that the collapse of our manufacturing base had gone that far.

And there you have it, folks.  The media/politician manufacturing-myth exacta.  Well done, ABC.  Well done indeed.

Sigh.

There are so many things wrong with this news segment, and ABC's entire "Made in America" special, that I can't possibly hit on all of them here.  For one, it's never really clear to me why ABC so desperately wants America to be the world's number one maker of cheap crap (and trust me, if you've ever been in a DC souvenir shop, you know that calling that stuff "crap" is actually doing a disservice to excrement).  Second, and more broadly, the folks at ABC never stop to ponder the economic problems that would result from making everything - especially low-end consumables - in America.  (More on that here, here and here.)

But for my non-economist money, the most egregious problem with ABC's program is that they never once inform their trusting viewers of the undeniable fact that, while America might have a comparative disadvantage at flag-pin manufacturing (nooooo!), the US manufacturing sector as a whole is absolutely dominating.  This, of course, is an issue on which I and many others have blogged repeatedly, but, hey, ABC's producers and researchers are busy, so maybe they missed all of that.  Maybe they also were too busy talking with Senator SocialistSanders to read Mark Perry's excellent (and well-timed!) op-ed in yesterday's Wall Street Journal on the "The Truth About US Manufacturing":

Is American manufacturing dead? You might think so reading most of the nation's editorial pages or watching the endless laments in the news that "nothing is made in America anymore," and that our manufacturing jobs have vanished to China, Mexico and South Korea.

Yet the empirical evidence tells a different story—of a thriving and growing U.S. manufacturing sector, and a country that remains by far the world's largest manufacturer....

International data compiled by the United Nations on global output from 1970-2009 show this success story. Excluding recession-related decreases in 2001 and 2008-09, America's manufacturing output has continued to increase since 1970. In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and ahead of the United Kingdom, Italy and Brazil.

The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.

Consider the incredible, increasing productivity of America's manufacturing workers: The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972.

These increases are a direct result of capital investments in productivity-enhancing technology, which last year helped boost output to record levels in industries like computers and semiconductors, medical equipment and supplies, pharmaceuticals and medicine, and oil and natural-gas equipment.

Perry's blog provides some backup visuals to really hammer his op-ed points home:

And, heck, since we're sharing pretty pictures, here's one more from my blog to further destroy ABC's meme du jour:

This important graph shows that the decline in manufacturing jobs is a worldwide phenomenon that is unrelated to trade deficits or surpluses (and, just so we're clear, China's losing manufacturing jobs too).  As I said at the time of posting, "According to the CIA's World Factbook, Germany, the United States, Japan, Italy, France, the Netherlands and the UK are all among the world's top ten merchandise exporters; according to the OECD, some are net importers, and others are net exporters. Yet the long-term employment trend for each country is decidedly downward (but for a few random upticks).  So neither a country's total exports output nor its trade balance is a magical recipe for increasing - or even retaining - manufacturing jobs."

And yet, you'll never hear any of this reality-based sanity on ABC or any other TV network.  It's for this reason that, upon reading Perry's new WSJ op-ed, Cato's Dan Ikenson (who's valiantly fought the manufacturing myth for years now) blogged:

University of Michigan economist and American Enterprise Institute scholar Mark Perry has an excellent oped in today’s Wall Street Journal [$] about how U.S. manufacturing is thriving. It can’t be emphasized enough how important it is to present such illuminating, factual, compelling analyses to a public that is starved for the truth and routinely subject to lies, half-baked assertions, and irresponsibly outlandish claims about the state of American manufacturing.

The truth matters because U.S. trade and economic policies—your pocketbook—hang in the balance.

Indeed.  You see, it's ridiculous, lazy segments like ABC's that cause many unwitting Americans to support protectionism and other horrid economic policies peddled by economic snake-oil salesmen like Bernie Sanders and others.  And it's these policies that, while clearly benefiting discrete and well-connected interest groups (like American flag pin-makers!), are just awful for the rest of us because they retard the free market's natural - and immensely beneficial - evolutionary process.  As Perry noted in his op-ed:

Our world-class agriculture sector provides a great model for how to think about the evolution of U.S. manufacturing. The U.S. produces more agricultural output today—with only 2.6% of our work force involved in farming—than we did 100 years ago, when farming jobs represented almost 40% of the labor force. Likewise, we're able to produce twice as much manufacturing output today as in the 1970s, with about seven million fewer workers. That means yesterday's farmhands and plant workers can become today's computer engineers, medical doctors and financial managers.

Sanders and others seek to deny the American citizenry this obvious improvement.  They would prefer that our farmers and plant workers remain "in their place," rather than move up the economic food chain to their, and our society's, obvious benefit.  And ABC (who is certainly not alone) helps them do it with Made in America and the myriad "news" segments just like it.

ABC and other mainstream media outlets would do the nation a great service by escaping their bubbles of conventional wisdom and reporting on America's awesome market evolution, or on the truly amazing advances in American manufacturing productivity and our nation's continued industrial dominance.  But don't hold your breath waiting for that story.  Nope, ABC is far too busy lamenting our fake flag-pin-failures to notice our real, and far more important, successes.

No wonder nobody watches the "news" anymore.

US Trade Deficit Widens; Ignorant Hysteria Predictably Ensues

The Obama administration today announced May's trade numbers:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the Department of Commerce, announced today that total May exports of $152.3 billion and imports of $194.5 billion resulted in a goods and services deficit of $42.3 billion, up from $40.3 billion in April, revised. May exports were $3.5 billion more than April exports of $148.7 billion. May imports were $5.5 billion more than April imports of $189.0 billion.

The government's announcement elicited a typical round of very loud worry from the some of country's professional worriersjournalists and economists:

The U.S. trade deficit with the rest of the world surged to $42.3 billion in May, a nearly 5 percent increase over April's numbers that reflects strong growth in imports of cars, computers and clothing, the Commerce Department reported Tuesday morning.

The monthly deficit is at its highest since November 2008. Since bottoming out about a year ago, U.S. exports have put in a strong performance, growing by 21 percent, as U.S.-made shipments of heavy equipment like tractors and airplanes were scooped up by fast-growing developing nations like China and Brazil.

But the solid gains in exports, which helped to revive growth in the overall economy, were not enough to offset a 29 percent surge in imports in the last year.

"Imports are rising much faster than exports, and the overall trade deficit will increase even more sharply when oil prices rebound, threatening the economic recovery," said Peter Morici, business professor at the University of Maryland.

"President Obama has cautioned Americans about the dangers of another boom financed by excessive borrowing. But unless the administration implements policies that reverse the huge trade deficits on oil and with China, the nation risks economic stagnation," he said.

Mr. Obama last year extracted pledges from other global political leaders in the Group of 20 economic powers to seek more balanced growth between nations. But the U.S. economy a year ago resumed its pattern of consuming more goods from the rest of the world than the U.S. is able to produce or to export.

Mr. Morici and other analysts blame that trade imbalance — particularly the gigantic $300 billion yearly trade deficit with China — for helping to cause the credit and housing bubble that led to the 2008 financial crisis and Great Recession. China used its massive earnings from exports to the U.S. to buy U.S. bonds and mortgages, helping to dramatically lower interest rates and feed the bubbles that dragged down the whole world economy when the bubbles collapsed in 2008.

Noting that oil and consumer goods from China account for nearly the entire trade deficit, Mr. Morici said the nation needs a "seismic change in energy and trade policies" to reverse the trend.

But the administration's moratorium on offshore oil drilling will only worsen the deficit, he said, and its diplomatic efforts succeeded in extracting only a mild concession from China last month when it agreed to allow a minor appreciation of its currency, the yuan, against the dollar.

The article admittedly goes on to quote an economist who says that the deficit numbers are - shocking! - a positive sign for the US economy, but it quickly follows that comment with more doom and gloom.   And, of course, those who regularly follow this blog already know the facts about the US trade deficit, particularly the undeniable truth that over the last 20+ years an expanding US trade deficit is strongly correlated with economic growth, not stagnation.  Maybe that's why the stock market didn't implode today and instead rose almost 150 pts (1.44%), causing humorous headlines from other, umm, "misinformed journalists" like this fun one: "Stocks surging on upbeat earnings, shrugging off trade deficit."

Nice.

But for a moment, let's assume that Mr. Morici is right (he isn't), and that the US government follows his advice and implements protectionist policies attacking imports of consumer goods from China and energy imports from Canada, the Middle East and elsewhere (it won't).  And assuming that such idiocy does't cause the US economy to implode (it might), would these policies actually affect the US trade deficit?

Quick answer: No.

The long answer comes courtesy of Brian Wesbury and Robert Stein of First Trust Advisors in a great article entitled "Trade Deficits As Far As the Eye Can See" (h/t Andy Roth):

The trade deficit peaked at 6% of GDP in 2006. It fell during the recent recession – to about 3% of GDP. While this decline has quieted those who support protectionism, and allowed the Obama Administration to declare that there are no countries manipulating currency values, protectionism is never far from the political front burner.

As the trade deficit increases again in the next few years, and as manufacturing jobs disappear because of productivity increases, protectionism will once again become an issue.

But, this fear about the deficit ignores a major reason for it. Ultimately, the US trade deficit is a by-product of an attractive investment climate. Foreigners, with assets to invest, often need to worry about the risks of exposing those assets to a local banking system that makes ours look like a pillar of strength. Just look at Thailand’s populist upheaval, or the pressure for Greece to abandon the euro and devalue. No wonder central banks and other investors view US investments as preferable, even if investment returns (in dollars) are paltry.

Meanwhile, emerging markets have been growing very quickly in the global recovery. When countries grow, they need to issue more currency or suffer deflation, because they would not have enough money chasing the expanding amount of goods and services. So, for emerging markets, economic growth means having their central banks issue more currency and then buy more US Treasury debt.

Despite this, there are those who will claim the US trade deficit is unsustainable because it requires us to sell more and more assets to foreigners, going deeper and deeper into “net debtor” status. What these analysts are missing is that despite owing foreigners a great deal more than they owe us – that’s why we’re called a “debtor” country – US investors consistently earn more on their foreign assets than foreigners earn on their US assets.

This is complicated so here’s a simple example. Let’s say George owes Ivan $100 and at the same time Ivan owes George $50. Obviously George is the net debtor, by $50. But let’s also say George has to pay an interest rate of 3% on his debt to Ivan, while Ivan pays an interest rate of 8% on his debt to George. Then, despite being the net debtor, every year George gives Ivan $3 while Ivan pays George $4. Who would you rather be? George, obviously!

In the real world, the US is George. Although our investments abroad are smaller than foreigner investments here, US investments have earned $145 billion more than foreign investments in the past year. Free markets, property rights and enforceable contracts remain the true attractors of capital. As a result, capital will continue to flow to the US because it is viewed as a refuge from risk, even when returns appear low. Remember, there are always two sides to a coin. And looking at the other side gives a significantly different view.

Pretty cool, huh?  Now, Morici and others want us to be Ivan.  I'd prefer that we remain George (crazy, I know).

Which guy do you want us to be?

Japan Regains Title as "America's Top Banker"; America Shrugs

The Wall Street Journal and other news outlets reported yesterday that China, after selling off significant US Treasury holdings at the end of last year, is no longer the biggest holder of US debt:

China sold a record amount of its U.S. Treasury holdings in December, ceding its place as the world's biggest foreign holder of U.S. debt to Japan.

The move triggered concerns about China's continuing appetite to loan money to the U.S. amid a mounting budget deficit here and tensions between Washington and Beijing.

China pared its Treasury holdings by $34 billion to $755.4 billion in December, placing it second behind Japan, with $768.8 billion, according to U.S. Treasury estimates. For the first time since August 2008, Tokyo took over the top spot after steadily increasing its purchases of Treasury debt over the past several years....

Chinese officials have begun expressing "worries" over its significant holdings of U.S. government bonds and concern about the U.S. budget deficit, which is expected to hit $1.6 trillion....

However, China's sales of Treasurys don't necessarily translate into a loss of confidence in the U.S., many analysts said, noting that Beijing's moves in December could simply indicate steps toward diversification. Market observers said the Chinese may simply have moved their money into other dollar-denominated assets, such as corporate debt or private equity.

The increase for Japan appears to have come from private financial institutions shifting investments out of risky, high-yielding foreign financial products into safer assets such as U.S. Treasurys, analysts say....

The Japanese government itself hasn't acquired Treasurys in recent years. However, it may soon ramp up purchases, as officials at the huge government-run postal-savings system have said they are looking to diversify assets away from Japanese government debt and into U.S. government debt.

"The U.S. is having difficulty due to a lack of funds," Shizuka Kamei, the cabinet minister overseeing Japan Post, told reporters recently. "It's only natural that we should support the U.S. when it is weak."...

The rest of the article is well worth reading, and I'll leave the serious monetary analysis to the experts.  But two rather noteworthy things struck a layman like me about this big news.  First, other reports confirm that China's not really backing out of the United States - it's simply diversifying from short-term Treasury debt into long-term debt and other US assets (and also masking short-term purchases through offshore buyers).  So if this move is a Chinese "message" on US fiscal policy to President Obama, it's a subtle one, and one that's only targeted at the United States' (read: the White House's) short-term economic policies.  The Chinese still seem quite bullish about the US economy long-term.  Now, whether that commitment is by choice or necessity remains to be seen.

Second, I'm left wondering where's the public hysteria about Japan dramatically ramping up its purchases of US debt over the last few months to once again hold the title of "America's Top Banker."  As you may recall, when China took over the number one spot in the Fall of 2008, commentators on the right and the left were beside themselves with the news.  And the media reports were even more breathless.  For example, when the news was announced in 2008 the Washington Post wrote (emphasis mine):

China passed Japan to become the U.S. government's largest foreign creditor in September, the Treasury Department announced yesterday, reflecting the dramatic expansion of Beijing's economic influence over the American economy.

China's new status -- it now owns nearly $1 out of every $10 in U.S. public debt -- means Washington will be increasingly forced to rely on Beijing as it seeks to raise money to cover the cost of a $700 billion bailout....

The growing dependence on Chinese cash is granting Beijing extraordinary sway over the U.S. economy. Analysts say a decision by China to move out of U.S. government bonds, for economic or political reasons, could lead a herd of other investors to follow suit.  That would drive up the cost of U.S. borrowing, jeopardizing Washington's ability to fund, among other things, a stimulus package to jump-start the economy.  If China were to stop buying or, worse, start selling U.S. debt, it would also quickly raise interest rates on a variety of loans in the United States, analysts say.

Ominous!  On the other hand, a quick bit of Googling shows that yesterday's big announcement prompted zero commentary about "growing dependence on Japanese cash" or a future "decision by Tokyo to move out of US bonds."  The answer for this difference is simple: China is today's economic bogeyman, and thus everything it does is blown way, way, WAY out of proportion.  Thus, China's commercial decisions to buy US debt in 2008 were met with dramatic wailing and gnashing, while Japan's purchases of the same type of debt in 2009 (also for commercial reasons) receive none of the attendant commentariat angst.  News about China's economic moves elicits ridiculous reactions/predictions like those of the Post only 18 months ago (Beijing's "sway" over the U.S. economy over since 2008 hasn't been "extraordinary," and none of those scary things - "spiking" interest rates and fleeing "herds" of investors - has happened as China's debt purchases have stalled.)  Yet when Japan regains the "number one spot," the only commentary is about whether the Japanese government will invest in more US debt. 

Shocking, I know.

What I find most interesting about US journalists' and politicians' disparate treatment of China and Japan today is that Japan - today's economic pussycat - was America's big bogeyman only 25 years ago.  For example, here's the Amazon summary of a typical Japan-hysteria book from the 80s:

A Washington business consultant and former government trade negotiator, [Clyde] Prestowitz here analyzes economic and cultural differences underlying our trade deficit with Japan and the U.S. decline in international markets. He also examines efforts to resolve our free-trade dilemma.  Japan is a close-knit, exclusionary society, notes Prestowitz, with no room for U.S.-style individualism and little understanding of "fair" competition. Highly personalized Japanese companies with lifetime-employment policies cooperate as cross-shareowning groups to common advantage. By contrast, argues the author, when rival giants IBM and AT&T cautiously held back, independent young physicists and engineers "the small and the swift" created a spectacular global electronic industry, which Japan's government and industry, acting in concert, proceeded to preempt through investment, imitation and intense product development. Near-dominance in the American market ensued. What to do?

Yes, whatever shall we do?!  The Japanese government, with its complicit, productive and innovative  corporate conglomerates and its omnipresent trade surpluses just dominated us!  Damn that "free trade dilemma!"

Oh, wait.  (Sounds familiar, no?)

It's perspective like this that is utterly lacking from today's journalism and a key reason why all of the current hype and hysteria surrounding China's trade and monetary policies should be treated with serious skepticism. 

Despite what all of those "experts," "consultants," "officials" and "analysts" are telling us.

A Quick Note About Trade Deficit Nonsense

The October US Trade Deficit unexpectedly narrowed today. According to the AP, "Stocks are rising as a report showing an improved trade deficit offset disappointing employment data."

Ugh. An "improved" trade deficit, huh? Isn't this the same October 2009 that recorded a ugly and unexpected increase in the US unemployment rate to a jaw-dropping 10.2%?

Gee, just think how bad it would have been if the trade deficit had gotten bigger!

(Or maybe, just maybe, widening US trade deficits are strongly correlated with economic expansion over the last few decades, while narrowing deficits occur when the US economy shrinks.)

Some Needed Perspective on "Trade War" Reporting

Although I have no scientific data to back this up, I think it's safe to say that I take a backseat to very few people in my criticism of recent US trade policy. That said, I've grown quite concerned with a growing number of media reports that a recent spike in US trade remedies (i.e., antidumping and countervailing duty) cases is a scary signal of burgeoining US protectionism or an impending "trade war" with China.  For example, last week the AFP reported:

Tensions between the world's number-one and number-three economies intensified last week when the US slapped anti-dumping tariffs of up to 99 percent on imports of some Chinese steel products used in the oil industry.

Similar statements have appeared in lots of recent op-eds and wire service reports, each pointing to a 2009 increase in antidumping and CVD cases as hard evidence that a tit-for-tat trade war between the United States and China is brewing. (Insert ominous "dah-dah-duhhhh" here.)

Such "analysis," however, demonstrates a basic misunderstanding of how AD/CVD cases are initiated and decided in the United States, and it might actually do free traders a disservice.  Sure, China is complaining, but that's hardly anything new.  The fact is that US government does not bring AD/CVD cases.  They instead are the result of massive petitions filed under US law by private domestic companies (or coalitions of companies) and/or their unions pursuant to their commercial interests.  Such petitions typically take months to produce, costing hundreds of thousands of dollars in lawyer and economist fees - hardly an efficient retaliatory weapon.  The US government (through the Department of Commerce) can, by law, have a small role in the crafting of an AD/CVD petition but only in a basic advisory capacity (e.g., to assist the petitioner with meeting the basic legal criteria for a proper petition) and little more.  And once filed, cases are essentially on "autopilot," with DOC's initiation of the case, as well as affirmative preliminary determinations by the DOC and the US International Trade Commission, all but certain (a common free trader complaint against the law, actually).  Meanwhile, the President himself has no formal role in the process.

Such automaticity, and the lack of White House involvement, means that it's a real stretch to claim that the filing of an AD/CVD petition - or the subsequent initiation of case against China, the preliminary domestic injury determination by the ITC or the preliminary calculation of antidumping or CVD duties by DOC - is a sure sign of US protectionism.  Indeed, even a final injury determination or the actual imposition of AD/CVD duties isn't a good indicator of surging American isolationism: according to a plethora of studies, the filing of an AD/CVD petition almost always results in the final imposition of remedial tariffs (unless respondents hire my firm, of course).

Yet even if one were to conclude that the simple initation of an AD/CVD case amounts US "protectionism," the number of AD/CVD cases in 2009 is well within recent historical norms. According to DOC statistics, the United States has initiated 22 AD or CVD cases against China on 12 products so far in 2009. That might sound like a lot, but consider that in 2008 there were 15 AD/CVD cases against China, and 19 such cases in 2007. (These elevated numbers actually have persisted ever since the "free trade" Bush Administration changed its decades-old policy in 2006 and started applying the CVD law to imports from China and other "non-market economies.")  Sure, you can blame US trade law for producing such numerous and seemingly pre-ordained outcomes, but it was doing that long before President Obama took office.

By contrast, the President's decision to impose prohibitive tariffs on Chinese tires under Section 421 of US trade law was both completely discretionary and the first of its kind.  As such, it warrants intense criticism and serious concern about increased White House protectionism and the future of US trade policy.

With the 421 decision, the White House's failure to engage at the WTO, its shelving of pending FTAs with Colombia, Panama and South Korea, its refusal to resolve te Buy American and Mexican Trucks disputes, and USTR's increased "enforcement efforts," free traders have plenty of bad moves to criticize, and journalists have plenty of troubling signs to report.   But when these well-meaning souls add AD/CVD initiations to the list, they risk undermining their message for those policymakers and readers who understand the difference between "typical" and "extraordinary" US trade policy.  Such a move, therefore, could actually end up hindering the important causes of trade liberalization and US accountability, rather than promoting them.

Finding Value in Bad Trade Journalism

One of the primary reasons that Americans are skeptical of free trade is junk journalism that lazily repeats tired lines about manufacturing "crises" and the "victims" of import competition, when the bulk of historical and economic evidence demonstrates that trade's less-visible benefits largely outweigh its highly-visible costs. As Dan Ikenson and I recently explained:

Congress and the media have indeed been central to the perpetuation of three myths. Both have spoken for years about the decline of U.S. manufacturing as though it were fact, when the overwhelming evidence points to a sector that, until the onset of the current recession, was robust and setting performance records. Both ascribe bloated significance to the U.S. trade deficit without attempting to convey or even understand its causes, meaning, or implications. And both contend that this alleged decline of manufacturing and the rising trade deficit attest to the Bush administration’s failure to enforce existing trade agreements.

The media’s motive is straightforward: it is giving its customers what they seem to want. Frankly—and regrettably—Americans seem to be more captivated by stories of gloom and doom than by factual, logical arguments that are devoid of sensational imagery. For that reason,the media seem to favor the anti-trade narrative.

...

If Americans break away from the oppressive political rhetoric about trade and the economy and make their own observations, they are likely to conclude that the country has strengths and competitive advantages unmatched anywhere else in the world. The continuing flow of foreign investment into the U.S. economy is testament to that fact.

Beyond these strengths and competitive advantages enjoyed by U.S. residents, there is the fact that 95 percent of the world’s consumers live outside of the United States. Yet when politicians and the media speak about trade, they usually focus exclusively on the Malthusian fiction of six billion people competing for 100 million U.S. jobs. From the perspective of the American worker, under this slanted premise, trade and globalization can only upset the apple cart. There are only ramifications—and negative ones at that—on the supply side of the equation. All that trade has to offer under this portrayal is increasing competition for my job, and downward pressure on my wages.

Today's Washington Post brings a fantastic example of lazy trade journalism in a syrupy story on the President's much-anticipated decision on whether to impose restrictions on Chinese tire imports under "section 421" of US trade law. I've written a few times on the economic and policy reasons why the President should resist the political temptation to impose the restrictions, so I won't rehash them here. Instead, the Post's article is valuable for two other reasons: first, it's a fine example of how not to write about trade, and second, it unintentionally provides excellent commentary on how American workers uniquely can, do and should adjust in a dynamic, globalized US economy.

But before I get to the article's pros, let's talk about its more evident cons, shall we?

The section 421 case is a complicated issue involving an obscure provision of US trade law that could have significant ramifications for US trade. But if you were to read the Post's take alone, you'd be certain that the issue was just another case of evil Chinese imports flooding the US market in order to line the pockets of greedy US corporations and simultaneously destroy the jobs and livelihoods of hapless, unsuspecting American workers. Here's a (very quick) breakdown of the article's 39 paragraphs:

- Background on section 421: 5 paragraphs (but no mention that a section 421 decision involves only fairly-traded products from China).
- Political ramifications of Obama's decision: 3 paragraphs (including his campaign promises to "crack down" on China).
- Economic ramifications Obama's decision: 0 paragraphs.
- Legal ramifications of Obama's decision: 0 paragraphs.
- Foreign policy ramifications of Obama's decision: 0 paragraphs.
- Union support for protection: 1 paragraph.
- US tire maker opposition to protection: 7 paragraphs.
- Chinese government opposition: 2 paragraphs (including a general economic discussion that precedes a Chinese government statement).
- Consumer support/opposition or impacts: 0 paragraphs.
- Tire merchant support/opposition or impacts: 0 paragraphs.
- Surge in Chinese tire imports and concomitant drop in US tire jobs: 1 paragraph. (Obvious, necessary distinction between causation and correlation: 0 paragraphs.)
- Outsourcing American tire production to China: 1 paragraph.
- Implications that the Chinese imports are unfairly traded: 1 paragraph. ("The ballooning trade imbalance with China has provoked complaints that the relationship is crushing U.S. manufacturers. Critics of the relationship say China manipulates its currency and employs other protectionist policies that make it difficult for U.S. factories to compete.")
- Random sneer at Walmart: 2 paragraphs.
- Anecdotes re: unemployed American tire plant workers and/or their "great" former jobs: 17 paragraphs.

So in an article entitled "As Cheaper Chinese Tires Roll In, Obama Faces an Early Trade Test," only 3 of 39 paragraphs address the impact of Obama's decision (i.e., why it's a "test"), and all of those focus only on the political dynamics. Not a single paragraph discusses the adverse effects of the decision on consumers, particularly poorer Americans who freely choose to buy cheaper Chinese tires, or on tire merchants and their numerous employees who sell the Chinese tires here in the States. Not one mention of the broad legal, economic or foreign policy ramifications that an Obama decision in favor of 421 protection - a dramatic shift in US trade policy - would have on the future of US policy. Zilch.

And yet the author devotes 17 of the article's 39 paragraphs - a little less than half of of the whole thing! - to anecdotal schmaltz about displaced American workers and the great jobs (in tire plants, mind you) that they once held. Thus, the uninformed Washington Post reader has no choice but to take away only one lesson from this piece: evil Chinese imports have destroyed the lives of these poor Americans.

Of course, this is a simplistic and counterfactual approach that ignores both trade's immense benefits for American families (particularly poorer ones), as well as the complexities of a dynamic global economy and its multinational supply chains. (Plenty of discussion here on that stuff.)

But amazingly, the Post article's not completely worthless. Instead, its sappy anecdotes unintentionally provide great insights into how the American worker adapts to changing market conditions in the dynamic US labor market. Consider these examples from the story:

Larry Cannon, 37 and the father of three children, ages 13, 10 and 4, used to specialize in molds at the plant. Now, as he starts classes to become a biomedical technician, his wife has taken a job in the photo department at Wal-Mart.
...
Byron Botdorf, 59, is taking up welding at Albany Technical College. He'll be 61 when he's retrained for a new job.
"My son got into welding -- it's a good trade," he said. ...
Mark Burns, 43, who used to drive a forklift at the plant, has been through layoffs before. Fifteen years ago, he was briefly laid off from the local cotton mill, Flint River Textiles. That company eventually shut down, citing the cost pressures of Asian imports. He then took the job at Cooper Tire. Laid off again, he now plans to become a welder.
"Welding is not something they could import very easily," he said.

It seems pretty clear to me that the author intends for these anecdotes to push the reader to yearn for the halcyon days when Larry, his wife, Byron and Mark all happily worked at the tire plant (you know, back before those evil Chinese imports ruined all that). But, as much as I can sympathize for the immense difficulties that these people face because they lost their jobs, I see a pretty significant silver lining in the dark clouds: each person has lost his/her job in an increasingly nonviable sector of the US economy (i.e., cheap tire or textile manufacturing), but instead of lobbying the US government for a bailout or for his/her old job, and instead of simply giving up (and turning to crime or going on welfare), each has rationally decided to move to well-paid jobs in traditional growth sectors that face no import competition - health services, construction (welding) or retail services. Each of the men also has decided to get job retraining in order to be more successful in these fields (through better pay or job security).

The American labor market is quite unique in its dynamism. It's a place that, while scary at times, provides the American worker with an unrivaled ability to adapt to changing economic environments in order to grow and prosper, instead of stagnate or become dependent on government assistance. (Great analysis of that dynamism here.) Thus, the reactions of Larry and his former co-workers in the face of the changing US tire market are refreshingly "American," particularly in this increasingly disturbing time of bailouts, protectionism and government lobbying.

For their resilience and hard work, I applaud these folks. (Even though they'd probably be annoyed that I'm doing so.) It's a great lesson for the whiners, protectionists, apologists and scapegoaters out there, and even for some of the "journalists" who can only bring themselves to write about trade in terms of its hapless "victims."

Too bad they'll probably never listen.

UPDATE: Looks like smartypants Stossel and Griswold posted similar things on this issue shortly after I did. I'd be foolish to say "great minds..." and instead will say "even a blind squirrel...."