Perfect: US TPP Negotiating Positions Getting Bogged Down by a Product We Don't Even Make Anymore

I've expressed more than a little skepticism about the Obama administration's ambitious plan to complete the Trans-Pacific Partnership by the end of the year.  My concerns relate more to systemic issues (e.g., the lack of a consensus view on the framework for market access schedules), rather than product-specific ones.  But maybe I should start sweating the latter as much as, or more than, the former. It seems that a minor war has broken out over - no joke - US tariffs on footwear.  Here's Businessweek with some details:

The Footwear Distributors and Retailers of America, which wants an end to the trade barriers, says tariffs for some types of shoes can run as high as 67.5 percent, and when the costs get passed on, they effectively triple the price of foreign-made shoes. New Balance, based in Boston, says the duties that help sustain its U.S. athletic footwear production are as high as 20 percent and asks that they be preserved.

The 7 million pairs of shoes New Balance produces each year in the U.S. make up only a quarter of U.S. sales, says Matthew LeBretton, director of public affairs. The rest are made in the U.K., China, Indonesia, and Vietnam. “If this is purely a business decision, then it’s very clear that you make more profit by making shoes in Asia than in the United States,” LeBretton says. “We aren’t purists, but we are doing this for reasons that are other than financial impact. It’s the right thing for us to do. We suffer as a country when we lose the ability to manufacture.” He adds that producing in the U.S. lets New Balance react faster to demand from U.S. stores and helps those stores maintain lower inventory. The company also says local workers maintain better quality control than workers abroad.

Keeping the tariffs is important because most of New Balance’s jobs are in communities where there are few other options for employment, says Senator Olympia Snowe (R-Me.). “They’re paying 46¢ an hour in Vietnam, and New Balance is paying $10 an hour here, plus all the benefits,” Snowe says. “It’s not a level playing field. Our government has to finally wake up and understand that.”

Nike has supporters, too. “I really believe that the government should not negotiate agreements for one company,” says Matt Priest, president of the footwear distributors association. Representative Earl Blumenauer (D-Ore.), whose district is home to Nike employees and the U.S. headquarters of Adidas (ADS), says keeping the tariffs taxes millions of consumers to keep a few thousand jobs.

Trade talks will continue this month. Maine lawmakers are applying pressure on the administration to keep cuts in athletic footwear tariffs out of any final agreement. The U.S. hasn’t made any decision, says Carol Guthrie, a spokeswoman for Ron Kirk, the U.S. Trade Representative, in an e-mail. “Footwear is an area of interest for Vietnam and remains a sensitive item for the U.S.,” Guthrie says. “The challenge we will face is how to address this product, and we continue to consult with Congress and stakeholders on how to do so.”

Greg Rushford adds in a recent op-ed for the Wall Street Journal Asia that this is not just a fight between protectionist New Balance and free trade Nike/Adidas for a tiny slice of the TPP.  In fact, this skirmish is affecting the entirety of the TPP negotiations; thus, there are a lot of other US companies also hoping that the Obama administration stops shilling for New Balance in order to save the struggling agreement:

The White House is demanding TPP partners, chiefly Vietnam, agree to new rules that would bring transparency and market-oriented efficiencies to their inefficient (and often corrupt) state-owned enterprises. SOEs are indeed a drag on Vietnam, comprising around 38% of the economy. Prime Minister Nguyen Tan Dung has struggled with the problem for years with little result.

Though the U.S. is pushing Vietnam to help itself by reforming SOEs, Hanoi wants something in return. The country is America's second-largest supplier of clothing, and Mr. Dung's trade negotiators insist the U.S. get rid of high tariffs on clothing and footwear, which generally range from 18% to 36%.

This is a chance for Mr. Obama to live in a "21st century economy," as he often says. Unfortunately, he seems to be caught in 18th century mercantilism.

The American president is in tight with the U.S. textile lobby, which supported him in 2008. The industry has benefited from high tariffs and various protectionist schemes since the 1700s. So U.S. trade negotiators have taken a hard line against liberalizing the U.S. rag trade. The Vietnamese know a double standard when they see one, and are incensed. No deal on market access for us, no deal on SOEs, they say.

Here's how the debate plays out in Washington. On the "21st century" side are the mainstays of the American economy. Giants like Boeing, General Electric, Intel, Microsoft, New York Life, Citi and Federal Express strongly support a TPP that would write new competition and transparency rules for Asian government-run corporations. Opposing the TPP deal is one shoe manufacturer in New England that employs about 1,200 Americans, New Balance Athletic Shoe, and a handful of mid-sized textile manufacturers in the American south.

The giants of American manufacturing and finance, which have major offshore operations, can't get serious consideration from this White House. Mr. Obama—the "Buy American" candidate—stands behind any company like New Balance that vows to keep jobs at home.

So, there we have it: New Balance (and Maine's uber-protectionist champions in Congress) versus the world, and the fate of the TPP could hang in the balance.  Fantastic.

Now, for the moment, I'm going to ignore the economic falsehoods spewed by LeBretton and Sen. Snowe about the state of US manufacturing or the idea that developing country labor costs are some sort of unfair game-ender for US manufacturers.  Instead, I just want to focus on the idea that New Balance actually still makes a lot of shoes in the United States (and thus that their fight is really about valiantly protecting US shoe manufacturing, regardless of how dumb the economics are).  The Businessweek article seems to indicate that tons of New Balance shoes are still made here and thus hang in the, umm, balance, but Rushford spills the beans:

[B]ehind the pro-American propaganda is a harder economic truth. New Balance makes 75% of its shoes in places like Indonesia and China, even some in Vietnam. The remaining 25% come from the New England factories. But most of those sneakers aren't really "Made in America," but "Made in the U.S.A. of Imported and Domestic Components," as the technical label reads. To be the former, at least 70% of the sneakers must be made from components sourced domestically. Company officials declined to comment or provide a detailed breakdown of their Asian-made components.

This much is clear: New Balance imports shoe parts from Asia and then has their American workers glue the shoes together. Without imported components, the American workforce couldn't make shoes at a competitive price.

Why is New Balance against giving Hanoi trade concessions? Its operations in Vietnam are tiny compared to elsewhere in Asia. But tariff cuts would give a big boost to its competitors, Adidas and Nike, which have significant footprints in Vietnam.

The company's patriotism feels even flatter if you consider Nike and Adidas, which unashamedly manufacture their footwear in Asia, together employ some 27,000 Americans. This highly paid workforce in marketing, logistics, design and advertising is 22 times New Balance's American presence.

In New Balance's defense (sorta), Rushford's oped also makes clear that the Obama administration isn't sandbagging the TPP negotiations only for shoes - southern textile manufacturers and their heavily-unionized workers are also getting in on the action (and I hear sugar's getting an, ahem, sweet, deal too).  Nevertheless, both articles above firmly establish that TPP is struggling, in part at least, because of the White House's staunch, politically-motivated defense of archaic tariffs on a product that isn't even "made in the USA" anymore.

Unreal.

Word on the street is that Canada's enthusiasm for joining the TPP negotiations may be waning, and that the US ally and major global player might be looking elsewhere for a trade deal.  If so, that would be a huge loss for the TPP.

But after reading the articles above, could you really blame them?

New McKinsey Study Pokes Fatal Holes in Common Trade Myths

Readers of this blog know that one of the themes here has been dismantling pervasive "protectionist myths" that mislead the public into supporting - and thereby empower politicians to implement - anti-trade policies.  Now, a new study from McKinsey, "Trading myths: Addressing misconceptions about trade, jobs, and competitiveness," contributes to this line of attack scholarship.  There are a few things here that I don't totally support (e.g., erroneously labeling an expanding trade deficit a per se "deterioration"), but the whole thing is definitely worth a read.  Some of the myths addressed include the following:

Myth: Mature economies are losing out to emerging markets in trade and thus face increasing trade deficits.

Reality: The trade balance of mature economies has remained largely stable in the aggregate and even begun to improve. There are wide variations between individual countries, but no evidence supports claims of a wholesale deterioration of the trade balance between the mature and emerging economies over the past decade. 

Myth: Manufactured goods drive deteriorating [SL: sorry, I couldn't resist] trade deficits.

Reality: Imports of primary resources, whose prices have been rising sharply, are the largest negative contributor to the trade balance of mature economies. In 2008, mature economies ran a 3.3 percent of GDP trade deficit in primary resources but a 0.5 percent of GDP surplus in manufactured goods and specifically a 1.6 percent surplus in knowledge-intensive manufacturing. Some individual mature countries run trade deficits in knowledge-intensive manufacturing.

Myth: Trade is at the heart of the loss of manufacturing jobs.

Reality: Changes in the composition of demand and ongoing productivity increases are the main reasons for the decline in the number of such jobs in mature economies. The share of manufacturing in these countries’ total employment is bound to decline further, from 12 percent today to less than 10 percent in 2030, according to our analysis. MGI finds that trade or offshoring are responsible for the loss of around 20 percent of the 5.8 million US manufacturing jobs eliminated between 2000 and 2010.

The authors also hit on several other myths in the report, such as:

Myth: Mature economies create jobs only in low-paid, low‑value domestic services

Myth: Service trade is small, and emerging economies with low‑cost talent will capture any increase

Myth: “Service economies” such as the United States are the world leaders in service trade

After dispatching all of these myths, the authors make several policy suggestions that also should sound familiar to this blog's readership:

- Resist protectionist pressures.

- See emerging economies as an opportunity, not a threat. 

- Push vigorously for the fuller liberalization of trade in services, where restrictions remain high.

- Gear trade-related policy toward supporting—and benefiting from—comparative advantage in attractive stages of global value chains (like R&D and design), and avoid any emphasis on sustaining or creating direct employment through manufacturing exports.

- Improve measurements of global value chains and services trade.

I, unsurprisingly, think that if the federal government implemented these policy solutions, US businesses and workers would be much, much better positioned to dominate the 21st century global economy.  (And I've been screaming it from the rooftops for a few years now.)

Now, if only a few of our political leaders - from either party - would listen.

(h/t ToGetRichIsGlorious)

Government Woefully Unprepared for Market Innovation, Part 7491

I've discussed "3D printing" before, but a new must-read article from The Economist explains just how the new technology is causing a "Third Industrial Revolution."  The whole article is worth reading, but I was particularly struck by this discussion of the revolutionary technology's immense impact on national policy:

Consumers will have little difficulty adapting to the new age of better products, swiftly delivered. Governments, however, may find it harder. Their instinct is to protect industries and companies that already exist, not the upstarts that would destroy them. They shower old factories with subsidies and bully bosses who want to move production abroad. They spend billions backing the new technologies which they, in their wisdom, think will prevail. And they cling to a romantic belief that manufacturing is superior to services, let alone finance.

None of this makes sense. The lines between manufacturing and services are blurring. Rolls-Royce no longer sells jet engines; it sells the hours that each engine is actually thrusting an aeroplane through the sky. Governments have always been lousy at picking winners, and they are likely to become more so, as legions of entrepreneurs and tinkerers swap designs online, turn them into products at home and market them globally from a garage. As the revolution rages, governments should stick to the basics: better schools for a skilled workforce, clear rules and a level playing field for enterprises of all kinds. Leave the rest to the revolutionaries.

This all should scare the bejeebus out of those of us who advocate national trade and economic policies which reflect modern realities of today's markets.  Why?  Because our policymakers still haven't accepted obvious market phenomena that have been around for a decade or more, and thus develop and advocate archaic policies that actually serve to hurt domestic industries, workers and the economy more broadly.  For example, almost all US politicians - in both major parties - still kvetch about the US-China trade balance, even though study after study has demonstrated just how pointless that statistic has become in this era of global supply chains.  The latest example of that fact comes from this great new graphic (h/t ToGetRichIsGlorious) which shows the cost and profit breakdown of the iPad in 2010:

As you can see, of the of the $499 retail price, Apple (30.1%) and other US companies (2.4%) get 32.5 percent of the profits, while China gets only a tiny fraction of that (1.6%).  Yet 100% of the iPad's US customs value adds to the US-China trade deficit.  So why on earth do our politicians act like this bilateral deficit - or any bilateral trade deficit for that matter - should form the basis for US-China trade policy?  It's simply mind-boggling.

Another common example of the gaping market-politics disconnect that I've frequently lamented - and one hinted by the story above - is our politicians' continued fetishization of manufacturing (and manufacturing employment).  It warms my heart that a few politicians appear to be getting the message about services, as this recent and (mostly) refreshing op-ed from US Trade Representative Ron Kirk demonstrates:

The United States today is a services trading powerhouse, and it's vital that we build on our already robust services surplus with dynamic new opportunities...

Next month, the U.S. will host the 12th round of negotiations in the Trans-Pacific Partnership. Those critical talks will follow closely on the heels of a number of key engagements with America's global trading partners, including last week's Summit of the Americas, this week's meetings of the G-20 trade ministers, and May's Strategic and Economic Dialogue with China. In June, the trade ministers of the Asia-Pacific Economic Cooperation forum (APEC) will meet in Russia.

In all of these fora, the U.S. will be seeking new avenues for American businesses to sell more of their products around the world, and to hire more workers in the services sector, which already accounts for four out of five American jobs.

The U.S. is the largest services trading country in the world, with $1 trillion in two-way trade in 2011 and a services trade surplus last year of $179 billion (up 23% from 2010). In what economist Bradford Jensen defines as the fastest-growing services sectors, Bureau of Economic Analysis data show that the U.S. in 2010 had a trade surplus of $57 billion with the Asia-Pacific region, of $44 billion with the European Union, of $35 billion with the countries covered by the North American Free Trade Agreement (Canada and Mexico), and of $25 billion with the rest of Latin America....

If some of those data sound familiar, they should - they mirror several of the points that I made in December about America's globally-dominant services sector (and politicians' ignorance thereof).  The aforementioned op-ed goes on to explain some of the (mostly good) things that USTR is doing to further expand US service suppliers' access to foreign markets, but unfortunately, Kirk's boss doesn't seem to share the love for the US service sector.  Instead, most of President Obama's tax and trade policies are geared toward boosting the US manufacturing sector (at the services sector's expense, naturally) - a troubling disconnect that I've noted repeatedly.  So while USTR Kirk's services affinity is certainly a welcome development, it's a bit less exciting when one considers the archaic and misguided policies pushed by the rest of his colleagues in the Obama administration.

And this gets me back to 3D printing and the "Third Industrial Revolution."  If our very "modern" and "progressive" government (and other governments like it) still refuses to recognize and adapt to simple and obvious market developments that have been going on for decades now, what hope does it have in recognizing and adapting to the more complicated and revolutionary things that are happening right now?

If the trade-related examples above are any indication, the answer to that question is as depressing as it is obvious.  That answer also should inform our faith in government policy accepting and adapting to other critical market phenomena too.  Maybe, just maybe, highly complex things like industrial policy or nationalized healthcare aren't very good ideas after all, huh?

Crazy thought, I know.

"Export-Oriented America"

GMU's Tyler Cowen has a new article in the American Interest that explores a lot of the issues that I've been covering here for the last few years.  Cowen first provides three reasons to think that the United States could become an export powerhouse in the next few years (hint: none of them involve China's currency or President Obama's National Export Initiative):

First, artificial intelligence and computing power are the future, or even the present, for much of manufacturing.... Factory floors these days are nearly empty of people because software-driven machines are doing most of the work....

The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess. That will help the wealthier countries, most of all America. This logic works on both sides. America is using less labor in manufacturing, but China is too, even as its manufacturing output is rising. The fact that Chinese manufacturing employment is falling along with ours means that both our higher wages and their lower wages are becoming less relevant for the location of manufacturing decisions. The less manufacturing has to do with labor costs and relative wage levels, the greater the comparative advantage of the United States....

The second force behind export growth will be the recent discoveries of very large shale oil and natural gas deposits in the United States. Come 2030, the United States may well be the new Saudi Arabia of energy markets. We have new fossil fuel discoveries to draw upon, enough to fuel this country for decades, and there is plenty of foreign demand for those resources....

[T]he third reason why America is likely to return as a dominant export power: demand from the rapidly developing countries, and not just or even mainly demand for fossil fuel. As the developing world becomes wealthier, demand for American exports will grow. (Mexico, which is already geared to a U.S.-dominated global economy, is likely to be another big winner, but that is a story for another day.)

In the early stages of growth in developing nations, importers buy timber, copper, nickel and resources linked to construction and infrastructure development. Those have not been U.S. export specialties, and so a lot of the gains from these countries’ growth so far have gone to Canada, Australia and Chile. Usually American outputs are geared toward wealthier consumers and higher-quality outputs, which is what you would expect from the world’s wealthiest and most technologically advanced home market. To put it simply, the closer other nations come to our economic level, the more they will want to buy our stuff. Indeed most of those nations are growing rapidly, so we can expect their attentions to shift toward American exporters. The leading categories of American exports today—civilian aircraft, semiconductors, cars, pharmaceuticals, machinery and equipment, automobile accessories, and entertainment—are going to be in the sweet spot of growing demand in what we now call the developing world....

Just as Canada and Australia have prospered over the past ten years because their specialties matched Chinese demands, the United States is likely to be the bigger winner in the next ten years as Chinese (and other) demands mature. It’s a trend that has clearly already begun. In 2010, for instance, American exports to China rose by 32 percent, according to a 2011 report by the U.S.-China Business Council. Furthermore, American companies, with their practicality and marketing expertise, will be well positioned to convert scientific innovations from Chinese labs into new commercial products once such innovations start to arrive in large numbers.

So far, so good. Cowen goes on to explain that America's new export strength "will resurrect the United States as a dominant global economic power," helping to resolve the United States budget, trade and diplomatic problems.  I especially like Cowen's optimism that "[t]he opposition to free trade as it existed during the 1980s, and which led even Ronald Reagan into auto protectionism, is almost gone, and these pro-export developments mean that it won’t come back anytime soon."  I wonder, however, whether this new US support for free trade could be undermined as US exports are increasingly subject to trade remedies actions in key foreign markets like China - ironic, considering that the United States has always been one of the biggest users (and defenders) of trade remedies to curb foreign imports.  On the other hand, maybe it will result in a significant change in US trade remedies policies in forums like the WTO, seeking to impose, rather than rebuff, more stringent disciplines on nations' application of trade remedies measures.

That interesting hypothetical aside, Cowen goes on to explain the big downside to the United States big export surge:

The new export-based prosperity may not translate into higher wages for everyone, or even most people, in the United States. Skilled laborers who work with smart machines or even hold advanced managerial jobs will continue to make big gains, as the numbers have been showing for some time. Capital will do well too, especially if it is geared toward export success.... [S]ignificant segments of the American workforce are likely to continue suffering falling real wages, even in a time of rising export prowess.

As the number of American jobs in manufacturing has fallen dramatically, it is often forgotten that American manufacturing output has continued to rise, even during some slow times. In the past decade, the flow of goods coming from U.S. factories has gone up by a third as capital has increasingly become a greater share of input over labor....

[W]e’ll probably see a lot of the American workforce accept lower wages. A lot of American exporters are already experimenting with a two-tiered wage structure, with significantly lower wages for incoming workers....

To some extent, these trends resonate with the old saying, “Live by the sword, die by the sword.” Jobs in the export sector face intense competition, precisely because U.S. companies are increasingly selling into a global market, and that means wages in this sector cannot be guaranteed to rise. They might, and they might not, depending on how creative, efficient and well managed we are. Services, in contrast, are often produced inefficiently, but the jobs are more extensively cocooned within a protected domestic market, often based on government privileges and market-distorting third-party payment schemes.

Although I agree (and have argued for a long while now) that US manufacturing exports are not some magic bullet for the US labor market, I'm inclined to quibble a bit with Cowen's repeated characterization of the US services sector as "cocooned within a protected domestic market."  While that's certainly true for government jobs and certain health care and education jobs, it's definitely not the case for an increasing number of services jobs - for example in medicine, engineering, IT and, yes, even law (trust me) - that totally dominate in the face of real and growing global competition (precisely because US services providers are much more "creative, efficient and well managed" than their global counterparts).  Cowen seems to imply later (see below) that a such a dynamic services sector is to be expected in the coming years; I'd argue that, in this respect, the future is indeed now (and it's not nearly as dystopian as Cowen makes it out to be).

Nevertheless, Cowen next explains that even his overly-bad news comes with a silver lining:

There is the prospect of a better career path, accompanying future export gains, that stands a chance of making life less grim for the working class. Some of the new technological and export-related breakthroughs will consist of making education and health care more affordable, often through software and smart machines that bypass the current credentialized control of those fields. Imagine getting an online medical diagnosis from a smart machine like IBM’s Watson, or learning mathematics from an online MITx program or one of its successors. The American poor and lower middle class will have considerably greater opportunities, at least if they are savvy with information technology and disciplined enough to take advantage of these new free or cheaper goods. Of course, this will not come close to helping everybody. These internet tools reward the self-motivated, who will be disproportionately well educated, even if their parents lack higher education, wealth and connections. Many of the rest will still fall by the wayside.

Even American earners who must cope with stagnant wages will probably reap big gains from new opportunities to lower their basic living expenses. Imagine a family earning $37,000 per year that has much cheaper education and health care costs, thanks to government benefits and internet-based innovation. No one will be tempted to call such households wealthy, but they won’t fit the standard measure of poverty either. They will have positive experiences in their lives and lots of free and nearly free goods....

The internet will continue to make it easier for small businesses to export, but many of the growth areas, including fossil fuels, heavy equipment and cars and other high-tech items will remain the province of big business. America will likely see a new age of corporate titans selling their products and services to the entire world, and the world as a whole will be far wealthier than in times past. The wealthiest American earners will be very wealthy indeed, even by current standards. Due to their export activities, they will take an increasingly global perspective, and they will give away lots of their money, just as Bill Gates has expanded his philanthropy abroad.

Cowen concludes by predicting that the growing divide between the hyper-productive and over-protected will grow to dominate our society and our politics:

These days, this old portrait of the two-tiered economy, originally applicable to a developing economy, may be re-emerging for the United States. We had not thought through seriously enough the possibility that the world’s most technologically advanced economy would, over time, develop persistent and indeed growing productivity differentials across sectors. It clearly has, and the social and political frictions this has caused now dominate our politics—or soon will.

One way to understand this is to note a neglected implication of Moore’s Law for computer processing speed, namely that its use in the value-added process benefits some economic sectors much more than others. In this case the static sector consists of the protected services (a big chunk of health care, education and government jobs), and the dynamic sector is heavily represented in U.S. exports, often consisting of goods and services rooted in tech, connected to tech, or made much more productive by tech innovations. Piece by piece, bit by bit, we Americans are replicating the two-tiered developing economy model, albeit from a much higher base level of wealth and productivity.

A battle between the "static sector" (e.g., public sector and industrial unions) and the "dynamic sector" (e.g., industrialists, non-union workers and professional services)?  Is this really, as Cowen contends, the distant future of American politics?

Or is "the future" right now?

Manufacturing Jobs Won't Save Labor Market Says... US Labor Department?

Reuters published a great analysis last week of the future of the US labor market, and the report's main conclusion shouldn't surprise anyone who's followed this blog for a while: the US manufacturing sector will experience a renaissance of sorts and may even see a near-term uptick in jobs, but longstanding, systemic factors - mainly continuing improvements in productivity - will prevent manufacturing jobs from keying a long-term recovery in the struggling US labor market.  What is surprising, however, is that the latest data come from President Obama's own Department of Labor:

U.S. manufacturers are hiring at the fastest pace in more than a decade to keep up with new orders but sweeping technological advances could cost thousands of factory workers their jobs in years to come.... 

Last year, factories added 237,000 jobs - the most since 1997 - and that burst in hiring is seen stretching into this year as the economy recovers from the 2007-09 recession. 

But a renaissance for industrial employment is unlikely. Over the long term, factory job creation looks destined to stagnate as technology advances, and manufacturers' role in the labor market will likely continue a decades-long decline. 

A Labor Department report published on February 1 projected factory employment will drop to 11.5 million workers by 2020 - down from 11.9 million in January - despite expectations production will increase in coming years....  

Even though the United States remains a pre-eminent manufacturing power, accounting for about a fifth of global factory output, only 9 percent of its workforce is engaged in factory activity, and that percentage is falling. Manufacturers' share of the labor market will likely drop to 7 percent by the end of the decade, according to the government projections, down from nearly a third in the 1950s when unskilled workers played a bigger role....

The Labor Department's new report is available here.  Almost all of the topline conclusions are important, but here are a few of the most telling:

• The health care and social assistance sector is projected to gain the most jobs (5.6 million), followed by professional and business services (3.8 million), and construction (1.8 million).

• About 5.0 million new jobs--25 percent of all new jobs--are expected in the three detailed industries projected to add the most jobs: construction, retail trade, and offices of health practitioners. Seven of the 20 industries gaining the most jobs are in the health care and social assistance sector, and five are in the professional and business services sector.

• The 20 detailed industries projected to lose the largest numbers of jobs are primarily in the manufacturing sector (11 industries) and the federal government (3 industries).

• Of the 22 major occupational groups, employment in healthcare support occupations is expected to grow most rapidly (34.5 percent), followed by personal care and services occupations (26.8 percent), and healthcare practitioners and technical occupations (25.9 percent). However, the office and administrative support occupations group, with projected slower than average growth of 10.3 percent, is expected to add the largest number of new jobs (2.3 million).

• One-third of the projected fastest growing occupations are related to health care, reflecting expected increases in demand as the population ages and the health care and social assistance industry grows.

• Occupations that typically need some type of postsecondary education for entry are projected to grow the fastest during the 2010-20 decade. Occupations classified as needing a master’s degree are projected to grow by 21.7 percent, followed by doctoral or professional degree occupations at 19.9 percent, and associate’s degree occupations at 18.0 percent.

• Of the 30 detailed occupations projected to have the fastest employment growth, 17 typically need some type of postsecondary education for entry into the occupation.

• Two-thirds of the 30 occupations projected to have the largest number of new jobs typically require less than a postsecondary education, no related work experience, and short- or moderate-term on- the-job training.

• Only 3 of the 30 detailed occupations projected to have the largest employment declines are classified as needing postsecondary education for entry.

So what do these numbers tell us?  Well, first and most obviously, manufacturing employment will continue its decades-long decline in the United States, particularly as a share of GDP.  Of course, as I've repeatedly mentioned, the long-term decline is not just an "American" phenomenon - it's happening pretty much everywhere in the world:

And before you ask, yes, it's also happening in China.  For example, Chinese manufacturing giant Foxconn announced recently that it plans to replace 500,000 workers with robots over the next few years.  And it's certainly not alone.

However, the outlook for US manufacturing in every area other than employment is quite good.  Reuters notes that the United States will continue to be a global manufacturing powerhouse, and, interestingly, we have China (in part) to thank for that:

[A]nalysts say much of the recent hiring spurt is just a temporary rebound from the recession, when manufacturing output fell about 20 percent and factories laid off 2 million people. Still, there are factors supporting the sector.... 

After a decade of heightened competition with China, which devastated American industries like clothing makers, the U.S. factories that remain are more high-tech and less likely to be undercut on labor costs. 

Moreover, wages in China are rising much faster than in the United States, reducing the incentive to offshore production, while the recession itself raised pressure on U.S. companies to embrace more cost-saving measures, like automation. 

S & S Hinge Company, for example, has retooled its plant in Bloomingdale, Illinois, since the recession. A pair of computers runs its newest production line, which makes hinges 50 percent faster than older lines. That is helping the firm meet rising orders for parts that go into pickup truck toolboxes while reducing the need for more staff. 

"We've upgraded our factory. We actually put in a new operating system. So it has cut the need for more bodies," said Richard Sade, the company's chief operating officer.

Fascinating stuff.

Second, the Labor Department report shows just how helpful a good education will be for finding and keeping a job in the 21st century American labor market.  Most of the fastest growing job sectors require post-secondary education, while almost none of the shrinking sectors do.  However, all is not lost for less-educated Americans, as the numbers make clear that there will still be plenty of jobs out there for them too (although not in manufacturing, it seems).

And that brings me to the third big takeaway from the DoL report: clearly the most promising sectors for jobs in America are almost all in services, especially health care.  Again, this is not surprising.  Services' share of the US labor force and GDP has been climbing for years now, and it's where the United States is globally dominant.  Reuters again:

As grim as that sounds for many workers, a future with fewer factory jobs isn't necessarily bad for the economy. 

Part of the drive to be more efficient has led factories to outsource more work, contracting services from accounting firms, consultancies and other companies.

Even though the number of workers in U.S. factories today is roughly the same as 70 years ago, jobs in business services, a sector that includes many people working indirectly for manufacturers, have grown eight-fold. The Labor Department expects business services will be one of the top job-creating industries in coming years.

As I noted a couple months ago, the often-maligned services sector has plenty of room for growth and produces tons of high-paying, globally-competitive jobs.

But it's this obvious fact that has me calling the Labor Department report "surprising."  President Obama has spent the last few months touring the US factories and touting a labor market recovery based seemingly on only American manufacturing.  And his budget and tax proposals are all biased in favor of manufacturing (and thus inherently biased against services).  This makes absolutely no sense, as Reuters politely notes:

[The services boom] makes plans by Obama to give manufacturers special treatment - or to penalize them for offshoring jobs - wrongheaded, says Jagdish Bhagwati, an economist at Columbia University.

Obama last week proposed new tax breaks for manufacturers, but many economists view the decline in factory employment as a normal part of the economy's development.

Very normal... and happening here in the United States for a very long time now.  So long that even the US Department of Labor has caught on.

So when it comes to fixing the American jobs market, maybe the President should - and I can't believe I'm about to say this- chat more with the Labor Department and less with his political staff next time.

(Okay, stop laughing.)

"Chinese Labor, Cheap No More" (UPDATED)

Over the last year or so, I've frequently discussed how several economic and demographic factors in China are putting serious upward pressure on labor costs (and, thus, export prices) there.  Michelle Dammon Loyalka continues this discussion with a great new op-ed in yesterday's NYT.  The whole thing is worth reading, but the latest data deserve particular note:

China has experienced sporadic labor shortages, which in turn have driven up its once rock-bottom labor costs. This trend is particularly evident in the weeks following China's Spring Festival, or New Year, when more than 100 million rural migrants return to the countryside to spend the year's biggest holiday with family. Coaxing those same migrants back into the urban work force has proven increasingly difficult.

This year has been no exception. Although nearly two weeks have passed since the Lantern Festival that officially marks the end of the 15-day holiday, cities across China are still facing a serious labor shortfall. In order to lure new workers and retain the old, some companies give employees sizable bonuses just for coming back to work, while others offer cash for every new employee they bring along with them. And in many areas, wage increases ranging from 10 to 30 percent have become the norm.

Despite all this, cities like Beijing, Shenzhen and Guangzhou are still short hundreds of thousands of migrant workers. Shandong Province is missing a full third of its migrant work force, and Hubei Province reports a loss of more than 600,000 workers. Last week, the Chinese government released a report describing this year's post-Spring Festival labor shortage as not only more pronounced than in years past, but also longer-lasting and wider in scope.

The author goes on to document the numerous factors underlying "China's mounting labor woes."  First, there's a shortage in the sheer number of available workers that will only get worse over the next few years.  This shortage is caused by (i) the depletion of the "rural surplus labor pool" (i.e., farmers who could move to industrial jobs); and (ii) a rapidly aging population ("by 2020 the nation will have more than 200 million people over age 60"); and (iii) rising living costs in urban China coupled with improved rural conditions keeping would-be migrant workers closer to home.

Second, China's labor costs are being pushed by a shift in the quality and character of China's work force.  In short, the older generation - who experienced the horrible living and working conditions of the Communist Revolution, collectivization, the disastrous Great Leap Forward and the Cultural Revolution - were willing to put up with low wages, long hours and substandard conditions.  The younger generation ("a full 70 percent of rural migrants are now under 30"), however, never experienced the abject misery of collectivist China and thus is "no longer willing to endure hardship without clear expectations that it is a temporary means to a more comfortable end."  These expectations, of course, have demonstrable effects on many Chinese factories and their comparative advantage in the global market:

In the past, China's migrant workers were just thankful not to go hungry; today they are savvy and secure enough to start being choosy. Higher salaries, basic benefits, better working conditions and less physically taxing jobs are only the beginning of their demands, and for many factories, these are already too costly to be tenable.

For China, having spent the last three decades building the nation on the back of its cheap labor force without having to pay too much attention to its welfare, all this is uncharted territory. It is also a serious blow to the comparative advantage that has helped make its factories an international juggernaut.

In short, basic economics works.  China had a massive comparative advantage in cheap labor; it used that advantage, via low-end manufacturing and international trade, to sell cheap stuff to willing consumers across the globe and thus dramatically improve national living standards; and now those improvements, coupled with certain demographic shifts, are slowly eroding China's labor advantage and thus its dominant role as the World's Factory.

This change, of course, will also have an impact on manufacturing in other countries, including the United States. The only thing it probably won't affect, unfortunately, is US politicians' Sinophobic rhetoric.

(CNBC has more on China's rising labor costs here, if you're interested.)

UPDATE: Lee Miller points me to this fantastic interview with BCG's Hal Sirkin on changes in China and their effects on US manufacturing.

Is The Obama Administration Really This Clueless About US Companies' Global Competitiveness? (UDATED)

In Sunday's Chicago Tribune, Caterpillar CEO Doug Oberhelman explained why his manufacturing powerhouse has no plans to expand business operations in its home state of Illinois.  The whole op-ed is worth reading, but here are the money grafs:

Despite the fact that we announced plans for dozens of new factories in the last few years and our United States workforce increased by more than 14,500 in the past 10 years, we haven't opened a new factory in Illinois in decades. Our Illinois workforce is at the same level it was 10 years ago. Caterpillar recently informed several Illinois communities that they are not in the running for a new factory we will build in the U.S., ultimately adding 1,400 jobs — work that's now done in Japan. In that case, logistics was a key factor, but even if it were not the case, when Caterpillar and most other companies look to locate a new factory in the U.S., Illinois is not in the running.

It doesn't have to be that way.

About 10 months ago I wrote a letter to Illinois political leaders expressing my hope that the state would undertake long-term, fundamental reforms so Illinois could compete for jobs and long-term business investment that drives growth.

To date, we haven't seen much change.

The governor's recent three-year projection of state revenue and spending proves that even with the income tax increase, Illinois has not done what is necessary to balance its budget. Major credit agencies have downgraded the state's bond rating. The state passed some changes to workers' compensation last spring, but it wasn't enough. Illinois will still be among the most expensive states in the nation for workers' compensation insurance. Our own comparison of workers' compensation costs showed Illinois was far more costly than neighboring Indiana, which is consistent with a comparative study by Oregon, which also shows Illinois is much more expensive than Indiana, Iowa and Kansas in workers' compensation insurance rates.

What's the solution? For starters, Illinois needs to adopt a long-term sustainable state budget that relieves pressures on taxpayers. Unlike some, I do not favor an early rollback of the temporary tax increases in Illinois; but they should expire as planned. Keeping the temporary tax increases in place for now gives the state time to develop a multiyear plan that balances the state budget. In addition, the state needs to dramatically lower workers' compensation costs. Some say these changes are not politically possible in Illinois. But if Illinoisans put pressure on both parties to make these types of improvements, I think the state can become a place that can successfully compete for business growth and new jobs.

Let me be clear. Caterpillar is not threatening to leave Illinois. Rather, we want to grow our presence here. For Illinois to really compete for new business investment and growth, the state must address these matters.

In short, high taxes, fiscal profligacy and bad regulation - not the absence of state subsidies or other taxpayer-funded "incentives" - prohibit Caterpillar from both locating new business operations in Illinois and remaining globally competitive (a critical issue for the export-dependent company).  Mr. Oberhelman was speaking about state-level policies, but the principles he describes apply equally to national policy.

Unfortunately, the Obama administration does not appear to understand these principles and is instead cluelessly pursuing the exact opposite course.  I've already explained repeatedly how existing US regulations - and new ones like ObamaCare - are doing a number on American businesses' ability to compete on the global stage, so I won't get into that again tonight. [UPDATE: Brand new - and totally depressing - stuff from The Economist on how the United States "is being suffocated by excessive and badly written regulation."]  Instead, I'd like to review the administration's brand new budget plans and their impact on American corporate competitiveness.

In short, it ain't pretty.

On tax policy, the budget keeps the United States' corporate tax rate at one of the highest levels in the world, even though pretty much every other industrialized economy has lowered their rates (charts courtesy of AEI's Jim Pethokoukis):

Pethokoukis cites to studies showing how high corporate tax rates lead to lower growth, and then explains that President Obama's budget not only retains our sky-high 35% stautory rate but also "raise the corporate tax burden by some $350 billion over ten years."  This insanity includes $30 billion in new taxes on oil & gas companies, even though they are fueling (pun intended) the current economic recovery and already pay a much higher effective tax rate than other US manufacturers:

Smart.  Meanwhile, our northern neighbor (and a major global competitor) Canada lowered its corporate tax rate again to a jealousy-inducing 15% on January 1, 2012, making Canada the #1 country in the world to do business, according to Forbes Magazine.  Congrats, Canada.  You big jerks.  (As I said, I'm jealous.)

Ok, well, sure, that's just tax policy.  I'm sure that those taxes are being well spent in the Obama budget and making sure that the United States house is totally in order, right?  Wrong (again via Pethokoukis, who's clearly been on a roll this week):

Pethokoukis concludes that the President's Budget "makes no effort to deal with Medicare, Medicaid, and Social Security — the long-term drivers of U.S. federal debt. The debt curve never gets bent, as the above White House(!) chart shows. It just goes up and up and up — until the heat death of the universe or the economy is struck by a Greek-style debt crisis."  Holy souvlaki, Jim!

So the Obama budget kills US companies on regulations, taxes and debt, but how does the administration propose to help them?  Targeted subsidies for US manufacturing, of course.  The administration's "Blueprint to Support U.S. Manufacturing Jobs, Discourage Outsourcing, and Encourage Insourcing" pays lip service to broader tax reform, but never once actually provides even a hint as to what such reform would look like. Instead, it just provides a laundry list of new tax subsidies for US manufacturers - including expanding "domestic production incentives," a new "Manufacturing Communities Tax Credit," and temporary tax credits for "domestic clean energy manufacturing."  (The plan also proposes - in tellingly vague fashion - to eliminate tax breaks for "shipping jobs overseas," but we all know what a political joke that is.)

Unfortunately, the administration's manufacturing blueprint - which continues the President's long-held preference for manufacturing - is just as misguided as their broader tax and fiscal plans.  As I've repeatedly noted, the prioritization and subsidization of US manufacturing over other sectors of the domestic economy (like our expanding and globally dominant services sector) is completely misguided, especially as some sort of "plan" to solve the country's high unemployment.

But, hey, don't take my word for it.  The former Chair of President Obama’s Council of Economic Advisers (Christina Romer) thinks the same thing, recently arguing in the New York Times that Obama's "singling out of manufacturing for special tax breaks and support" was wrongheaded because none of the primary rationales for subsidizing the American manufacturing sector - market failures, jobs or income distribution - actually holds any water.  She concludes:

AS an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.

As I noted when Romer's op-ed first came out, smart people on the right and left might disagree about the solutions to our current mess, but at least we they all can agree that the solutions do not involve targeted subsidies for the US manufacturing sector.  If only Dr. Romer had explained this obvious fact to President Obama when his office was a just few doors down the hall.

When Caterpillar realizes that Illinois' tax, spending and regulatory policies prevent it from competing in the global economy, it can - and often does - choose to simply move its operations to a state with a better business environment.  Indeed, the migration of American companies from poorly-managed, debt-ridden states like Illinois and California to leaner, meaner states like Texas is well-established.  Unfortunately, those migrating businesses won't escape bad federal policies so easily.  And if President Obama and his team don't soon get their fiscal and regulatory acts together quickly, Caterpillar and others might not be moving South to Texas but instead heading North to Canada and thus out of the country altogether.

New Podcast re: Corporate Taxes & Manufacturing

The good folks at Coffee & Markets invited me and ATR's Ryan Ellis on their show today to discuss GOP Presidential Candidate Rick Santorum's tax plan and, more broadly, corporate taxes, US manufacturing and global competitiveness.  The podcast is available here for your listening pleasure.

For those of you who have been reading this blog for a while, much of what I said on the podcast will sound familiar.  For the rest of you, I recommend the following homeworkbackground reading:

US Politicians' Unfortunate Ignorance of Global Services Trade

Greasing America's Competitiveness Slide

GOP Candidates Push the Manufacturing Myth

Happy listening!

BREAKING: Basic Economics Applies in China Too

As I've frequently mentioned, one of the biggest protectionist myths out there is the idea that the long, slow decline in US manufacturing jobs has been caused by imports.  In reality, technology advances and changing consumer tastes, not free trade, are responsible for the vast majority of manufacturing job-losses in the United States, and these basic economic principles apply to every country in the world...

...even China:

The parent company of Taiwanese tech giant Foxconn plans to mass produce industrial robots as part of its efforts to cope with labour shortages and rising wages.  The project, which is initially forecast to cost the Taiwan-based Hon Hai Precision Industry Tw$6.7 billion ($223 million), was unveiled Saturday when Terry Gou, chairman of the conglomerate, broke ground for the construction of a research and development unit in Taichung, central Taiwan.

"The investment marks the beginning of Hon Hai's bid to build an empire of robots," the Central Taiwan Science Park authorities said in a statement.

The investment will be made through Hon Hai's subsidiary Foxnum, a company focusing on the manufacturing of automation facilities and equipment, it said. Foxconn, hit by a spate of suicides at its Chinese plants, plans to replace 500,000 workers with robots in the next three years, official media earlier reported. Foxconn -- the world's largest maker of computer components, which assembles products for Apple, Sony and Nokia -- plans to use one million robots to do "simple" work, China Business News quoted Gou as saying in August.

Now, leaving aside the obvious and disturbing signs of the inevitable robot takeover, this article makes clear what free traders have been saying for a long time now: if you just have to blame US manufacturing job losses on something, blame robots, not China, because the Chinese (and the Germans and everyone else) are dealing with the exact same thing.

Let's just hope that Chinese politicians don't start ignorantly (or maliciously) blaming free trade like many US politicians do.

(h/t Freakonomics)

The China Threat that Isn't, Ctd.

Remember how China, armed with a "manipulated currency" and massive government subsidies, was allegedly taking all of America's manufacturing jobs?  Well, it looks like the Chinese are in a giving mood all of a sudden.  First, the FT reports on a new study by Boston Consulting Group (available here) showing that the "re-shoring" phenomenon (discussed frequently here) is picking up speed:

Rising Chinese labour costs are changing the economics of global manufacturing and could contribute to the creation of 3m jobs in the US by 2020, according to a study being released on Friday.

The Boston Consulting Group analysis says the new jobs will be generated by a “re-shoring” of manufacturing activity lost to China over the past decade.

“Re-shoring is part of a broad trend that will emerge as ... production gradually swings back to the US,” Hal Sirkin, a senior partner at the consultancy, told the Financial Times.

The Boston Consulting Group estimates that the trend could cut the US’s merchandise trade deficit with the rest of the world, excluding oil, from $360bn in 2010 to about $260bn by the end of the decade. The shift would also reduce its soaring deficit with China, which reached $273bn in 2010 and has triggered an intense political controversy over China’s exchange rate policies.

“While Chinese labour costs are rising, US competitiveness has been improving,” says Mei Xu, the Chinese-born co-owner of Chesapeake Bay Candle, which makes candles and other home fragrance products. “We can invest in automation to make our candles in a factory near Baltimore for a similar cost to doing the same job in China.”

Chesapeake Bay Candle has created 50 jobs, with another 50 likely next year, since it invested in US production. Half of the company’s production is now US-based. Last year all of its products were made in China.

According to Ms Xu, her company can now react more rapidly to customer design requests, while cutting out hold-ups due to transport delays and customs bureaucracy....

John Heppner, of the security division of Fortune Brands, a US consumer goods company, said its Wisconsin padlock factory hired 100 workers after “a reappraisal of whether it makes sense to base as much of our manufacturing in China”.

The BCG study is definitely worth reading in full, so be sure to check it out.  And according to another article out today, this time in the Wall Street Journal, Chesapeake Bay Candle and Fortune Brands definitely aren't alone:

Globalization has come full circle at Otis Elevator Co.

The U.S. manufacturer, whose elevators zip up and down structures as diverse as the Empire State Building and the Eiffel Tower, is moving production from its factory in Nogales, Mexico, to a new plant in South Carolina.

Fifteen years ago, Otis Elevator joined the stampede of U.S. manufacturers who moved production to Mexico in a bid to save money. Now they're moving it all back. Tim Aeppel explains why on The News Hub.

More startling: Otis says the move will save it money.

What's happening at Otis is part of a broader shift in the way manufacturers tally costs.

Their outlook has been changing as the cost of producing abroad has risen and they have devised more efficient ways to make things close to where they want to sell them.

International companies ranging from Ford Motor Co. to General Electric Co. have started returning to the U.S. some jobs that they had previously shipped offshore, a process sometimes dubbed as "reshoring."...

A number of forces are behind the modest influx. Wages and other costs are going up in foreign countries—especially China—while pay in many industrial sectors inside the U.S. has risen slowly or even fallen in many cases. Transportation costs have grown, as have the costs of holding large stocks of inventory, a common precaution when producing goods far from their end market.

Companies also recognize how moving jobs to the U.S. at a time of high unemployment can enhance their image. "A lot of companies still don't publicize plant closures in the U.S.-which they're still doing," says Mr. Paul, while going out of their way to tout moving jobs back into the country. But longer term, he says, there should be genuine gains for the American economy and workers.

Stephen Maurer, the head of the manufacturing practice at consultants AlixPartners LLP, says some things will always be made in low-cost places, like clothes, "because they involve tons of labor."

But for many other goods, the numbers are shifting. In new study, Mr. Maurer found that it's still cheaper to make a long list of basic industrial goods in places like Vietnam, Russia, or Mexico, but the gap has shrunk. Some analysts say this trend is accelerating and will eventually make the U.S. the cheapest place to produce a wider range of goods. Otis thinks that's already the case for its elevators....

Among other things, the [South Carolina] plant will be closer to many of the company's customers, about 70% of whom are on the East Coast of the U.S.

The company figures that will lower its freight and logistics costs 17.3%.

Another 20% of savings, the company says, will come from "efficiencies" of having all its white-collar workers associated with elevator design and production located at the new factory....

It also will be easier for customers to visit the plant. Nogales is 65 miles from the nearest U.S. commercial airport, in Tucson, Ariz.

That AlixPartners study on what they call "near-shoring" is here.  The WSJ article goes on to say that not all jobs leaving China are coming to the states - other, low-cost, labor-intensive ones are heading to Mexico.  But regardless of whether the manufacturing jobs are heading to the United States or to Mexico, three things are abundantly clear: (i) rising costs in China are causing more than a trickle of manufacturers to leave the country and move elsewhere; (ii) many companies are discovering that its actually better for their bottom lines to manufacture in the United States; and (iii) the idea that China is going to inevitably take all of the United States' manufacturing jobs is, once again, proving to be a somewhat misguided prognostication.

Maybe it's news like this that caused AEI's Dan Blumenthal to list in a new FP op-ed the following items among his "top ten unicorns about China policy":

3. China will inevitably overtake America, and America must manage its decline elegantly. This is a new China-policy unicorn. Until a few years ago, most analysts were certain there was no need to worry about China. The new intellectual fad tells us there is nothing we can do about China. Its rise and America's decline are inevitable. But inevitability in international affairs should remain the preserve of rigid ideological theorists who still cannot explain why a unified Europe has not posed a problem for the United States, why postwar Japan never really challenged U.S. primacy, or why the rising United States and the declining Britain have not gone to war since 1812. The fact is, China has tremendous, seemingly insurmountable problems. It has badly misallocated its capital thanks to a distorted financial system characterized by capital controls and a non-market based currency. It may have a debt-to-GDP ratio as high as 80 percent, thanks again to a badly distorted economy. And it has created a demographic nightmare with a shrinking productive population, a senior tsunami, and millions of males who will be unmarriageable (see the pioneering work of my colleague Nick Eberstadt).

The United States also has big problems. But Americans are debating them vigorously, know what they are, and are now looking to elect the leaders to fix them. China's political structure does not yet allow for fixing big problems....

4 (related to 3). China is America's banker. America cannot anger its banker. In fact, China is more like a depositor. It deposits money in U.S. Treasurys because its economy does not allow investors to put money elsewhere. There is nothing else it can do with its surpluses unless it changes its financial system radically (see above). It makes a pittance on its deposits. If the United States starts to bring down its debts and deficits, China will have even fewer options. China is desperate for U.S. investment, U.S. Treasurys, and the U.S. market. The balance of leverage leans toward the United States....

6. America's greatest challenge is managing China's rise. Actually, America's greatest challenge will probably be managing China's long decline. Unless it enacts substantial reforms, China's growth model may sputter out soon. There is little if nothing it can do about its demographic disaster (will it enact a pro-immigration policy?). And its political system is too risk averse and calcified to make any real reforms.

Good stuff.  (Bluementhal's foreign policy insights are also worth checking out, of course.)

So given all of this news and analysis (and plenty more like it), can someone please explain to me again why so many US politicians and unions are blaming China for all of America's economic problems and lashing out at the Chinese in order to allegedly prevent China's inevitable destruction of the US economy?

Oh, right.

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?

GOP Candidates Push the Manufacturing Myth

Although I didn't watch the GOP debate the other night, I heard it was quite a contentious affair.  But a quick review of the transcript reveals one issue on which several of the candidates seemingly agreed (again): the American manufacturing sector is in dire straits.  Here's a sample:

SANTORUM: ... When I grew up in Butler, Pennsylvania, a little steel town, 21 percent of the people of this country worked in manufacturing. It is now nine. If you want to know where the middle of America went, it went to China, it went to Malaysia, it went to Indonesia. We need to bring it back.

HUNTSMAN: ... If we want to strengthen our core in this country, which we must do, the percentage of our GDP that is from manufacturing is down to 10 percent or 11 percent. When I was born, it was 25 percent. It used to mean something when you read “Made in America.” We don’t make things anymore in this country. We need to start making things in this country.

Unfortunately, and as I've said here many times, this is flat wrong: the US manufacturing sector is producing more value today than it ever has (even in this nasty recession), but it's just doing so with fewer workers and as a lower percentage of total GDP.

Our amazing industrial productivity, of course, is not isolated to the United States.  In fact, it's happening pretty much everywhere on the planet (including China):

This, along with the growth of the US services sector, accounts for the historical decline of manufacturing's share of US GDP - something also happening everywhere else in the world:

As I noted a while back (quoting AEI's Mark Perry), a very similar thing happened to the US agriculture sector last century (and yet no one laments the "decline of American farming").

I guess the bright side from the Iowa debate is that no one on the stage blamed manufacturing's "decline" on free trade or China or Mexico, and instead focused on many of the real problems that American manufacturers (and other businesses) currently face, such as our government's onerous tax and regulatory policies.  But, still, sloppy statements and anecdotes such as those from Huntsman and Santorum reflect a basic misunderstanding of the American economy, and, as we all know, are ripe for protectionist demagoguery.

And, frankly, they should know better.