One way to better understand what’s really going on with U.S. trade politics — as opposed to what politicians and their backers say is happening at any given moment — is to appreciate the many ironies. Especially the ironies of Buy American trade policies that have failed to deliver as promised by President Barack Obama and two top union leaders who worked overtime in 2008 to put their man in the Oval Office, AFL-CIO President Rich Trumka and Leo Gerard, the president of the United Steelworkers. These are perhaps the three most ardent advocates of economic nationalism in America. Aiming to please the pro-tariff labor wing of his Democratic Party, Obama has put the AFL-CIO’s trade agenda front-and-center. This is the first irony. A president who promised to change lobby-driven business as usual in Washington has basically turned over his international trade policies (and much else) to the labor lobby.
“I don’t want to buy stuff from someplace else,” Obama declared in a Sept. 6, 2010 Labor Day appearance in Milwaukee that set the tone as the Democrats prepared for the Nov. 2 midterm elections. “I want to grow our exports so that we’re selling to someplace else — products that say ‘Made in the U.S.A.'” Sharing the stage, the AFL-CIO’s Trumka agreed, railing against unpatriotic corporations that ship jobs overseas, offering that the elections would be about “economic patriotism.” Elsewhere on Labor Day, USW President Gerard — a man who last year accused Washington international trade lawyers whose clients import tires from China of being “traitors” to their country — called for “punishing predator countries” like China that “subvert fair trade.”
The unions pulled out all the usual stops to influence the Nov. 2 voting. “USW activists distributed 1.6 million leaflets at work sites, while making 745,240 phone calls in union halls across America to active and retired members,” Gerard boasted in a statement on election day. “In addition, local union volunteers knocked on more than 350,000 doors in the final weeks of the campaign where our members live.”(Here is another irony. Gerard is a Canadian citizen, a native of Ontario. Last year the USW chief told reporter Ann Belser of the Pittsburgh Post-Gazette that he refuses to become an American, for fear of losing his Canadian health care. Gerard declines further comment for this article.)
Four more of the most glaring ironies:
Obama vows to double U.S. exports within five years, but has not included the one federal program — the duty-free Foreign Trade Zones that are supporting jobs in every state of the union, plus Puerto Rico — that actually has doubled exports in the past five years. In fact, Obama aides at the Commerce Department are trying to make it more difficult for exporters in these zones to compete globally.
Obama personally decided to slap tariffs on imports of Chinese tires, hoping to save American jobs. The Chinese have retaliated against $700 million worth of U.S. exports of chicken parts. Meanwhile, U.S. tire employment is down, while imports are rising from other countries that have taken some business from China.
Obama bailed out General Motors, aiming to protect American (union) jobs. Yet GM sees its future operations centered on low-wage countries like China, Mexico and Brazil. Meanwhile, Obama refuses to support legislation that would help American workers in auto plants in the U.S. owned by foreign investors like BMW and Toyota compete with General Motors’ duty-free exports to the U.S. from Mexico.
Thea Lee, the top trade-policy official at the AFL-CIO, cannot say how many American union members still make clothing in the U.S. The answer: probably fewer than the 30,000 doormen in Manhattan who are unionized. Yet the AFL-CIO continues to support high U.S. tariffs on clothing made by workers in poorer countries like Cambodia and Bangladesh.
Let’s get to the ironic details, and their consequences that help illuminate the political context that the Obama White House now faces, as the president positions himself to stand for a second term in office two years from now.
As everyone with a political pulse now knows, the shrill tones of economic nationalism that resonated for Obama and the unions two years ago didn’t work this Nov. 2. The Democrats’ electoral rejection was then followed by last week’s embarrassing failure at the G20 summit in Seoul, where Obama tried to re-negotiate key parts of the U.S.-Korea preferential trade agreement that both governments had formally signed three years ago. Once again, the president — who quickly promised to keep the pressure on the Koreans to knuckle under in the coming weeks — was basically aiming to make the deal more satisfactory to the AFL-CIO. When it failed, Rich Trumka said that he was cheered that Obama had stood up for the “concerns of working people and small business.”
Looking ahead, some pundits are suggesting that Obama may soon be forced to consider a so-called “mid-course correction” on trade, where he would move back to the economic center. After all, that is the political territory from which all American presidents since Franklin D. Roosevelt have basically governed, until Obama. This is hardly illogical advice, as governing closer to the economic mainstream would seem to be necessary if Obama hopes to win the support of independent (non-union) voters he will need to win reelection in 2012. Yet it is not at all apparent that the president will do so. It could turn out that Obama — so far, no Tony Blair, who fought what the Brits call Old Labour; and no Bill Clinton, who famously broke several times with his AFL-CIO supporters over important globalization issues — will never grow out of his present role as organized labor’s man in the White House.
But whatever happens as Obama and his strategists maneuver between now and 2012, it’s not the pontificating, but the largely unnoticed ironic details of his trade agenda that best illustrate the broader political and economic context.
An Ironic Export-Promotion Plan
Obama promises to double U.S. exports, which were $1.5 trillion in 2009, to $3.1 trillion by 2015. His five-year plan, called the National Export Initiative, mainly focuses on traditional government tools like trade missions and export subsidies. Curiously, the Obama administration has refused to give any priority whatsoever to the one federal program that has more than doubled exports in the last five years.
In 2004, $19 billion worth of manufactured goods were exported from foreign-trade zones; by 2008, the last year for which figures are publicly available, that sum had more than doubled, to $40 billion. You’d think that Obama and political appointees in Secretary Gary Locke’s Department of Commerce would be eager to tout the success stories associated with more than 300,000 Americans who work in some 700 of these zones around the country. But they aren’t. It seems there is no room in the president’s export initiative for Foreign Trade Zones.
When he talks about doubling exports, Obama does not mention the FTZs. Neither does Gary Locke, whose Commerce Department has the lead in administering the zones. Nor has Locke’s politically-minded director of the export initiative, Courtney Gregoire, trumpeted the zones’ successes.
(Gregoire has excellent political credentials. Her father Chris Gregoire, is governor of Washington state; and her current boss , Gary Locke, is a respected former Washington governor. Courtney Gregoire did not respond to a request to the interviewed, and her Commerce spokeswoman did not return a phone call asking about the relationship between Foreign Trade Zones and the president’s export initiative. Another spokeswoman in the FTZ office did not respond to an e-mail request for information about the zones’ successes.)
Will Berry, a veteran Washington international trade authority who is president of the National Association of Foreign Trade Zones, has been around the block long enough to recognize the old run-around when he sees one. Yet Berry says he remains optimistic, pointing out that Obama has said that he would take advantage of “every available resource” to promote U.S. exports. “There is a lot the FTZ community can do to advance the National Export Initiative and the president’s export goals,” Berry notes. “We have made a number of recommendations, but to really maximize our impact we have to be part of the coordinated effort.”
Politically Incorrect Trade Zones
FTZs date to the 1930s Depression era, when ways were sought to get around the crippling Smoot-Hawley tariffs that hovered in the 50-percent range. Manufacturers inside these zones were allowed to import their raw materials into the U.S. duty free. These days, think of the chemicals that go into drugs made by pharmaceutical companies like Merck, refined oil products made by crude-oil importers like Chevron, and components that go into high-tech products made by American innovators like Intel. The finished products can then be either exported overseas, just like any other American company would do, subject only to whatever foreign tariff would apply. Or the companies that manufacture inside the zones can “export” their widgets through U.S. Customs into the United States proper, subject to the normal tariffs for the finished products. As such tariffs are lower than those for the imported components, it’s a sensible deal for the manufacturers — and for their workers, a jobs program that works.
To illustrate, because it operates from a foreign-trade zone in Virginia, Merck avoids paying duties averaging in the 3% to 6% range for its imports of various chemicals, chlorides, gums, resins and such. And when it “exports” the finished medicines into the United States — everything from treating evils like HIV, river blindness, Parkinson’s Disease, High cholesterol, glaucoma, and simple pain — the tariffs on the pills are basically zero. The Americans who work in such duty-free zones understand why tariff slashing is good for them.
So why are these foreign-trade zones considered to be politically incorrect in the Obama administration? Look no further for the answer than to the president’s political base in the unions.
The AFL-CIO, and particularly the steelworkers, don’t much like the duty-free zones. There is another irony within the larger one here. The jobs of unionized steelworkers in U.S. integrated steel mills themselves depend upon duty-free access to semi-finished slabs of steel. Those slabs are the raw materials the American steelworkers need to make finished steel products. To the United Steelworkers of America, their own imports are never “unfairly” traded or “dumped.” The less expensive those slabs are, all the better. But the American unions assert that the raw materials that are imported duty-free into foreign trade zones where other Americans work can offer unwelcome and “unfair” competition to union members.
Un-American Auto Manufacturing
Consider BMW, which makes cars in a free-trade zone near Spartanburg, South Carolina. Last year, 72.9% of those American-made BMWs were exported. Mercedes is in Alabama, as is Hyundai. Honda is in Ohio, and Nissan is in a zone in Tennessee. Toyota of America builds cars in a Kentucky zone, and also operates in Indiana, Texas, Alabama and West Virginia — clearly staking the future of its U.S. operations inside the United States. But the United Autoworkers aren’t much impressed, as the Americans who work in the the successful foreign auto transplant companies do not belong to the union.
This stance leads to further ironies. General Motors, which has moved production to places like Mexico, can export its autos to the U.S. duty free, thanks to the North American Free Trade Agreement. But when BMW “exports” its cars out of the South Carolina zone for sales within the United States, they are subject to the U.S. 2.5% tariff on autos. Some Americans might consider it patriotic duty to buy a GM truck rather than a snazzy BMW X5, unaware that the GM vehicle was really made by Mexican workers in that country, while the foreign sports car was made by Americans in South Carolina.
The National Association of Foreign Trade Zones has advocated legislation to give American workers in the duty-free zones “parity” with their competitors like GM, who enjoy duty-free Nafta privileges. With such parity, those BMWs made in South Carolina could be “exported” duty free into the United States proper.. That would give the American auto workers in South Carolina the same advantage that GM’s Mexican workers get pursuant to Nafta. But the unions and their allies on Capitol Hill hate the idea — again, those South Carolina workers do not belong to the UAW — and the Obama White House wants no part of it.
Politically Incorrect Steel
Once one gets further into the details, the ironies multiply. ThyssenKrupp Steel North America, for instance, has been developing a new $3.7 billion state-of-the-art plant to produce stainless steel from ferroalloys, some 19 types of which mainly come from places like India, Kazakhstan and South America. These ferroalloys are subject to U.S. tariffs for components like ferrochromium (1.9% to 3.1%) and ferroniobium (5%). But the United Steelworkers have been bitterly opposing the city of Mobile’s application to establish the ThyssenKrupp facility as a Foreign Trade Subzone, so it can import its raw materials duty-free. “USW members work for domestic steel producers and raw material suppliers who would be adversely affected” by the ThyssenKrupp competition, Linda Andros, the USW’s legislative counsel, declared in a submission to the Commerce Department earlier this year.
ThyssenKrupp’s Alabama investment strategy is also resented by AK Steel Corp. which is headquartered near Cincinnati. Unlike the savvy ThyssenKrupp, AK Steel has not had the foresight to apply for a duty-free FTZ of its own.
One wonders: What would candidate Obama have to say about his jobs-promotion efforts if he campaigns in the Mobile area in 2012?
Creating New U.S. Export Hurdles
It gets worse. Secretary Gary Locke’s officials at the Commerce Department have made a preliminary recommendation that would overturn a regulation that was first enacted in 1991, when George H.W. Bush was president, and has been accepted by every president for the past 19 years — until Obama. The regulation’s reasoning has a simple logic. Products that are subject to U.S. anti-dumping tariffs cannot be imported duty-free in foreign-trade zones, if the finished products would be “exported” into the U.S. proper, as such a practice would evade the anti-dumping laws. But at the same time, manufacturers in the duty-free zones have been allowed to avoid paying the tariffs on the imports that would otherwise be subject to anti-dumping duties, as long as the finished American-made products are subsequently exported to other countries.
But the steelworkers have persuaded Locke’s aides that this regulation should be overturned. The irony: The same U.S. Commerce Department that is busy on one hand trying to promote the doubling of U.S. exports, is with the other hand planning to throw up another barrier to exports from foreign-trade zones. If Locke accepts the recommendation to rescind the regulation from 1991 — as is considered likely — mark another victory for the AFL-CIO.
And back to the subject of compound ironies, look more closely at the unions’ opinions on General Motors.
Economic Patriots, or Corporate Traitors?
At the urgings of the American labor movement, Obama bailed out General Motors by turning it into a 60% government-owned corporation. The idea was to save American jobs and — in the words of Rich Trumka — support “economic patriots” instead of “corporate traitors” who send American jobs overseas. GM is perhaps the most famous Buy American initiative of the first two Obama years. Obama fired GM Chairman and CEO Richard Wagner, picked a new chairman and four new board members, and then forced the iconic Detroit automaker into bankruptcy.
The good news is that GM is getting back on its feet now plans to issue a public stock offering. The iconic Detroit automaker seems to have a future. But the first irony is that that future isn’t quite as the Buy American types had imagined.
According to a 10Q filing that General Motors filed with the U.S. Securities and Exchange Commission on August 16, 2010, here’s the corporation’s view of its future: “Approximately 43% of our vehicles are manufactured in regions we believe to be low-cost manufacturing locations, such as China, Mexico, Eastern Europe, India and Russia, with all-in active labor costs of less than $15 per hour and approximately 17% are manufactured in medium-cost countries, such as South Korea and Brazil, with all-in labor costs between $15 and $30 per hour.” Elsewhere on its website, GM says that its “largest national market is China,” followed by the U.S. and Brazil.
[Steven Rattner, in his book “Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry,” reports that GM pays American workers $55 per hour, pays Chinese workers $4.50 an hour, and $17 per hour to Mexicans. GM’s Obama-appointed CEO, Fritz Henderson, told Rattner that Mexican productivity was “at least as good as in the U.S., maybe better.”]
The AFL-CIO’s Trumka has established a new Job Tracker, which reports on the actions of “unpatriotic” corporations that “ship jobs overseas.” Guess which multinational corporation is at the top of the list when you check Zip Code 48265 in Detroit? Surprise, surprise, it’s the same General Motors that Barack Obama bailed out on behalf of the AFL-CIO.
Chinese Tire Tariffs and Jobs
The ironies continue. Instigated by Leo Gerard’s steelworkers, on Sept. 11, 2009 Obama slapped on punitive 35% tariffs (this year, lowered to 30%) to curb imports of certain lower-end tires from China. The idea was to save American jobs. Exactly how many, nobody knows. The Obama White House has declined to have the economic analysts at the independent U.S. International Trade Commission conduct a thorough study.)
Leo Gerard offers anecdotal evidence that perhaps 500 union jobs were saved by the tariffs. If true, that compares unfavorably to 700 jobs that BMW is adding to its auto plant near Spartanburg, South Carolina. The U.S. Bureau of Labor Statistics has reported that overall there were 55.4 thousand American tire workers employed in 2009, and 49.8 thousand U.S. tire workers during the first five months of 2010.
Moreover, US tire imports overall were up 21 percent for the first six months of this year. Predictably, other Asian tire exporters were happy to pick up business that would otherwise have gone to Chinese tire makers. The irony here is that the Obama tariffs did create some new jobs — but mainly in countries like Thailand and Indonesia, not the USA.
Meanwhile, tire prices in the U.S. have shot up by as much as 20% for some lines.
There’s even a larger irony to this case. When Obama next campaigns in Arkansas, one of the largest poultry states in the country, someone might ask him about another consequence of his decision to punish China with high tire tariffs. In retaliation, the Chinese have hit back at $770 million worth of American chicken exports to China (of which about $500 million were comprised of so-called chicken “paws,” i.e. feet, with the remainder involving assorted parts like legs). Chicken parts previously were America’s biggest agricultural export to the Middle Kingdom.
When Obama’s allies in the unions talk about “punishing” China, they never seem to understand that the Chinese also know how to dish out economic punishment — and unfortunately are currently in a chest-thumping mood to do so.
How High Should Clothing Tariffs Be?
A further irony: American union members may be economic patriots who usually vote for Democrats, but when it comes to spending their own money, they tend to buy like conservative Republicans.
The Union Shop that sold union-made clothing and other political paraphernalia from AFL-CIO headquarters on 16th Street in Washington, D.C. went out of business at the end of April, 2010. No wonder. Rosie the Riveter T-shirts were going for a pricey $16, and AFL-CIO hooded sweatshirts for $35., hardly competition for the likes of Wal-Mart. (I’ve bought silk shirts and wool sweaters in Hong Kong for $11).
Amaya Tune, a spokeswoman for Thea Lee, the AFL-CIO’s top trade-policy official, said back in April that there was little worry that American workers whose clothing had been sold by the Union Shop would lose their jobs. “The quantities the AFL-CIO has purchased are much too small to affect any manufacturer,” Tune explained. Asked how many union members still make clothing in America, Tune replied, “Unfortunately, I don’t know,” suggesting that the Labor Department might have a better idea.
The U.S. Bureau of Labor Statistics reports there were 497,100 American workers in the rag trade in 2008, the most recent year for which figures are available. Of these, 198,400 worked in the domestic apparel industry, and another 298,700 workers were in textiles. Only 6% of the total 497,100 textile and apparel workers belonged to unions — that’s less than 30,000 jobs, which is roughly compared to the number of doormen in New York City. BLS further predicts that about half of these jobs will be gone in the next eight years. America simply isn’t globally competitive in the rag trade anymore. Yet even though she doesn’t know how many American union members make clothes in America, the AFL-CIO’s Thea Lee nevertheless continues to support high U.S. tariffs on imports of clothing sewn by women who live in poor countries. Lee declined to be interviewed for this article.
The ironies and inequities associated with U.S. clothing tariffs are closely related to some broader political and moral issues.
Ed Gresser, president of the pro-trade Democratic Leadership Council, points out that from January to July 2010 impoverished Cambodia exported $1.2 billion of clothing to the United States. At the same time, exports from the United Kingdom amounted to some $27 billion in high-tech airplane parts, medicines, and other such products associated with that highly industrial society. But the Cambodians were faced with U.S. tariffs for clothing that average 16.7 percent, which is about 23 times higher than .7% tariffs that cover the British imports. Crunch the numbers, and one sees that both the Cambodians and the Brits paid $195 million in U.S. duties. These “archaic tariffs fail to protect jobs, but are very effective in obstructing growth and job creation in poor countries,” Gresser says.
Gresser adds that the high American clothing and shoe tariffs also conflict with U.S. security goals in encouraging economic growth in predominately Muslim countries like Bangladesh. Here is perhaps the ultimate irony: The current occupant of the Oval Office says that he wants to do everything in his powers to persuade the Islamic world that America is their friend. But the same Barack Obama has consistently supported the high U.S. tariffs on the garments that Muslim workers want to sell to America. When it comes to the subject of how high tariffs should be, Obama listens to the pro-tariff organized labor wing of the Democratic Party, not the progressives at the Democratic Leadership Council.
Experienced trade observers in Washington and other major world capitals are wondering where the Obama trade agenda with its many ironies is headed. If the still-inexperienced U.S. president, at least when it comes to international trade, is going to move to the economic center, that surely wasn’t apparent in Seoul at the G-20 last week. There, the president sought to obtain still further concessions from the South Koreans than they had negotiated in the U.S.-Korean trade deal that was supposedly finalized three years ago. Obama reportedly plans in coming weeks to pressure the Koreans to weaken their environmental standards on auto imports from the U.S., threatening to take back the signed American promise to eliminate its present 2.5% tariffs on imports of cars made in Korea. These are demands that the AFL-CIO has been making, along with Ford Motor Co.
For those who always appreciate the ironies as they look for signs as to where the U.S. trade agenda is headed, here are two more: GM owns Daewoo and is not opposing the U.S.-Korea trade deal. Meanwhile, after Obama left Seoul, Peru’s President Alan Garcia flew in, advancing a Korea-Peru preferential trade deal. And newspapers in Seoul reported yesterday on similar overtures coming from Taiwan.
Rich Trumka cheered Obama’s overall performance in Seoul, where he also failed to persuade fellow G20 leaders to try to crack down on perceived Chinese currency manipulation (another subject dear to the hearts of the AFL-CIO). But other, more sober, observers were more impressed by what appeared to be another demonstration of American decline in Seoul last week. As the sharp-eyed Alan Beattie reported in the Financial Times, “This, perhaps, is what the decline of economic hegemony looks like.”