Obama: Back on the Campaign Trail

 The “Made in America” president got back on the campaign trail last week.

Barack Obama’s name, of course, will not be on anyone’s ballot come the Nov. 4 mid-term congressional elections. But the president, fearing he could become a politically impotent lame duck during his last two years in the Oval Office, is naturally keenly interested in doing whatever he can to head off any possibility that the Republicans could control both the House of Representatives and the Senate.

A key part of Obama’s current politicking portrays congressional Republicans as uninterested in using sensible government leverage (and a few tax dollars) to keep what the president calls good “middle class” American manufacturing jobs at home in a competitive global economy. It is a continuation of a successful political formula based on patriotic-sounding Buy American rhetoric that has helped an inexperienced junior senator from Illinois win two terms in the White House. The Republicans have never figured out an effective response to Obama’s economic nationalist rhetoric.

But while his politics have been savvy — or at least smarter than his political opposition —Obama’s grasp of global economic realities remains uncertain. He’s been missing a simple insight that is at the core of International Econ 101. Nearly four years ago, then-WTO Director General Pascal Lamy began issuing repeated — and well-publicized — reminders to World Trade Organization member countries why open international trade flows are so important. Thanks to the rapid development of modern global supply chains, the WTO chief explained, manufactured products are no longer made in just any one country. Rather, they are assembled from components and raw materials that are “Made in the World.” Put another way, countries that pursue inward-looking policies pressed by parochial politicians who play to protectionist-minded lobbies — whether Buy America, or Buy India, or Buy China — are going to be left behind.

The WTO’s cutting-edge economic research continues under Roberto Azevedo, Lamy’s energetic successor from Brazil. Obama, however, remains a Made in America politician — and bases his economic policies on such. Over the last year, Obama’s top trade negotiator, Michael Froman, has declined to respond to persistent inquiries as to whether the White House would care to associate itself with the WTO’s Made in the World educational endeavors. But that background gets ahead of the facts that drive this story, which begins on Jan. 15, when Obama flew to North Carolina’s celebrated Research Triangle Park.

Some 170 companies conduct advanced high-tech research and development in the Triangle. Some of the biggest names that are associated with modern technological advances —- think America’s IBM, Intel, Microsoft, Biogen, and Cisco; and also BASF, Ericsson, Sumitomo and even China’s Lenovo — have made the Raleigh-Durham-Chapel Hill area a living illustration of American technological innovation at its best.  Last week, Obama singled out one particularly admirable company to visit, the research and development offices of Vacon Inc.  The president’s idea was to explain how federal subsidies for such praiseworthy private-sector innovators could help keep manufacturing jobs in America.

Never heard of Vacon? Well, this smart company is in everyone’s daily lives, one way or another. Vacon makes something called AC drives. While AC drives are hardly household words, they are highly useful things. Essentially, they use software attached to electronic boxes to make electric motors run more efficiently. Vacon’s clean-energy drives lower costs for a great many useful things that help make the American economy run more efficiently: including elevators, escalators, fans, pumps, compressors, you name it. Vacon’s biggest customers include the likes of giants like Honeywell and Eaton. As Obama rightly noted, Vacon’s innovations tell a very “good news” story.

Vacon is one of 18 corporations that are participating in a federally supported consortium of six universities led by North Carolina State that aims to come up with even more advanced clean-energy ideas. Obama’s Energy Department has pledged to support the hub with $70 million over five years, drawing on funds that the president says he has the existing executive authority to spend. The White House says it has another $130 million available to launch two more so-called “manufacturing hubs” that have yet to be announced.

In his 2013 State of the Union address, Obama said he would ask Congress for $1 billion to create a nationwide network of 15 manufacturing hubs. But unsurprisingly, the idea stalled on Capitol Hill. This election year, the president has doubled down politically, saying that what he’d really like is congressional authorization to subsidize 45 public-private manufacturing institutes. While this is hardly likely to happen, Obama at least has the more opportunities to criticize a do-nothing Congress between now and the Nov. 4 vote. And that’s exactly what he did (with tub-thumping relish) in North Carolina last week. “Where I can act on my own, without Congress, I’m going to do so,” Obama declared on Jan. 15. “And today I’m here to act,” Obama said to applause.

The president’s message was delivered to an enthusiastic audience of some 2,000 at North Carolina State: Smart spending of tax dollars is what it takes to promote an American manufacturing renaissance that will keep good “middle class” jobs at home, rather than continue to ship them overseas, Obama declared. “So the reason I came here today is because we’ve got to do more to connect universities like NC State with companies like Vacon to make America the number-one place in the world to open new businesses and create new jobs,” Obama declared. “We want to do that here in North Carolina, and we want to do this all across America,” Obama vowed.

The president recalled how North Carolina had seen textile- and furniture-making factories “closing their doors down” while “jobs were getting shipped overseas.” More federal support for such “good news” success stories like Vacon, Obama said, will keep the jobs of America’s future here at home. “I don’t want the next big job creating discovery, the research and technology, to be in Germany, or China or Japan; I want it to be right here in the United States of America,” Obama said.

The following six sentences about Vacon from Obama’s Jan. 15 speech are worth quoting in their full context, as they clearly illuminate the president’s view of what international economics is all about: “So this company is making these engines and these systems more efficient, saving businesses big bucks on energy costs, improving the environment. Those savings get passed on to customers, puts money in people’s pockets.  And growing companies that need the products that Vacon makes, they’re benefitting enormously.  So it’s a good-news story.  But in a global economy, that company, just like every company in America, has to keep inventing and innovating in order to stay on the cutting edge.  And that’s where all of you come in.”

And that’s where the Made in the World trade flows enter this story. Obama was certainly correct in portraying the innovative Vacon as an entrepreneurial success story. But the praiseworthy entrepreneurial energy came from — Scandanavia. Vacon Plc is headquartered in Vaasa, Finland. Its U.S. operations are only a small (if important) part of the Finnish company’s international business strategies.

Yes, it stands to follow that Vacon’s factory workers in America will benefit from whatever technological advances come from the tax dollars that Obama will channel to the North Carolina manufacturing hub. But that’s only part of the story. Vacon also has factories in Europe and Asia, as well as R&D operations in other countries. So any high-tech breakthroughs that are made in the Triangle will also help Vacon’s workers around the world, including, you guessed it…China.

A quick look at how Vacon is thriving in a competitive global marketplace easily explains.

In 1993, thirteen engineers who worked for the ABB Group in Vaasa, Finland, faced an uncertain future when the giant Swedish-Swiss conglomerate decided to shut down its Finnish lab. At the time, Finland’s economy was in the tank, suffering from a lingering economic hangover after the collapse of the neighboring Soviet Union. Still, the intrepid Finns bravely struck out on their own, launching Vacon Plc. They risked their job security, their homes, their families’ welfare, and took all the other usual risks that aspiring entrepreneurs do as they summon the inner strength to endure. But the geeks believed in the strength of their ideas.

Today, this fine Finnish company that figured out smarter software to transform the ways that electrical energy is processed holds about 5 percent of a worldwide $11-plus billion AC Drive market. Company revenues were over $500 million in 2012. Altogether, Vacon employs about 1,500 people worldwide. Some of these work in the United States.

Vacon employs nearly 20 highly motivated workers in the Research Triangle. (The words “highly motivated” explain why innovators from around the world find the Triangle attractive.) Another 100 Americans work in Vacon’s factory in Chambersburg, Pa. The company’s U.S. headquarters are in Milwaukee, with support offices in Chattanooga and Houston. They have reason to be enthusiastic about the possibilities of the manufacturing consortium that Obama is pushing — as do Vacon’s factory workers in Suzhou, China, and also in Europe.

Vacon’s website notes that the Finnish company sees its “focus of growth” in six other countries besides the United States: Germany, Brazil, Canada, India, South Korea, and China. Vacon’s website notes that it’s “focus of production is moving to Asia.” Vacon, like other globally competitive corporations, has a natural economic incentive to be near to its growth markets, whether they are in Chambersburg, Pa., or Suzhou.

Moreover, all of Vacon’s factory workers, no matter which country they live and work in, are dependent upon international trade flows across borders, which give them the necessary components they must have to assemble their AC drives. Without access to the imports, all of the factories would fold.

According to Import Genius, an authoritative private research firm that tracks U.S. Customs’ records online, Vacon’s U.S. operations import key parts such as frequency connectors from Finland, valves from China, and control modules from Mexico. Likewise, the workers in Vacon’s factory in China could not assemble their Made in China AC drives without the necessary imported components from various countries. As Karl Marx might put it if he were alive in the 21st century: Workers of the world, you really are united.

But when the president of the United States talks of promoting an American manufacturing renaissance, he is loath to mention that imported components help sustain American manufacturing jobs. The protectionist-minded labor unions that heavily influence the Democratic Party’s trade policies don’t much like to talk about such things.

The puzzle is why the Republicans — who have allowed themselves to be the Fall Guys in Obama’s successful economic morality play — have never figured out how to deflate the patriotic sounding presidential rhetoric. Especially as evidence they would need to put Obama on the defensive is right under their noses.

Remember Obama’s much-touted pledge, first uttered in 2010, that he would move heaven and earth to double U.S. exports between 2009 and 2014? Obama said his White House had a Five Year Plan, which he called the National Export Initiative? It sure had a nice ring to it during the 2012 presidential campaign.

Last week in North Carolina, Obama — who now has new buzz words for job creation, like “manufacturing hubs” — didn’t mention his so-called National Export Initiative. No wonder, considering the numbers.

In 2009, during the economic whirlwinds created by the Great Recession struck, U.S. exports of goods and services totaled $1.5 trillion. But by 2012, the 4th year, U.S. exports had only risen to $2.2 trillion. The numbers aren’t in for all of 2013 (they will be released on Feb. 6.). But it looks like last year was about the same as 2012. So U.S. exports, instead of doubling in five years, have risen by only about one third. To reach Obama’s goal of doubling in five years, U.S. exports this year would have to reach a little over $3 billion. It’s not likely.

But that’s only part of the story. It turns out that there is one existing federal program that actually has an enviable track record of sustaining American jobs — a government program that has steadily been helping exports skyrocket for many years. The reference is to the nationwide network of highly successful U.S. Foreign Trade Zones, which are administered by the Commerce and Treasury departments.

Some 2,800 corporations employ more than 340,000 American workers in FTZs located in every state of the Union, plus Puerto Rico. Manufacturers in these special zones are allowed by the federal government to import the raw materials and components they need to manufacture the finished products, without initially paying import duties. If the goods are sold in the United States, they pay the lower U.S. duty rate for the finished product. Or they could be exported, paying only whatever tariffs buyers in foreign countries are subject to.

The FTZ’s performance clearly illustrates the benefits of a duty-free world. From 2004–2008, the value of exports from FTZs more than doubled, from $19 billion to $41 billion. Since 2009 they have been up more than 80 percent. Last year the department reported that exports from the zones reached a record-high of $54 billion in 2011, a 56 percent increase from fiscal year 2010. (These are the most current numbers the federal government has published.)

Dan Griswold, the president of the National Association of Foreign Trade Zones, has observed that the export numbers “confirm that companies operating through the FTZ program are contributing more than their share toward meeting the president’s National Export Initiative goal of doubling U.S. exports between 2009 and 2014.”  Yet the Obama White House, far from putting FTZs at the center of the president’s National Export Initiative, basically has talked about the free-trade zones as little as possible. The economically thriving zones have been about as far from the center of the president’s National Export Initiative as the White House can keep them.

During the 2012 presidential contest, neither Obama nor his Republican challenger, Mitt Romney, visited a Foreign Trade Zone to tout the benefits of a zero-tariff world. In fact, in more than a quarter century of covering the politics of international trade, memory does not recall any example of a presidential candidate of either party who ever trumpeted the jobs-creating virtues of FTZs.

Still, such export success stories are dotted all over the U.S. BMW has exported more than one million spiffy roadsters and four-wheel drive vehicles from the company’s zone in Spartanburg, S.C. since 1994. Mercedes exports its M-Class SUVs and other luxury cars from a duty-free zone in Alabama. Toyota has announced it will be selling its Kentucky-made Venza Crossover to customers in Russia and Ukraine.

Another shining FTZ success is found in Elkton, Va. (pop. 2,700), nestled in the Shenandoah Valley about 100 miles southwest of Washington, D.C. There, pharmaceutical giant Merck operates a sprawling factory that, according to the company’s federal filings, makes drugs to treat diseases ranging from HIV to river blindness to Parkinson’s to cervical cancer. Workers in Elkton make their pills without Merck’s paying U.S. tariffs on imported raw materials (various chemicals, gums, resins) that otherwise would be subject to duties. Free trade is what Elkton, Va. is all about — ask the Merck workers whose jobs depend upon it.

Or take Caterpillar Inc.’s operations in a Foreign Trade Zone in Victoria, Texas, where it makes its iconic yellow excavators and frame assemblies. There is a very long list of imported parts that Cat brings in duty free to keep its Texas workers busy: including various rods and tubes, hoses, fittings, seal strips, clamps, caskets, glass, ceramics, and many more.

There’s another company that has been creating American jobs in a place where they are much needed, but which isn’t in a Foreign Trade Zone. A commendable start-up named Shinola has started putting Americans to work making fine watches and bicycles in bankrupt Detroit. “We know there’s not just history in Detroit, there’s a future,” the company declares on its website.

Hopefully, savvy risk takers like Shinola will become shining successes, inspiring other intrepid entrepreneurs to start re-building Detroit — a sad city that is perhaps the nation’s number one example of the consequences of unenlightened economic policies. (The AFL-CIO’s unions and the old-line U.S. auto manufacturers bear the responsibility for this, but prefer to blame import competition.)

And of course it happens that Shinola’s prospects for success turn on the ability of this entrepreneurial-minded company to benefit from global trade flows. Shinola sources its bike frames and fork tubing from Mississippi, the chainstay plates from Wisconsin, spokes from Colorado — but also imports other necessary parts from Asia and Europe. And the Shinola workers who assemble watches in Detroit, make them from Swiss movements, and also cases, dials, hands, crystals and buckles from China. So this success story is Made in the World, not Made in America.

Given his attitude towards import competition, Obama is not likely to go to Detroit and call for economic policies that would make the entire city a free-trade zone. Nor have prominent national Republicans expressed any such interest.

While American politicians of both political parties remain intellectually trapped in their insular Made in America mentality, other countries — China, for instance — are thinking of better adjusting their economic policies to fit Made in the World economic realities.

Last summer, with the apparent endorsement of Chinese Premier Li Keqiang, Beijing announced plans to make parts of Shanghai a free trade zone. As the South China Morning Post, the respected Hong Kong daily newspaper, has observed, this will be the “first Hong Kong-like free trade area in mainland China.” And according to various recent news reports, Beijing is also considering creating another dozen such duty-free zones around the country. They include Guangdong, which is economically close to Hong Kong, the port of Qingdao, and Hangzhou, home of the e-commerce giant Alibaba. While the Chinese plans’ implementation are still works in progress, at least Beijing’s leaders are asking the right questions.

As for Obama, it might help if the president would spend less time thinking about effective campaign rhetoric, and more effective governance. After all, it’s the latter that eventually determines presidential legacies.