Obama: Back on the Campaign Trail

posted by
on January 24, 2014

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.

 

 

 

 

 

 

 

 

It’s the Imports, Stupid!

posted by
on July 24, 2013

A Gallup Poll this February reported that 57 percent of Americans view open trade positively. That’s certainly an improvement from surveys a few years ago, which found that far more of them believed in flying saucers (35 percent) than supported free trade (9 per- cent). Yet, Gallup found that 35 percent of the public – that’s some 100 million Americans – still see imports as an unambiguous threat to their jobs.

No wonder, considering that all recent American presidents, regardless of party, have had the same take on the benefits of trade: exports are good things, because they create jobs; job-threatening imports, we won’t talk about. George W. Bush, speaking in 2003 to an audience of importers and exporters at the Port of New Orleans, explained that the famous port existed to promote U.S. exports, avoiding any mention of the politically incorrect “i” word. And Barack Obama helped win a second term by skillfully tapping into fears of import competition. “I don’t want to buy stuff from someplace else,” he said, vowing to spark a U.S. manufacturing renaissance by doubling exports by 2014. Audiences cheered when Obama told them that his three favorite words were “made in America.”

Come again? The mercantilist political premise – we want to sell our products to for- eigners and buy as little from them as possi- ble – is a ticket to stagnation and conflict. In- deed, rapidly evolving trade patterns have scrambled who does and who doesn’t benefit from imports, putting many opponents of open trade in the position of undermining their constituents’ long-term interests – in ef- fect, cutting off American workers’ noses to spite their faces.

In the 21st century, imports are as vital to the health of American manufacturing as the coronary artery is to the health of the human heart. Nearly two-thirds of the $2-trillion- plus worth of U.S. imports are component parts and raw materials that sustain Ameri- can jobs. If you want to export more manu- factured goods, you’ll need to import more components. “Manufacturing in today’s world of interdependent global supply chains,” Pascal Lamy, the director-general of the World Trade Organization, explains, “is no longer just about products made in the U.S.A., or France or China – but ‘made in the world.’”

Lamy’s reasoning is supported by solid re- search. Economists at the Word Trade Orga- nization, working with their colleagues from the Organization for Economic Cooperation and Development, have created sophisticated databases that show how global supply chains (sometimes called value chains) dominate just about all manufacturing. Sweden’s Na- tional Board of Trade has published research that translates this data into common sense terms. Thus, for example, about half of a Volvo’s value is added by parts imported from the United States, Japan, England, Canada and Argentina. So, while Volvos may be less Swedish these days, the supply chain that al- locates component acquisition according to what individual economies do best makes it possible to do a fair share of the manufacturing in high-wage Sweden.

locking in economic logic

To be sure, neither of the 2012 presidential candidates could be accused of walking an extra mile to enlighten the public on the job- sustaining role of imports. Mitt Romney’s most relevant utterance was a promise that, on his first day in the Oval Office, he would roll back imports from the “cheating” Chinese. Romney also accused his Democratic opponent of having been “asleep” on promoting job-creating U.S. exports.

Obama definitely didn’t look sleepy when he reminded American audiences that, with trade, employment was priority No. 1. “It’s time to stop rewarding companies that ship jobs overseas, and start rewarding companies that are creating jobs right here in the USA,” Obama told the cheering workers at the Mas- ter Lock Company in Milwaukee.

Master, which for nearly a century has made the iconic locks that adorn so many high-school lockers, had come to Obama’s attention when it moved about 100 jobs back to Wisconsin from China. The president got the point that supply chains matter; when businesses like Master Lock create new American jobs, he explained, “it’s also good up and down the supply chain, because if you’re making this stuff here, that means that there are producers and suppliers in and around the area who have a better chance of selling stuff here.” But he neglected a critical extension of the argument – that supply chains ignore borders.

boeing, boeing

Two days later, Obama was in Everett, Wash., where he visited the assembly line for Boeing’s new 787 Dreamliner, which he called “the world’s most advanced commercial air- plane.” “Companies like Boeing,” Obama pro- claimed, “are realizing that even when we can’t make things cheaper than China, we can make things better. That’s how we’re going to compete globally.”

While Dreamliners are made in Washing- ton State, the entire U.S. economy gets a boost, thanks to “nearly 11,000 small, medium and large supplier businesses,” the economist-in- chief explained. “Boeing has suppliers in all 50 states, providing goods and services like the airplanes’ groundbreaking carbon-fiber- composite aircraft structure from Kansas, ad- vanced jet engines from Ohio, wing compo- nents from Oklahoma, and revolutionary electro-chromic windows from Alabama,” he said. Again, though, he stopped short of ac- knowledging the role of imports in the mix.

The following month, Obama visited a Rolls-Royce plant in Petersburg, Va. that makes jet engines for the Dreamliner. The president praised the venerable British manufacturer for investing in America. It is “creating jobs here, manufacturing components for jet engines, for planes that we’re going to send all around the world,” he declared. What Rolls- Royce has been doing in the United States rep- resents “the kind of business cycle we want to see,” Obama stressed. “Not buying stuff that’s made someplace else and racking up debt, but by inventing things and building things and selling them all around the world stamped with three proud words: ‘Made in America.’”

Well, sort of. It doesn’t take any special eco- nomic insight to see how global supply chains sustain the jobs of Americans who make locks, airplanes and jet engines. Just consider their provenance.

where do master locks come from?

Master Lock’s signature products are composed of a dozen or so parts, notably cylinders, ball bearings, shackle pins and screws. In 1995, the last year for which publicly available documentation is found in U.S. Customs’ re- cords, 9 of the 11 parts used in one of Master’s locks were made in Milwaukee. But the lock case and cylinder-retainer block were imported from Taiwan – and those two parts constituted an estimated quarter to a third of the production cost of the finished lock.

In Milwaukee, Master Lock now employs more than 400 workers, including the workers in the 100 jobs repatriated from China. The company has another 700 workers in Nogales, Mexico. The Milwaukee and Mexican plants account for about 55 percent of the company’s lock production, with the remainder still in China. These Chinese, American and Mexican workers depend upon each other so much to complete the supply chain that it is often difficult to say which country really makes the locks. Indeed. In 2010, U.S. Customs officials struggled to determine where one of Master Lock’s products really was made. It had ten components, of which the principal ones, the lock body and the shackle, were made in Milwaukee and China, respectively. All of the components were then assembled in Mexico. Customs finally decided the finished padlock should be marketed as a product of Mexico – a judgment call that reflects political and bureaucratic imperatives more than reality.

Other times, Master Lock has imported the lock bodies and shackle assemblies from Asia or Mexico, with workers in Milwaukee finish- ing the product by attaching the cylinder locks. Those padlocks were labeled “Made in USA.” (As a chastened Karl Marx might have quipped if he were alive today: “Workers of the world: you really are united.”)

global dreams

It’s the same story for Boeing’s Dreamliners, which Obama praised for having supply chains that stretched to all 50 states. The Swedish National Board of Trade estimates that 70 percent of the Dreamliner’s components are produced outside the United States, with suppliers “spread over 135 sites around the world.” In fact, the board said, “the wings are produced in Japan, the engines in the United Kingdom and the United States, the flaps and ailerons in Canada and Australia, the fuselage in Japan, Italy and the United States, the horizontal stabilizers in Italy, the landing gear in France, and the doors in Sweden and France.”

fuzzy economics

When Obama toured the Rolls-Royce engine plant near Richmond, “I learned a bit about how a jet engine comes together,” he told the workers there. The president drew appreciative chuckles when he added, “I’m a bit fuzzy on some of the details.”

But the president insisted he was clear on one principle: the virtues of a buy-American world. “Think about how important this is,” he said. “I mean, imagine if the plane of the future was being built someplace else.”

But while we’re in an imagining mood, re- flect on how the jobs of those Americans who make jet engines in Virginia would fly away if the plant lacked easy access to imported com- ponents. For example, the Rolls-Royce AE 3007 gas-turbine engine – a workhorse in short- haul passenger jets – requires titanium fittings imported from “unspecified” countries, U.S. Customs records show.

Those engines also need fire-resistant braided cord that ties bundles of electric cables together, which is imported from England. There are also stainless steel oil-seals and bolts from Great Britain, and stainless steel gravity tanks from Sweden. Imported socket screws, shaft liners and sleeves for thruster-propulsion systems from Finland, Sweden and Norway (and machine screws from too many countries to mention) keep Rolls-Royce’s Virginia workers busy.

Throughout the presidential campaign, Obama wrapped himself in the flag of eco- nomic nationalism without saying much about imports. And the shtick worked. Rom- ney tried his best to turn the tables, calling Obama the true “outsourcer-in-chief ” for hav- ing spent federal stimulus funds on American manufacturers who had been making wind turbines from – horrors! – imported blades. But it apparently didn’t quite resonate. (And it didn’t advance the candidate’s buy-American credentials when it came out that his wife had been flying around the country on a chartered regional jet made in Canada.)

export this!

Obama’s first-term, five-year goal of doubling U.S. exports of goods, which totaled $1.07 trillion in 2009, remains a worthy objective. To accomplish that, the president is busy tout- ing the usual policy mix: trade missions, in- vestment in infrastructure and breaks for small businesses. In his 2013 State of the Union message, the president announced that he would like to create 15 “manufacturing hubs” around the country. He also wants Congress to give the Defense and Energy Departments $1 billion, “to turn regions left behind by globalization into global centers of high- tech jobs.”

Ironically, though, the president’s national export initiative has pretty much ignored one federal program that has a highly successful record in promoting American exports. In fact, expansion of U.S. foreign-trade zones – which revolve around cheap access to imports– weren’t even included in the Obama export- doubling program.

Foreign-trade zones have been around since the Great Depression, when Congress and President Franklin D. Roosevelt were scrambling for ways to keep Americans work- ing by getting around the crippling Smoot- Hawley tariffs that hovered in the 50-plus percent range.

Manufacturers in these special zones – ad- ministered by the Commerce and Treasury Departments – were allowed to import the raw materials and components to manufac- ture finished products without initially paying import duties. The goods could then be sold in the United States, where they would be sub- ject to the lower U.S. duty rate for the finished product. Or they could be exported to other countries without paying any U.S. tariffs.

That model for stimulating exports is still in place. These days, some 2,800 companies em- ploying more than 340,000 American workers operate in such zones in every state of the union. And talk about results: from 2004 to 2008, the value of exports from U.S. foreign- trade zones more than doubled, from $19 bil- lion to $41 billion. Since 2009, they are up by more than 80 percent.

Moreover, these zones operate in parts of the country that have lagged behind in the rapidly evolving economy. BMW has ex- ported more than one million spiffy roadsters and four-wheel-drive vehicles from the free- trade zone in Spartanburg, S.C. since 1994. Mercedes exports its M-class SUVs and other luxury vehicles from a duty-free zone in Ala- bama. Meanwhile, Toyota recently announced it will be selling its Kentucky-made Venza crossover to customers in Russia and Ukraine.

Another shining export success originates in Elkton, Va. (pop. 2,700), nestled in the Shenandoah Valley about 100 miles south- west of Washington. There, pharmaceutical giant Merck operates a sprawling factory that makes drugs to treat diseases from HIV to river blindness to Parkinson’s to cervical cancer. In a story that should now be familiar, the Merck plant depends on cheap imports, pay- ing no U.S. tariffs on the imported raw mate- rials – various chemicals, gums, resins – that otherwise would be subject to duties.

Nonetheless, it remains an uphill battle to beat back opposition to foreign-trade zones. The United Auto Workers opposes them – especially those in the South that use non- union labor. Detroit automakers, which have in the past operated from U.S. foreign-trade zones, no longer serve as a counterweight. Thanks to the North American Free Trade Agreement, General Motors can make its Silverados and Suburbans in Mexico and export them duty-free to the United States. The foreign automobile manufacturers that operate in foreign-trade zones in the rural South have to pay normal U.S. tariffs on automobiles if they sell their cars in the United States (as op- posed to exporting them).

When Obama became president in 2009, he was offered the opportunity to support an idea aimed at boosting the number of jobs of Americans who work in foreign-trade zones. Representative Bill Pascrell, a New Jersey Democrat, was pushing legislation that would have put the Americans who make BMWs in South Carolina on an equal footing with GM’s Mexican workers by exempting domes- tic sales of autos made in free-trade zones from the regular tariff.

But Obama, loath to challenge the auto workers’ union, refused to support Pascrell’s proposal. Nor did any major Republican show much interest. Even Pascrell decided not to speak in favor of his own bill, which he quietly dropped.

reality check

Though polls show a majority of Americans are inclined to accept global economic integration, politicians see little advantage in of- fending the vociferous third who are still demonizing imports. That’s why both Republican and Democratic bigwigs decline to explain the relationship between exports and imports in intellectually honest terms.

But corporate CEOs don’t have that excuse. And many of America’s top business leaders – who certainly know better – have refused in recent years to acknowledge the vital role that imports play in keeping domestic jobs, preferring to invest their political capital on other issues. U.S. steelmakers, to cite the most glaring example, know that their American workers cannot make finished steel products without access to duty-free imports of semi- finished steel. Yet presidential candidates who want to win votes in steelmaking states like Pennsylvania and Ohio long ago learned not to rock that particular political boat.

The more encouraging news is that some influential trade groups have begun to speak candidly about the role of imports in the U.S. manufacturing supply chain. For the past two years, the U.S. Chamber of Commerce has been supporting an Imports Work For America week. The Business Roundtable –- not so long ago a bastion of anti-imports sentiment –- recently posted a study by Matthew Slaughter, a Dartmouth economist, that praises the contributions of imported goods to U.S. manufacturing.

“Exports are great for Caterpillar, but so are imports, and that’s a point that often gets overlooked,” Doug Oberhelman, Cat’s chief executive and the head of the Roundtable’s task force on trade, said. “Without access to manufacturing inputs from around the world, Caterpillar’s global supply chain would be less competitive and our ability to compete in all markets would be diminished.”

Free trade has always been controversial because it produces both winners and losers, even though the evidence that open trade promotes innovation, retards inflation and increases consumer-centric competition is undeniable. But with the economy changing, the exports-good/imports-bad mantra is less and less relevant to groups traditionally op- posed to free trade. The more the American public hears the simple truths about why im- ports are good things, the sooner the politics of trade will cease to be dominated by interests stuck in the 1980s.

 

The main themes of President Barack Obama’s international-trade strategy for the November 6 presidential election are now fully established. It’s all about the 21st Century, where the buzzwords are American jobs, U.S. exports, and more American jobs. He doesn’t want America known for “buying stuff from other nations,” Obama told representatives from a dozen-plus corporate luminaries including Ford Motor Co. and Intel Corp. who assembled in the East Room of the White House on Jan. 11. “I want us to be known for making and selling products all over the world stamped with three proud words: ‘Made in America.'”

If economists would immediately retort that the president’s language was the stuff of 17th and 18th century mercantilism, practicing politicians could shoot back that hey, campaigns are not academic seminars. In that vein, the nation’s Politician in Chief furthered his plea for economic nationalism in his Jan. 24 State of the Union address, where he asked Congress to help him give tax breaks aiming at bringing back lost manufacturing jobs to US shores. More broadly, Obama will be vigorously asserting that on his watch, he has succeeded in restoring America’s traditional claims to international economic leadership. Toward that end, he will ignore his lack of focus on what should have been top priority — the truly big-money stakes involved with the World Trade Organization’s Doha Round of multilateral trade liberalization talks, which the White House has helped kill. Instead, Obama will keep touting how he managed to obtain congressional passage of three small-by-comparison trade pacts last year— with South Korea, Colombia, and Panama — that had been negotiated by predecessor George W. Bush, but had become trapped in Washington’s gridlock. Obama has also positioned himself as an an advocate of government efficiency: a reformer who is fighting for lean-and-efficient bureaucracies, pitted against an entrenched Congress and corporate lobbyists. And looking to a second term in office, Obama will advertise his focus on forging deeper ties with dynamic, forward-looking Asian-Pacific economies in a region which he asserts Bush had neglected (and which conveniently encircles China, a trading partner that the president misses no opportunity to say doesn’t “play by the rules”).

The forward-looking Asia-Pacific part of the Obama campaign strategy was clearly on display before a high-powered audience of Washington insiders who packed a conference room on K Street the morning of Jan. 4 at an event organized by the respected bipartisan Center for Strategic and International Studies. Keynote speaker Michael Froman, the deputy national security adviser for international and economic affairs, smoothly spoke of US leadership in the so-called Trans-Pacific Partnership negotiations. The TPP negotiations are designed to liberalize trade with promising Asia-Pacific countries including Singapore, New Zealand, Australia, Malaysia and Vietnam, Froman said. After the Obama administration came into office in 2009, the White House had studied the gridlock and “determined that we needed a new, 21st century approach to trade,” Froman said. “When we launched TPP,” the White House top international economic aide added, “we developed entirely new texts that reflected US interests and the competitive realities of the region…we pushed our limits and forced ourselves to try to think a bit outside the box about traditional issues.” US Trade Representative Ron Kirk and his team of trade negotiators, Froman related, “have now led 10 rounds” of TPP negotiations, boasting how in 2010 “we welcomed” emerging tiger-cub economies Malaysia and Vietnam into the trade pact.

But a close examination of what has really happened on the Obama watch strongly suggests that the White House claims to economic leadership in the TPP negotiations should not necessarily be taken at face value. For openers, the United States isn’t even a member of the trade pact. Moreover, the issues that are at the core of the White House negotiating strategy are straight out of an 18th century fascination with the mercantile world of high tariffs. It’s the same old story: sugar, steel, cotton, clothes, shoes, and a few other coddled farm lobbies. Moreover, even a cursory look at Obama’s proposals to “streamline” what he says are inefficient federal trade agencies reveals an absence of policy prescriptions truly aimed at bringing official US trade policies into line with 21st century economic realities.

Here’s the story, beginning with the White House assertions of enlightened 21st century “leadership” in the Asia-Pacific negotiations. Read the rest of this article »