The Harsh Reality of Free Trade

If you are truly against free trade deals, then please throw-out the following items immediately: any consumer electronics (stereos, TVs, DVD players, cell phones and PDAs), you computer, at least half of your clothing (if not more), at least half of your miscellaneous household "stuff" (any kitchen implements, various decorations etc...), and your car. You should also stop purchasing at least half of the food you eat (foreign imports from Latin America).

The point of the above paragraph is simple: products and/or devices which the US economy depends on are all foreign made in one degree or another. The US does not have the industrial capacity to make these products. In addition, there is no reason for the companies that make these products to shut down manufacturing facilities in other countries to build similar facilities in the US. The cost is simply too high and US manufacturing costs would prohibit rebuilding those plants in the US. That's not a bad thing; it is simply a reflection of the higher cost of labor and manufacturing in general in the US -- it's simply a function of where the US economy is relative to other countries. For the US to do this on a national scale -- that is, uproot established industries in other countries and move them to the US -- is simply and practically impossible.

Now let's review a bit of history. There is an argument that the US use to make all of this stuff and we should again. What this argument overlooks is the simple fact that after WWII the US was the only producer of most major products because we had the only industrial base that wasn't bombed into the Stone Age. After WWII, all of Europe and Japan were completely decimated; it would take at least a generation (if not more) for most of these countries to come back online, let alone compete with the US. Our manufacturing preeminence was a function of lack of competition. Using Japan as an example, Japan focused on several key industries (automobiles and consumer electronics) in their effort to rebuild themselves. By the last 1970s (approximately 35 years after the end of WWII) Japan was competing effectively in both these areas and displacing US industries. As more and more countries have come online their respective production capabilities have supplanted various US capabilities for a variety of reason (cost and quality being the most obvious).

Let's review the above points before we move forward. First, the US' "golden age of manufacturing" was as much a product of lack of manufacturing capability in the rest of the world as it was to US preeminence because the US had the only industrial base that wasn't decimated by saturation bombing during WWII. As these decimated countries came online their respective capabilities replaced various US capabilities for a variety of reasons, the most obvious being cost and quality.

Now, let's add the current crop of "developing countries" into the mix. Here I am referring especially to the "Asian Tigers" -- Singapore, Malaysia, Hong Kong, Taiwan, South Korea and the like. These countries targeted specific industries and implemented various export friendly policies that promoted their domestic economy (for more on this, read the book Asia Rising). Through a combination of a highly educated workforce and governmental policy, these countries have grown at fast rates. Some are now basically of "first world" status from several perspectives. Two countries -- India and China -- are now implementing policies and structures that have allowed their countries to grow in a manner similar to the "Asian Tigers" success. In effect, they are in some ways copying a blue print with a proven track record hoping it will succeed. The growth rates of both countries indicate they are on the same track as their Asian brethren were over the last 20 or so years.

So now we have new countries which have the ability to make certain things that are exporting those things to the US. These countries are acting in their own self-interest. They have seen that developing certain economic sectors and selling products from those sectors to the developed world will increase their respective standard of living. They are taking advantage of that situation and bettering their overall economic position in the process. If we were in the same situation, we would do the exact same thing.

And most importantly, the rest of the world is riding along with these countries. We consume their products. We are entirely dependent and integrated with these developing economies. The products they produce increase our own productivity and standard. We need their manufacturing capabilities for the goods we purchase. Our standard of living depends on it. In other words, it's not a matter of turning back the clock. We can't turn back the clock without causing serious damage to our economy and standard of living.

This is not an endorsement or condemnation of the current system. It is simply an acknowledgment of where we currently stand. In other words, this is the way it is.

So, what does this mean going forward? There are two general conclusions.

First, the US must accept the fact that we have a hard road for the next few generations. As the rest of the world catches up with OECD levels of economic development, the OECD countries will probably experience slower growth in their standard of living. While we can alleviate some of the pain this will cause, we can't prevent it. Instead, we must develop long-term strategies meaning multi-generational plans to deal with this shift. And there will be massive shifts as various industries move offshore and new industries rise. This means there will be worker dislocations that have to be humanely dealt with. This will require a combination of public and private initiatives and programs to help.

Second, the US must be proactive regarding business policy. It is imperative for us to develop the "industries of tomorrow." There are several that I always promote: alternate energy, nanotechnology and stem cell research. There are countless others; those are simply three that I personally think will provide excellent growth opportunities. In addition, the US must implement a plan to develop this strategy. High growth industries must be targeted and favored on a variety of fronts. Educational policy must be coordinated with business planning to provide the workforce these new industries will require.

The next 20 or so years will not be easy. However, we have already integrated our economy with others; turning back is not possible without causing serious damage to our economy and that of our trading partners. But we can take proactive steps to mitigate the damage and see that we are prepared for the new opportunities that will come down the economic road.

Two comments from the posting on Daily Kos make excellent points.

we may make strides, inroads (whatever) into environmental technology for instance -- but so what -- the jobs will eventually be shipped away

That is partly the point. The simple truth is that as techniques or developments become more widely disseminated, the more production of those items goes to low cost producers. In the current environment there is no manufacturing job that will not change and to ensure work for the working class several factors have to be in place.

First, a highly skilled and flexible workforce. That means that they will have to undergo retraining at some point. It also means that technological skills have to be taught at appropriate levels and degrees in them have to be seen as important to a corporation as somebody with an MBA

Second, a scientific/industrial co-operation that encourages innovation.

Third, the teaching of design appreciation and its spread through the population. This will ensure a home market for well designed and well made goods that can be produced in the USA.

The model that you have to aid for is to produce high quality goods with high "added value". You could take the example of civilian airlines here. There will be some companies where a home workforce starts making new models or products but the production of these moves overseas. The point is to ensure that the companies develop new products for the home workforce to produce smaller quantities of before it goes into super-mass production. I can give here the example of the Dyson vacuum cleaner company. They produce those bagless "cyclone" cleaners that many companies are copying. They started as a small UK company making their original models in smallish quantities. As demand increased, they moved production to overseas but retained their workforce on new designs and new products like innovative washing machines.

Unfortunately the history of the decline in the US manufacturing and heavy industry has been one where the corporations demanded and got increased protection from overseas competition but failed to invest in plant where they could compete. Here you can look at steel where the savvy companies moved out of bulk steel and into specialist materials for high tech end uses. They survived but the bulk manufacturers became the rust belt when they could not compete even with the tariff barriers in place.

To the extent that labor is an important input, high-wage countries will lose jobs to low-wage countries. The key isn't so much to find new products to make -- that's something we should want to do anyway, to the extent that new products would address evolving needs -- but rather new technologies of production that will make the US competitive. Of course, that will happen, if it happens, by minimizing labor inputs altogether: so we might make stuff in the US once again, but it won't produce much employment, and ultimately that's what this is all about unless you're a balance-of-payments obsessive.