The Myths of Offshoring - The Imperative of Manufacturing

No economy as large and complex as ours can prosper with less than 20-25% of its workers being in manufacturing and without the sector contributing a like percentage of GDP.
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For fully two decades, the American people have been fed the canard that the offshoring of literally millions of American manufacturing jobs is an acceptable price to pay for lower cost imported consumer goods. Yet indisputably, we now know from work done by the non-partisan Center for Economic and Policy Research and others, especially including Lori Wallach and Michael Mandel, that for the vast majority of Americans, the gains in lower prices from trade are being outweighed by wage losses - meaning net losses for most American workers.

We also know from ongoing work by Mandel that shifting production overseas has inflicted far worse damage on the U.S. economy than the numbers show. Because of persistent flaws in the data fed us by the Bureau of Labor Statistics, the growth of domestic manufacturing is substantially overstated which means that productivity gains and overall economic growth have been overstated as well. Offshoring to low-cost countries is in fact creating reported gains in GDP that don't correspond to any actual domestic production. This "phantom GDP" helps explain why U.S. workers aren't benefiting more as their companies grow ever more efficient.

All of this seems esoteric until you reflect on the fact that we are tearing the core out of our economy and, in my opinion, the very heart and soul out of society as those in big business and their supporters in Congress try to justify and perpetuate a form of globalization that has:

  • Reduced our nation's manufacturing sector to less than half of what it needs to be in size and import;

  • Saddled 90% of American workers with, on average, stagnant wages for twenty consecutive years;
  • Mired 30 million American workers in long-term real unemployment; and
  • Seen China -- just this past weekend -- pass Japan to become the world's second largest economy, thanks almost entirely to the dominance China has gained from being the beneficiary of nearly thirty years of grossly unbalanced (and unfair) offshoring by the U.S.
  • The insidiousness of offshoring is three-fold. Yet the recent pronouncements from the administration about revitalizing American manufacturing fail to address them.

    First, from its high point in the summer of 1979, employment in manufacturing has fallen from 19.7 million jobs to only 11.6 million today, with 6-plus million of this decline coming just since 1997, when China's trade with the U.S. first exploded. Less than 9% of Americans now work in this sector.

    And as a percent of GDP, manufacturing is now just 11.2% of the total; it would be closer to 10.5% if the BLS properly counted the 25% imported component portion of American production as 'domestically made'. Today's meager GDP figure is down dramatically from 14.2% just a decade ago and a consistent 25-30% during the first twenty-five years after WW II.

    No economy as large and complex as ours can prosper with less than 20-25% of its workers being in manufacturing and without the sector contributing a like percentage of GDP. Yet there has been no commitment to driving the sector back to these higher levels of employment and economic contribution.

    And without such targets in place, the U.S. Chamber of Commerce and the Business Roundtable -- Mr. Obama's new "BFFs" -- and others take the position that because the number of manufacturing workers in the U.S. is rising again (albeit only modestly and probably only temporarily), then anything more than modest palliatives would be an over-correction. After all, we've seen General Electric bring back to the U.S. from China all of 400 jobs (USA Today, 8-06-10), and "rising industrial production and capital investments are signs that manufacturing will remain a significant part of the U.S. economy at least in the near term" (Wall Street Journal, 1-19-11). Surely, there is no need for anything as dramatic as having our own National Manufacturing & Industrial Policy to match the mercantilist practices of China and our other major trading partners.

    Second, offshoring is always described by its proponents as nothing more than moving jobs to 'lower-cost' countries, in our case most obviously to China. What is not discussed is that fully 90% of these lower costs are not labor-based, but rather they are the unfair combination of environmental degradation, illegal subsidies, currency manipulation and intellectual property theft, with which no American company or worker can ever compete - nor should they. Yet, the administration has to date specifically excluded trade reform from its 'boosting manufacturing' initiatives.

    Third, we have finally come to appreciate that American corporations committed to offshoring have almost universally been providing their foreign suppliers and overseas subsidiaries with massive amounts of business knowledge, management practices, training and other intangible exports. Almost none of this activity is picked up in the BLS's shoddy and, I would argue, irresponsible data gathering, but it is the proverbial second shoe to drop. And a very big shoe it is. This massive transfer of intellectual property is what will ultimately be the biggest drain on our economy.

    As Peter Cohan of Daily Finance has written, General Electric "believes that China will be a $400 billion market for its aircraft products over the next two decades", with the preponderance of such sales being products manufactured in GE facilities relocated from the U.S. and using American-conceived technologies. Cohan goes on to note that "if China follows Taiwan's footsteps [in semiconductors], its aircraft industry should surpass the US's in a much shorter time".

    President Obama, according to the New York Times (1-21-11), has started making the case that the United States has moved past economic crisis mode and is entering "a new phase of our recovery," which demands an emphasis on job creation. "The past two years were about pulling our economy back from the brink," he says, and "the next two years, our job now is putting our economy into overdrive." He is finally talking about revitalizing manufacturing as an important part of his jobs creation initiative, although this should absolutely have been an immediate post-Inauguration imperative rather than a February 2011 'now it's time' undertaking.

    The specific vehicle that Mr. Obama has chosen to advance his jobs agenda is a new Council on Jobs and Competitiveness, to replace the Economic Recovery Advisory Board chaired by Paul Volcker. The chair of the new Council is Jeffrey Immelt of GE. All of this is consistent with the President's expressed 'transition' from economic recovery to job creation.

    The challenges for the new Council will be three.

    First, its mandate has to unequivocally include trade reform, because job creation and trade reform -- especially our trade with China -- are inextricably linked. In this regard, Mr. Obama has made a curious choice to be chair of this new Council, as few multinational corporations have benefited more from our current flawed definition of globalization -- or from China's unfair trade practices -- than has Mr. Immelt's company, GE.

    (The Obama administration's track record on avoiding conflicts of interest in economic policy areas already has been called into question by the President's choice of James McNerney of the Boeing Company to head his Export Council. Boeing, like GE, is completely joined at China's economic hip, while planning every day to ship ever more U.S. machinist jobs to Mexico and throughout the company's global web of suppliers and component part manufacturers.)

    Second, if the Council gets a trade reform agenda, it must be a fair trade reform agenda -- and that must mean no Free Trade Agreements (or FTAs) based on discredited NAFTA and Bush administration principles. Yet in his January 21st guest column in the Washington Post Mr. Immelt made clear his support of the recently concluded South Korea FTA, an FTA which indisputably failed to put the interests of American workers ahead of the interests of large global corporations, which has to be the primary standard for any FTA.

    Third, the Council on Jobs and Competiveness must, as its name implies, take the strongest possible exception to further unwarranted offshoring of American jobs. Yet GE's own history on this issue is checkered at best, especially in its dealings with China. Also, its ongoing significant financial support of the U.S. Chamber of Commerce -- the 'big dog' when it comes to supporting offshoring -- is certainly not an encouraging sign of resoluteness in the future. As Alan Beattie wrote recently in the Financial Times, "many U.S. multinationals are far more interested in investing in China than exporting there." Historically, GE has been one of those multinationals..

    Because the President has made job creation the focus of the next two years, let me close with some observations on what happens if as a nation we fail in this task.

    In an article written last Friday (2-11-11) by Matt Bai of the New York Times, he concluded that Mitt Romney's speech that day to the Conservative Political Action Conference which called today's job fairs and unemployment lines "President Obama's Hoovervilles" was misplaced. Specifically, said Bai, "It would be hard to construct a compelling case, based on any fair reading of political and economic history, for linking Mr. Obama's term thus far to that of the most maligned president of the last century."

    However, as Rick Sloan, who is the Machinists Union's communications director, has noted, while Romney's analogy may not be exactly spot on, the results of the November 2 elections offer us a preview of the 2012 campaign if real unemployment in America is not down dramatically from today's dismal levels of 18.1% and 28.9 million. Thirty percent of the turnout last November came from jobless households, and nationally this vote split only 50 to 46 for Democrats, which, Mr. Bai, is not exactly an FDR-style landslide a la 1934.

    The world of hurt that the millions of jobless in America have endured will not be easily forgotten, especially if the most recent solution put forward on their behalf -- i.e., the Council on Jobs and Competitiveness -- is flawed at the onset in its formation and thereafter in its execution.

    Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.

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