The Politics of Manufacturing

I doubted that we would do so because many of the White House economists were opposed to any such “industrial policy” action of “picking winners and losers.” So it turns out that my premonition was correct. The U.S. government may have made some loans available to A123, but they were a pittance compared to what other countries have made available to their producers.

Wangxiang may well turn out to be the salvation for A123, whose executives say there will be no transfer of technology to China and that the Chinese investment will enable it to get over a rough patch and maintain production and jobs in the U.S. But Holstein’s question is why there even needs to be a rescue and why the rescue can’t be American instead of foreign. There are two basic answers.

One is that, presently in the United States, there is no concept of a national economic interest that is separate from and above the wish lists of the myriad of industries and interest groups. Unlike most Asian countries, the U.S. has no Five-Year Plan and, unlike Germany, it has no national level consultative mechanism among labor, industry, and government for achieving consensus on national economic performance. America’s professional economics community has, for the most part, embraced an extreme laissez-faire doctrine that eschews concern for the structure or the economy and what it produces.

This sentiment was well captured in the comment of one Reagan-Bush era economist who said, “Potato chips, computer chips. What’s the difference? They’re all chips.” A number of economists have denied making that comment, so perhaps it is apocryphal. But even so, it perfectly captures the essence of the reigning economic orthodoxy. A number of leading economists have said that America does not need a manufacturing sector and this view finds wide expression in the notion of a primarily services-based economy.

As a result, U.S. bureaucratic and political leaders are not guided by any principles of an independent American economic interest as they devise legislative and international negotiating agendas. Time and again the question of what we want is asked at the Department of Commerce and at the Office of the U.S. Trade Representative. Always, the answer is the same in the form of a counter question: What do the U.S. companies want? On rare occasions, that is supplemented with the question of what U.S. labor wants. But in either case, the implicit assumption is that the interests of the companies and the unions are the same as the American interest. That is not the situation in other leading countries.

The second reason is that as the heads of global companies, U.S. chief executives are subject to pressures and feel responsibilities wholly divorced from American national interests. Holstein asks why something like the 1980s Sematech industry/government consortium that helped revitalize the U.S. semiconductor industry in the face of the Japanese challenge can’t be done today with batteries in the face of the Chinese challenge.

The answer is that in the 1980s, Japan did not allow more than minimal U.S. semiconductor industry participation in the Japanese market. The U.S. semiconductor CEOs faced a situation in which they could not sell or invest more than minimally in the Japanese market while they were under aggressive attack in the U.S. market. In this situation, their interest was to survive in the U.S. market. They felt and acted like American companies threatened with extinction.

It was easy then to define the interest of the semiconductor companies being the same as the interest of America. This is not so in the case of China now. Global companies can invest and operate in China and, in fact, are under great pressure to do so. So the interest of the global company and that of the United States economy have been divorced. Until either of these situations changes, there will be no more Sematechs. Companies like A123 Systems will likely need to be rescued by foreigners.

DUELING FREE TRADE AGREEMENTS
Are Free Trade Agreements (FTAs) really about free trade or are they just war by other means? The 14^th round of negotiations for the Trans Pacific Partnership (TPP) was recently launched in the Virginia suburbs of Washington. If concluded, the deal will establish what it calls “free trade” between the U.S., Canada, Mexico, Peru, Chile, New Zealand, Australia, Malaysia, Brunei, Singapore, and Vietnam. It will be the biggest FTA of which the U.S. is a member.

Just the week before, however, agreement on the start of negotiations for a Comprehensive Regional Economic Partnership (CREP) was announced in Siem Reap, Cambodia. This deal would be between the ten members of the Association of Southeast Asian States (ASEAN) plus New Zealand, Australia, India, China, Japan, and South Korea. In other words, six of the TPP countries would be in CREP and that could grow to eight if Japan and Korea join TPP, as has been rumored. So the outliers would be the countries of the Americas (U.S., Canada, Mexico, Peru, Chile) and the Asian giants, India and China.

But wait. This gets even more complicated. The annual meeting of the Asia Pacific Economic Cooperation (APEC) just concluded in Vladivostok, Russia. This 21-member grouping of Asia Pacific countries pledged in 1994 at Bogor, Indonesia to achieve free trade and investment between its developed country members by 2010 and between all members by 2020. So, presumably, all the members of CREP and TPP except India (which is not a member of APEC) already enjoy free trade among themselves or will do so by 2020.

Nevertheless, the apparent desire for free trade is so strong that still other groupings are moving ahead with other agreements. Even as they fight over who owns which reefs, rocks, and small islands in the waters between them, China, South Korea, and Japan are committed (in principle) to negotiating an FTA among themselves. China also has an FTA with ASEAN and Japan has a comprehensive economic partnership agreement with ASEAN.

Of course, all of these countries have long been members of the World Trade Organization (WTO) and thus, presumably, are already pledged to universal free trade.

So why couldn’t they all complete the Doha round of WTO free trade talks? If the developed countries of APEC have already achieved free trade back in 2010, how was that freer than the trade of the WTO and why do they need yet more free trade agreements? Or did they really not achieve free trade? How will the free trade of CREP be different from the free trade of the TPP? Why can’t the two groups, already with enormous overlap among their members, simply combine and form one big free trade area. Or better yet, extend to the whole of the WTO and achieve truly universal free trade?

The answer is that it’s not about free trade at all or, at least, it’s very little about free trade. In Siem Reap (Cambodia) recently, U.S. trade representative Ron Kirk said that the TPP and CREP are not competitive, but complementary. That is simply not the case. They are totally competitive, not economically, but diplomatically and strategically.

All these arrangements are about exercising influence. None of them deal with the really key elements of trade and investment. Many of these countries pursue export-led growth strategies and manage their currencies to be undervalued as a way of subsidizing exports. Many also operate indigenous industry and technology development policies and make technology transfer a condition of market access. Many also offer big tax breaks and other incentives to lure foreign investment and technology transfer.

Despite all the free trade deals, the fact is that the markets of many of these countries are among the most managed and difficult to penetrate in the world. And most of these countries run persistent trade surpluses. Yet, these issues are never on the negotiating agendas. With regard to the TPP, U.S. officials have told me that the main purpose of the deal is to demonstrate American commitment to Asia and to make a statement that “we’re back.” That would be nice if it expanded U.S. exports, reduced the U.S. trade deficit and created jobs. But that’s not the main point.

It really is pretty much war by other means.

Clyde V. Prestowitz, Jr. is the founder and president of the Economic Strategy Institute, 1401 H Street NW, Suite 750, Washington, D.C. 20005, 202-965-9485, presto@econstrat.org, www.econstrat.org.

Next is the VAT proposal that was developed by Gilbert Kaplan and John Taylor, international partners at the King & Spalding law firm in Washington. Their presentation appears courtesy of the New America Foundation (New York, NY). Here is their plan:

HOW VAT TRADE ZONES CAN BOOST AMERICAN MANUFACTURING
Exporters of goods from the United States face an enormous disadvantage every time a U.S. product leaves our shores. There is no rebate of the income tax paid with respect to that product, and as such the embedded costs of the export include a tax cost. The exact amount of that cost can vary, but it can be high given that the current U.S. corporate income tax rate is 35 percent. This contrasts dramatically with exporters of goods from almost every other country in the world, who receive a rebate of their value-added taxes (VAT) upon export.