Industry Today: The World of Manufacturing

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 Date:10/6/2009

 

Wake Up Call
My Fellow Americans: It’s My Fault
Alan Tonelson muses on a ‘tough love’ speech President Obama might give in the face of a floundering international trade policy.

The Pittsburgh summit of the world’s 20 largest economies has come and gone, and President Obama still hasn’t made the type of speech on U.S. trade policy for which the world’s economic and business elites have recently been clamoring. Before the summit, they were practically panting for a presidential endorsement of U.S. trade policy’s outsourcing- and import-friendly status quo. And despite overwhelming evidence that Obama has no intention of upsetting the apple cart in any significant way, his imposition of WTO-legal tariffs on surging Chinese tires imports has boosted professed anxiety to record levels among outsourcing interests.

Trying to strengthen his free trade “street cred” could pay off handsomely for Obama – at least momentarily. He would please America’s major trade partners – including the creditor governments that have propped up his re-bubble-ization economic strategy. He would also delight the liberal Wall Street and Silicon Valley outsourcers who bankrolled so much of his run for the White House. Meanwhile, influential but still hopeful Democratic trade policy critics – now mainly fighting the health care war – would surely swallow yet another set of promises to tweak some high profile trade policy details, like adding strong protections for workers and for the environment to trade agreements.

Nonetheless, if Obama wants to be a transformational leader, rather than simply play one on TV – and perhaps if he wants to save his presidency in the process – when he does address trade policy, he might deliver a no-nonsense, tough-love, boundary-breaking address that would go something like this:

My fellow Americans: It’s time to talk about a subject that’s been flying under our country’s radar screen for too long, but that needs much more attention. That subject is international trade policy, and some of that neglect has been my fault.

When I began my presidential campaign, I knew how controversial and unpopular our trade policies had become – especially with lower and middle-income Americans. But the economy was growing and the dangers claimed by critics seemed far from obvious. So I emphasized responding to longstanding discrete complaints about specific trade deals while preserving the essentials of a strategy that seemed beneficial overall.

The economic crisis’ outbreak revealed the folly of this position. But along with the rest of Washington, I balked at recognizing that this trade strategy deserves much blame for turning our economy and the global economy into a disastrous accident just waiting to happen.

American trade policies encouraged too little domestic production and too much outsourcing. They promoted too little exporting and too much importing. As a result, for decades, we have recklessly consumed far more than we have produced. Unfortunately, our trade partners were just as reckless. Although they invested and produced robustly, their growth strategies relied too heavily on exporting to a U.S. market they kept subsidizing with their trade profits. We fooled ourselves into thinking that creating debt could substitute for creating wealth. And the easy money they provided sustained this illusion – until the consequent credit bubble began bursting two summers ago.

But wrongheaded trade policies not only helped trigger the ongoing recession. They wrought economic changes that are neutralizing the standard economic policy cures. That’s why real growth and employment – meaning private sector growth and employment – has been so hard to restore, despite record government stimulus. Worse, unless we tackle these issues of economic structure, and their trade policy origins, our current recovery plan could literally pauperize our economy for good.

Trade-induced change has sandbagged real recovery efforts mainly by making our economy so import-heavy. Here’s why this matters decisively. Two summers ago, much of the credit keeping our economy artificially afloat disappeared. With too few engines of real growth remaining, the country sank into the deepest recession in decades. So we have needed not only avoid another Great Depression while repaying massive debts. We must also recreate the conditions for healthy growth.

Meeting any one of these challenges will be tough enough. But meeting the “healthy growth challenge”– the key challenge – will be especially tough because so much of the wealth-creating part of our economy has been replaced by imports.

The experience of the Depression and simple logic tell us that neither belt-tightening nor boosting incomes alone is likely to work. Simply reducing consumption will produce poverty, not solvency, unless earnings rise. Moreover, if everyone cuts back and saves more, rather than spends, customers for any new production will become scarcer, and a real depression will become likelier. This predicament will worsen if much of the new earnings are devoted to paying down principle. In addition, America’s national debts are so astronomical that we can’t possibly earn our way out of penury unless our spending cuts are excruciatingly painful. True, the more income we generate, the less austerity we’ll need. Yet thanks to our trade policy mismanagement and resulting deficits and debts, never have we been so deep in the red.

The Depression convinced most economists that government can and should create the new demand needed to avert major downturns and restore real economic health. Some mix of more spending and bigger tax cuts would offset slumping consumer and business purchases until enough confidence returned to generate new private sector spending and real growth. And that’s what my administration and my predecessors have concentrated on so far.

But this conventional wisdom – including my administration – has ignored how heavily this approach depends on the U.S. economy supplying practically all its own needs – as was the case during the Depression and for decades afterwards. Government stimulus would create private sector growth because consumers would buy goods and services overwhelmingly made in the United States. The factories winning their business would be located in the United States. The new machinery and equipment they would buy would be American-made. The new workers they would hire would be Americans; they would spend their new wages on domestic output, and so on.

This logic naturally extended to finance, too. Americans would spend their easier money on those same American-made goods and services, promoting new growth at home and that same virtuous cycle.

Trouble is, our recent trade policies have boosted imports high enough to shred these assumptions. The latest official figures – which are two years out of date – show that 27 percent of the manufactured goods we buy come from abroad. And the percentages are many times higher for numerous consumer goods categories, like apparel (83 percent), and computer and electronics products (more than 52 percent). These trends, however, also increasingly extend to capital goods and industrial supplies, like machine tools, construction equipment, and chemicals. The levels are much lower in agriculture and services, but the upwards trends are the same.

So when we policymakers press on the economy’s gas pedal and apply more stimulus, we get just as much spending as before, but not nearly as much domestic output – and certainly not enough to pay off our debts without extreme belt-tightening. Worse, unless this new structure of our economy changes, too much new growth will also reinvigorate import flows and increase our trade deficits and national debts still further.

Similar structural issues are undermining internationally oriented crisis responses, too. Some Americans believe that exports can solve many of our problems – that foreign consumers can fill much of the demand gap American consumers in particular have been creating. But our trade partners were reluctant enough to Buy American in good times. Why would they become more willing in bad times? In fact, for all the talk about resurgent U.S. protectionism, new trade barriers abroad are sprouting much faster – and from much higher bases. And although our trade deficit is down in recent years, our net exports are not up nearly enough to produce adequate domestic growth.

This means that our trade partners must change the structures of their economies, and become less export-obsessed and more import-friendly, at least when it comes to the U.S. economy. If they don’t, their stimulus programs won’t greatly reduce the U.S.-centered global trade and financial imbalances that led to the crisis. In fact, they could well recreate these balances at higher levels, and inflate a new, bigger, and more dangerous global bubble.

If our trade partners won’t change, I will have no choice but to use trade policy decisively to escape the policy trap created by trade policy mismanagement. U.S. policy will create the new customers needed by American producers to enable greater U.S. spending to boost needed output and genuine growth, not imports and deficits. We will do so, however, not by pursuing the false promise of big new export markets but by encouraging the replacement of our imports with domestically produced goods and services. As our trade partners know, Buy American requirements for huge government procurement markets can help tremendously – that’s why they’re so alarmed by them. But many other policy tools are available, and I will not hesitate to use them.

Our trade partners will no doubt keep squawking, but since they’re still dropping the restructuring ball, these new measures will ultimately benefit them, too. After all, the U.S. market is the goose that’s laid most of their golden eggs. It’s why their export-led strategies worked. If debts and deficits sink it, they’re sunk, too.

Tragically, the recession is so deep, and the global economy still so lopsided, that there are no pain-free roads to recovery. Americans will bear their fair share of the necessary sacrifices, but no more.

Moreover, time is short. If our trade partners don’t make the necessary changes soon, the vicious cycles fueling the current slump could create years of genuine depression.

Still, I know how hard big changes are to make. And in fairness, my presidential predecessors never stated clearly or forcefully enough that our trade partners bear responsibility for global prosperity as well. So I will delay a full-court press to reduce unilaterally America’s deficits and the global imbalances until year end. But if no substantial signs of progress appear by then, America will begin leading again – and immediately.

Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council Educational Foundation in Washington, D.C. A contributor to the Council’s AmericanEconomicAlert.org website, he is also a consultant to CNN anchor Lou Dobbs and the author of The Race to the Bottom (Westview Press, 2000). The views expressed here are his own.