Financial Resource

U.S. Trade Policy and Declining Manufacturing: Where do we go from here?

Paul Crist, August 14, 2010 

The U.S. economy and the manufacturing sector in particular, face both short-term and long-term challenges.  There is debate about whether government can or should play a role in addressing those challenges, and if so, what are the fiscal, industrial, regulatory, and trade policies that would benefit the stakeholders, which essentially include all U.S. citizens in one way or another.

I should acknowledge at the outset a bias toward thoughtfully considered government interventions to guide the economy and trade in ways that benefit American workers and allow them to participate in the gains that accrue from their labor.  There are economic reasons for my bias that have nothing to do with either socialist or altruistic impulse.  That bias in no way means that I favor protectionism or a retreat from global trade, or that government intervention in the economy is always desirable, but there are, I believe, issues and stakeholders that get too little consideration and solutions to structural economic problems that are given short shrift in the name of conservative ideological orthodoxy.

There is ample evidence that without adequate and well-designed regulatory intervention in domestic and global markets, capital and political power tends to migrate upward and become concentrated at the top of the economic ladder. We see that phenomenon in country after country, most recently in the U.S.  Concentrated wealth becomes problematic when it undermines social cohesion and a sense of shared purpose. 

The wealth/income gap is at the core of social and political stress and instability in most developing countries, and the U.S. is now experiencing the pangs of disequilibrium once confined to so-called “poor” countries. 

As inequality increases, it can begin to undermine demand for goods and services.  The wealthy may consume a great deal, but there are simply not enough of them to maintain aggregate domestic or global demand.  Further, at the extreme, even those at the top may suffer negative economic effects if insufficient demand results in their capital being inefficiently allocated to producing goods and services, assuming international markets are not soaking up domestic demand shortfalls. 

Despite what conventional trade and economic theories suggest, there are benefits to large countries in maintaining a diverse economic base that includes a broad manufacturing sector.  Not everyone in a large country is suited to higher education and high-skill employment.  The alternatives for non-college-educated workers ought to go beyond low-paid service sector jobs.  Comparative advantage theory may be great on paper, but societies have more complex goals that trade theory alone cannot address. 

Comparative advantage may also have lost some of its relevance in a highly globalized world where the factors of production, labor, capital, goods, services, and information can cross national borders quickly and easily.

There are always losers and winners when countries move toward free trade. That part of the theory seems enduring.  But decades of evidence worldwide make clear that the political will to compensate the losers rarely if ever exists, despite the fact that the gains to the winners are more than adequate to do so. Most economists acknowledge that trade has played a significant role in the increasing income inequality which has characterized the past two decades in the U.S. 

Increasing “financialization,”[1] accompanied by declining industrial output in large, mature empire economies has also, I believe, played a historical role in their decline.

So there are political and economic factors that support arguments for thoughtful trade management and interventions, in order to preserve economic sustainability, diversity, and an efficient distribution of income and wealth that enhances a well-functioning capitalist system.

Finally, my firm opinion is that global trade, as practiced today, inadequately accounts for the power of large, multinational corporations whose allegiance is to shareholders (the owners of capital) regardless of where the headquarters office is domiciled.  U.S. trade in particular is characterized by labor and environmental arbitrage by U.S.-based multinationals with no real national allegiance.  Political leaders who routinely support globalization without questioning the motives of multinational players are either corrupted by their influence, or insufficiently versed in the current realities of international trade flows between the U.S. and its major trading partners.

On the question of government intervention in the economy, I take issue with so-called “free market conservatives”[2] who oppose what they see as government meddling in private sector investment, production, and decision making. “Free market” and small government ideology has dominated American policy for a generation.  The resulted has been a broad retreat from worker and environmental protections and benefits; an enormous increase in the income gap; disastrous consequences in the financial sector that plunged the world into the worst economic recession since the 1930’s; and a less diverse and more fragile economy than we had in the postwar era.

Domestic industrial production and employment has continued a long decline, even as industrial sector deregulation accelerated and unionization plummeted. Deregulation and lax oversight of the financial sector contributed to financialization of the U.S. economy in recent years. The development and trade in complex financial instruments helped the financial sector grow substantially as a percentage of GDP.[3]  And in due course, the casino mentality on Wall Street, combined with monetary and housing sector policies that were furiously trying to prop up consumer spending as wage growth stagnated, resulted in the current deep economic downturn.

There is an inadequate sense of urgency to seek equitable solutions to the structural problems confronting the U.S. economy.  The gutting and outsourcing of regulatory oversight in many U.S. economic sectors led to environmental degradation and worker exploitation (both of which have long-term costs not apparent on annual corporate balance sheets).  A broken immigration policy has served the economic interests of politically influential business sectors while sewing social, economic, and cultural divisions. Tax, monetary, and trade policies have favored the richest and most politically powerful Americans, exacerbating the growing income and wealth gaps while putting middle class workers under increasing pressure (and this has in turn put more price pressure on multinational firms, forcing them to be peripatetic searchers of ever-cheaper labor, and further exacerbated already large trade imbalances).  Political posturing on all these issues must give way to unified, strong leadership. 

Given this extensive list of complex economic and trade issues, what are the policy prescriptions that might best revitalize American capitalism?  All of these issues are deeply interrelated, and it would take a book to adequately deal with all of the important questions.  But it is possible to identify a few specific areas where change could have profound and lasting positive effects.

U.S. Trade Policies Have Failed American Workers and Led to Structural Imbalances in the Economy

Trade policy and trade agreements are rightly a prime target for criticism: manufacturing competition from low-wage, low-regulation countries is unfair to U.S. workers, exploitive of foreign workers and labor migrants, and injurious to the global and local environment. 

Solutions to reviving the U.S. economy in ways that benefit working Americans and stimulate environmentally benign industrial production involve more than trade policy, but trade policy has played a central role in creating the problems we now face, and a refocusing of  trade policies can also play a central role in renewal.

Growing trade deficits since the 1980’s have been associated with declining real wages, especially for non-college educated Americans that make up nearly 2/3 of the workforce. Manufacturing sector workers have been shifting to lower-wage service sector jobs, in retail, healthcare, and other low-skilled services as manufacturing jobs migrated overseas. 

To keep consumer demand buoyant as wages stagnated, ever greater downward pressure was put on prices, driving demands from U.S. multinationals for new bilateral and multilateral agreements that opened investment and trade access to low wage, low production cost countries.  Initially, production offshoring was confined to low-skill, low technology sectors, but over time, more technology intensive manufacturing has followed the march overseas.  

Of the top eight trade deficit industries, the second largest deficit after oil & natural gas is in motor vehicles and parts, which is not a low-technology industry by most measures. There are also large deficits in computers, office machines and parts; in steel and alloys; and in televisions and other electronic equipment.  Only three of the top eight trade deficit industries (apparel, leather goods, and toys) are in categories usually considered by economists to be low-technology. 

Meanwhile, the total surpluses produced in our top eight net surplus industries have on average amounted to less than half of the deficits of the top eight net deficit industries in recent years.  And while most of our top eight surplus industries involve high technology production, three are in the (sometimes subsidized) commodity sector: agricultural grains, meat packing products, and

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