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

Written by admin on May 14th, 2011

cigarettes.  These sectors do not generate many high-wage jobs.

In several of the net surplus industries that do involve high technology and high wage production (aircraft, chemicals, construction machinery, scientific instruments, and engines and turbines) there has not been sustained growth since the late 1990’s. Further, the U.S. is also an importer in all of the high technology industries where we manage to maintain a surplus.  Other countries are rapidly expanding their capabilities in these sectors.  How long will the U.S. maintain surpluses even in high technology production without fundamental changes in policy?

The scale up in foreign countries of auto, aerospace, energy, biotechnology, and other high technology industries provide evidence of longer-term workforce benefits to maintaining low and medium-skilled manufacturing jobs.  At least some of those workers will, over time, acquire the skill and training required for higher-skilled manufacturing jobs and engineering innovation. 

Highly productive human capital is the result of many things, including an effective education system, good public health, and continuing skills development…the benefits usually associated with economic development. Thus, it may be no coincidence that even U.S. manufacturers in high technology sectors are increasingly relying on imported labor to meet U.S. based manufacturing workforce needs.  After all, we’ve been exporting the low and medium skilled jobs that are the training ground required to meet the workforce demands of our own high technology sectors.  And immigrant workers, even highly skilled, are often willing to work for lower wages in return for U.S. employment.

Globalization has accomplished the goal of lower consumer prices, but the long-term economic consequences of cheap imports and stagnant domestic wages in an increasingly service-oriented economy has begun to become clear.  When wages eventually fail to sufficiently support domestic consumption, even in the face of cheaper prices, economic contraction is inevitable. Consumers can only use the equity in their homes as an ATM for so long.  And if exchange rates and trade agreements hamper exports, the contraction in consumption coupled with trade deficits present a complex dilemma for policymakers. 

To be sure, America has enjoyed substantial aggregate gains from growing trade.  Overall, U.S. GDP growth has been moderate to strong right through mid 2008.  And it may yet resume post recession.  But the benefits of that growth have not been shared with American workers, and the current downturn has exposed deep structural challenges to our economy. 

The time has come to re-think our approach to global trade and the economy on many levels.  In some cases, renegotiation of key portions of existing agreements is called for.  Fortunately, growing political pressure for change is limiting further expansion of trade policies that have cost an estimated 1 million manufacturing jobs during the past decade.  There is an emerging consensus that the U.S. needs to take definitive steps to rebuild a domestic manufacturing base, to address the problem of wage disparities, and to take steps to level the global trade playing field.


Exchange Rates, Trade Barriers, and the Dollar as Global Reserve Currency

Exacerbating the challenges resulting from U.S. trade policies of the past several decades are complex trade barriers, export-led growth policies among key U.S. trading partners, and a global currency architecture that is unfavorable to U.S. exports. 

There is little argument among economists that China manages renminbi exchange rates to promote exports and limit imports.  But exchange rate controls are just one of many forms of non-tariff barriers to imports and export-led growth policies pursued by China.  With China trade accounting for about three-quarters of the total U.S. non-oil goods trade deficit, China should be the primary focus for U.S. efforts to right trade imbalances.  But progress will not be easy.

The Chinese government announced recently that it would allow its currency to fluctuate slightly, but there is no concrete evidence of progress.  Between the June announcement and August 2010, the currency only appreciated by about 1 percent. Despite lack of progress, the U.S. Treasury Department declined to designate China as a currency manipulator.  With the renminbi undervalued by as much as 40% according to some analysts, U.S. manufacturers and workers are paying a steep price for Chinese intransigence on this issue.

A number of bills to deal with Chinese currency manipulation are pending in congress, in the absence of firm action from the Obama administration.  These include the Currency Exchange Rate Oversight Reform Act of 2010 in the Senate (18 cosponsors); and the Currency Reform for Fair Trade Act in the House (133 cosponsors).  Both bills are in committee, with passage still uncertain.  Many Members consider trade issues to be under the purview of the Executive, with Senate ratification of trade agreements.  But several trade deals remain pending in the Senate, owing to growing anxiety over many trade issues including Chinese currency manipulation.

The large portfolio of U.S. government securities held by China complicate the relationship, but for the foreseeable future, China will rely on access to U.S. markets as much (and perhaps more) as the U.S. relies on China to buy U.S. debt.  The relationship is not as asymmetrical as some fear.  Chinese leaders have their own challenges with development, and rely on high rates of economic growth to maintain political support.

Chinese government control over economic resources and activities, particularly in the banking sector, have also helped China to pursue and export-led growth strategy.  Where a banking system is controlled or heavily directed by the state, national savings can be assembled and funneled into development and infrastructure that either directly or indirectly supports an export led national policy. 

China is not the first country to pursue growth using government control over banking and financial decision making.  Germany pioneered the model in the late 19th century, and many of the East Asian countries have done the same thing in the 20th century. Over time, these other countries decided they needed to move beyond that model in order to promote economic diversification, and China may yet follow that same path over time.  But for now, government control is an important driver of China’s export led growth policy.

Related to, but quite different from, government control and decision-making is the issue of trade barriers driven by private sector exclusionary policies toward imports.  Japan has its Keiretsu and South Korea has Chaebol.  Both are systems of interwoven banking, business, and management relationships within different companies or subsidiaries.  These are closed systems that favor transactions within and between members, keeping outsiders out even when outside players are competitive.  Chinese private-sector business practices and trade policies, in many ways, are modeled on those of Japan and South Korea.  But at its most extreme, the U.S.-Japan trade imbalance never exceeded a three-to-one ratio.  U.S. imports from China exceed exports by five times.

The Chinese government has also been remarkably good at using pilot projects to speed development, and this, too has benefited its export industries.  China is able to try laws and policies out in one city or to invest in an innovative manufacturing process in one place, and then pick what works for promotion elsewhere (often called “picking winners”).  Few other political systems work in that way, but in China it is very easy to do.  It has led to uneven development across China, but has allowed for rapid development and scale up from low and medium skill manufacturing to now competing globally in higher-technology sectors.[4]

China is not alone in its effective protectionism and use of non-tariff barriers to U.S. exports.  Subsidizing domestic producers, minimum import pricing, advertising restrictions, import licensing requirements, rebates of domestic taxes to exporters, and many other barriers are added to the more obvious trade barriers engaged in by many countries.  But China is the leader in promoting exports and blocking imports, especially in its trade relations with the U.S. 

Returning to the general theme of currency valuations on trade competitiveness, the effects of a global currency architecture that keeps the dollar overvalued cannot be overestimated.  As long as the U.S. dollar remains the global reserve currency, strong demand for dollars will keep the value at a level that makes U.S. exports uncompetitive on global markets.  By most measures, the dollar is now at least 10% overvalued.

There are a number of potential ways to address exchange rates that negatively affect U.S. manufacturing (both over-valuation of the dollar and volatility). One option would be an orderly shift toward a new reserve currency system based on the IMF’s special drawing rights (SDRs).  SDRs are denominated in dollars, but the nominal value is based on a basket of major currencies, including Japanese yen, U.S. dollars, Euros, and British pounds.  The concept could be expanded to include other currencies, not least the Chinese renminbi.  The shift, implemented over time and in coordination with international partners, would be a positive long-term solution to excess global demand for U.S. dollars. 

Such a shift would necessarily be measured and not without challenges.  At present, SDRs make up only about 4%of global reserves, and to become the principal reserve asset, the supply would have to grow tremendously, to about

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