savingusmanufacturing.com

When I give my presentation on “Why Should we Save American Manufacturing and What can I do?” I am often asked if unions drove manufacturing offshore.   My answer is “not in general.”  This answer elicits disbelief so I briefly explain the reality.  This article will explain my answer in more detail and consider the real reasons why manufacturing in the United States has gone offshore.

First of all, unions only represent about seven percent of the private sector workforce today, down from 12 percent in 2007.  At the peak in 1945, nearly 36 percent of American workers were represented by unions in the private sector workforce.  Now, 36 percent of national union membership is comprised of public sector workers; in other words, people who work for local, state, and federal government directly or indirectly for government-funded agencies.

Second, the first industries to set up manufacturing offshore were not unionized – electronic component and toy manufacturers.  I’ve worked in San Diego’s electronics and manufacturing industry since I was 18 years old, and I never worked for a company that was unionized.  In fact, at the most there were only a dozen or so companies that were unionized, and at the present time, I only know of two companies that are unionized – General Dynamics NASSCO (shipbuilding) and Caterpillar’s Solar Turbines (gas turbine engines, compressors, and power generator sets).

California’s high technology industry in Silicon Valley was never unionized, and virtually all of California’s technology-based manufacturing industry is not unionized.  The only union that still has any significant membership in California’s manufacturing industry is the International Association of Machinists & Aerospace Workers, and its membership has dropped dramatically in the past 20 years.

The search for lower cost areas for manufacturing isn’t something new.  Sixty years ago, northern and New England companies started moving manufacturing to the southern states.   Why did these companies move?  First, because southern states were “right to work” states; in other words, not unionized, so wages were lower.  Second, there were less burdensome government and environmental regulations in these states in the years before the establishment of the national Environmental Protection Agency and OSHA.  And third, most of the southern states had lower personal and corporate tax rates than the northeast states.

Thirty years ago, manufacturers, particularly West Coast manufacturers, started moving high-volume production to Hong Kong, Singapore, and the Philippines for the same reasons – lower wages, less government regulations, and far less stringent environmental regulations.  About the same time, manufacturers set up assembly and manufacturing in Mexico in maquiladoras to produce goods for the U.S. and world markets for all of the same reasons.

The next area for lower cost manufacturing was Asia, predominantly China and India.  At first, U. S. manufacturers outsourced specific parts and components of products with offshore vendors.  Then, they outsourced whole product lines to offshore vendors, and finally they built their own manufacturing plants in China after the Chinese government’s policies changed to allow private ownership of companies and foreign investment.

The difference between sourcing in foreign countries such as Hong Kong, Singapore, the Philippines, and Mexico is that the manufacturing facilities in those countries have been either manufacturing plants owned by U.S. companies or owned by private entrepreneurs of the particular country and were not companies owned all or in part by their government as was the case initially when manufacturing was set up in China.

In my opinion, the main reasons why U. S. companies have offshored manufacturing are:

• Lower labor costs
• Few or no environmental regulations
• Less government regulation on building construction and operations
• Lower taxes
• Global “free trade” mentality

The benefits of the first two are eroding as wages increase in China and other foreign countries and environmental laws are passed and starting to be enforced.  A good understanding of the Total Cost of Ownership about which I have written previously and which is now quantified by Harry Moser’s Total Cost of Ownership worksheet calculator for the Reshoring Initiative will help bring some manufacturing back to the U. S. from offshore.

What I call the global economy mentality is even starting to be questioned, although there have been key people in the past 20 years that have been warning of its perils.

The late Sir James Goldsmith, a billionaire international business leader, wrote two books, The Trap (1993) and The Response (1995) warning of the perils of globalism.  He even gave a speech to the U. S. Senate in 1994 warning of the perils of globalism.  He “predicted that the working and middle classes in the United States and Europe would be ruined by the greed of Wall Street and corporations, who would boost corporate earnings by replacing their domestic work forces with foreign labor, which could be paid a fraction of labor’s productivity as a result of the foreign country’s low living standard and large excess supply of labor.”

Roger Milliken, who led Milliken & Company for 71 years, during which it grew to become the world’s largest privately owned textile and chemical manufacturer, shared the same opinion.  One of the last in the tradition of those great industrialists who built America’s manufacturing success; he believed that America’s manufacturing leadership was the foundation of his nation’s economic achievement.

Ralph Gomory, an American applied mathematician, former IBM executive, and president of the Alfred P. Sloan Foundation for 18 year, has written extensively on the nature of technology development, industrial competitiveness, models of international trade, and the function of the corporation in a globalizing world.  In 2007, he became president emeritus and joined the Stern School of Business at New York University as a research professor.  He currently focuses his work on addressing the increasing complexities of the globalized economy and the differing goals of countries and companies.  In his 2001 book, Global Trade and Conflicting National Interests, co-written with Professor William Baumol, Gomory wrote, “A country that ends up producing little value will have little to consume at home and little to trade abroad, and will have a low standard of living.”  The book also presents the idea that the free trade theory of “comparative advantage” of David Ricardo was merely a special case, not a general theory.  Mr. Gomory’s books and papers have contributed to shaping the national argument on the roles and responsibilities of American corporations in the modern American economy.

Another person of like mind is Paul Craig Roberts, an American economist and columnist for Creators Syndicate who served as an Assistant Secretary of the Treasury in the Reagan Administration and earned fame as a co-founder of “Reaganomics.”  He is a former editor and columnist for the Wall Street Journal, Business Week, and Scripps Howard News Service.  He has written or co-written eight books, contributed chapters to numerous books and has published many articles in journals of scholarship.

In an opinion article in the June 20, 2011 issue of Manufacturing & Technology News, he said, “Anytime there is an excess supply of labor, or the ability of corporations to pay labor less than its productivity, the corporations bank the difference, share prices rise, and Wall Street and shareholders are happy.”

In this article, Mr. Roberts comments on the key points made by Nobel prize winning economist, Professor Michael Spence, and Sandile Hlatshwayo, a researcher at New York University, in their report “The Evolving Structure of the American Economy and the Employment Challenge,” published by the Council on Foreign Relations.

Mr. Roberts writes that Spence and Hlatshwayo use data from the Bureau of Labor Statistics and the Bureau of Economic Analysis to show that “U. S. industries are separated into internationally tradable and non-tradable components.”  Non-tradable goods and services cannot be offshored or produced in locations distant from their market, and government and health care have become the largest employers in the past 20 years.  Tradable jobs produce goods and services that can be produced in locations distant from their markets and can be exported.   This has resulted in “the adverse movements in the distribution of U. S. income over the past 20 years, particularly in the middle of the income range…The evolution of the U. S. economy supports the notion of there being a long-term structural challenge with respect to the quantity and quality of employment opportunities in the United States “

Jobs paying the $20 per hour that have historically enabled American wage earners to support a middle-class standard of living are leaving the U. S.  Only 16 percent of today’s workers earn the $20 per hour baseline wage, down 60 percent since 1979.

This is expected to get worse according to the U. S. Department of Labor Occupational Outlook for 2006-2016 in which the prediction in 2006 was that 70 percent of the jobs created between 2006 and 2016 would be service jobs, paying low to very low wages.  Of course, this report was written before the start of the Great Recession, and we’ve lost another one and a half million manufacturing jobs since then.

State employment data released on July 22, 2011 by the Bureau of Labor Statistics mirrors national patterns of the past two months.  American workers continue to pay a staggering price for the lack of concerted action to create jobs for the millions who are unemployed.  In June, 19 states and the District of Columbia continued to have unemployment rates of 9.0% or higher, and seven states and Washington, D. C. continued to have rates of 10.0% or more.  Ten states and D. C. have lost jobs since June 2010, even though the economy has technically been experiencing a recovery.

In a meeting on June 13, 2011, the Jobs and Competitiveness Council, headed by General Electric CEO Jeffrey Immelt, told President Obama that there isn’t so much a shortage of jobs, but a shortage of trained workers, engineers, and skilled foreign immigrants to fill jobs that may exist.  Their answer for the manufacturing industry that has lost 5.5 million jobs in the past decade is to increase training of CNC machining and advanced production.  While I agree that there is a shortage of CNC machinists, their plan would only generate a grand total of 2,000 jobs in the first year, and 4,000 jobs in the second year.  This is nothing compared to the 21 million jobs we need to get to full employment.

Another suggestion of the Council was to increase immigration of foreigners with graduate degrees and PhDs so they could quickly receive Green Cards.  Tell that to the millions of highly educated technicians and engineers that remain unemployed at the same time foreigners on HB-1 and I-1 visas are filling many of the jobs that remain within the United States.   There was no discussion on how to create more jobs for American engineers, computer scientists, programmers and other technology specialists who are currently unemployed.

It’s frustrating that many experts say that education is the answer to the unemployment crisis.  I’ve never known so many highly educated General Managers, Operations Managers, Vice Presidents, CFOs and even CEOs that are unable to find jobs in San Diego’s high technology manufacturing industries.  The last thing these people need is more education.   What they need are more companies willing to hire a person with the education and experience that puts them in a higher salary bracket.

One of the most useful recommendations of the Council was that the federal tax code be changed to allow training of advanced manufacturing workers to be a depreciable expense under Section 179 of the tax code.  This would help manufacturers train their workers in the concepts and tools of lean manufacturing and Six Sigma, which is one of the best ways for U. S. manufacturers to be more competitive in the global economy without having to offshore their manufacturing.

Reshoring American manufacturing will bring back more jobs than any training programs could possibly do and create more American made products for export, which will reduce our trade deficits.

The Korea Free Trade Agreement (KORUS) was first signed on June 30, 2007, with a renegotiated version signed in early December 4, 2010.  However, the agreement has not yet been ratified by the United States Congress or the National Assembly of South Korea and thus has not become in force.

After being stalled for more than four years, the treaty is once again being considered in Congress, and supporters had hoped it would be ratified shortly after many of the objections has been addressed in the renegotiated version.

The original negotiations were conducted under the trade promotion authority (TPA), also called fast-track trade authority, which Congress granted the President under the Bipartisan Trade Promotion Act of 2002. (P.L. 107-210).  The authority allowed the President to enter into trade agreements that receive expedited congressional consideration with no amendments and limited debate.  The fast-track trade authority under TPA expired on July 1, 2007 and has not been renewed.

The December 2010 deal represented a compromise between the two sides.  Significant concessions were granted to the U.S. on trade in automobiles: tariff reductions for Korean automobiles were delayed for five years, and U.S. autos were granted broader access to the Korean market. At the same time, the negotiators agreed to set aside disagreements over U.S. beef exports for the time being.

The agreement would eventually eliminate tariffs between the two countries. Because those levies are typically higher on the South Korean side, administration officials estimate the deal could mean more than $10 billion annually in increased U.S. exports to Seoul and tens of thousands of new U.S. jobs. South Koreans say they would benefit from lower prices — some tariffs on food imports from the U.S. are as high as 40 percent — and a more efficient flow of investment in and out of their country.

The deal was supported by Ford Motor Company, as well as the United Auto Workers, both of which had previously opposed the agreement.  With widespread support from both Democrats and Republicans in Congress, the Obama administration expected approval in both houses to be easy.

However, on Thursday, June 30, 2011, several Senate Republicans boycotted a preliminary hearing on free trade agreements with South Korea, Colombia and Panama by staging a simultaneous press conference and bringing the stop-and-go process to yet another halt.

While Republican senators stood before television cameras to declare that they would not allow a hearing on legislation that much of their own base strongly supports, Democratic senators filled half a hearing room to declare their support for trade deals opposed by much of their party’s political base.

Senator Orrin Hatch, the ranking Republican on the Finance Committee, said Republicans were responding to a decision by the White House to include in the free trade legislation the expansion of a benefits program for workers who lose jobs to foreign competition, known as Trade Adjustment Assistance (TAA).  During the portion of the press conference I heard, Republicans stated that part of the funds to provide TAA would come from a $400 million cut to Medicare funding for “imaging” for seniors such as MRIs, Cat scans, etc., and they objected to taking this funding from Medicare to partially fund TAA.

Senate Republicans had not been included in a deal with House Republicans and Senate Democrats over the terms of the benefits program.  An expansion of TAA passed by Democrats in 2009 expired at the beginning of this year, and the deal would reinstate about 60 percent of the lapsed financing ($964 million) for an additional two years.  Democrats had demanded the deal as a condition of their support for the trade agreements.  House Republicans had agreed after several weeks of negotiations.

It seems to me that the fight over Trade-Adjustment Assistance is a tacit admission by both sides that this treaty will put more American on the unemployment rolls; i.e., Republicans would not oppose it unless they felt displaced workers would use it and Democrats would not support it unless they felt displaced workers would use it.   Historically, trade agreements do displace workers, and the effects of other trade agreements have shown that more American jobs are lost than gained.

Just before the Senate Finance Committee convened Thursday afternoon to consider the legislation, the Republican members invoked Senate rules to prevent the meeting.  After all the Democrats spoke, they got up and left.  Senator Orrin Hatch said, “We made it clear time and time and time again that we would not stomach attaching a big government spending program onto these agreements.  “The president knew where we stood, and he decided to ignore those who don’t agree with him.”

The Obama administration planned to submit that deal as part of KORUS to give Democrats the assurance that it will rise or fall with the agreement.  House Republicans say they will hold separate votes on the trade pact and the benefits program.  Because Senate Republicans lack the power to set the terms of debate, they said that their actions were an assertion of the rights of the minority party to be heard and respected.  Republicans cannot prevent the legislation from leaving the committee, but they can delay it.

This delay is a good time to reconsider whether KORUS and the other pending trade agreements with Panama and Chile should be ratified by Congress.   The fundamental dispute is over free trade itself. Presidents Bill Clinton and George W. Bush aggressively promoted it, while President Obama promised more protection for American workers in future agreements when he was a candidate.

The appeal of free trade has waned amid large U.S. trade deficits and concerns that more American manufacturing jobs will disappear overseas at a time when unemployment remains stuck above nine percent

The mistake many people make is lumping free trade, free enterprise, and free markets together, whereas each has its own specific meaning. In simple terms, free trade allows faster and more business between two countries/regions by agreeing to lift tariffs, quotas, special fees and taxes, and other barriers to trade between the two entities.  Free enterprise is the freedom a company has to select the headquarters and manufacturing locations to make its product as inexpensively as it can, regardless of where that might be, in order to enjoy continued profitability and remain viable.  Of course, a company is subject to the laws of the country in which they are located.  A free market is a one in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts, relying on supply and demand.

The underlying economic theory of free trade agreements is that of “comparative advantage,” which originated in an 1817 book entitled “On the Principles of Political Economy and Taxation” by British political economist David Ricardo.  He postulated that in a free marketplace, each country/area will ultimately specialize in that activity where it has comparative advantage; i.e., natural resources, skilled artisans, agriculture-friendly weather, etc.  The result should be that all parties to the agreement should increase their income.  Unfortunately there are winners and losers if the “comparative advantage” of one country is unequal to the other.

Advocates of free trade argue that it is essential to our country’s growth and point out that the North American Free Trade Act (NAFTA) and other trade agreements have created more than 20 million jobs around the world since their passage.

Opponents to free trade argue that the U.S. has lost over six million jobs to offshore countries since 1994 when NAFTA was passed.  Furthermore, they make the point that American jobs are not being supported when we buy products that have been made offshore, and that the U.S. should not encourage and even facilitate its corporations to ship jobs out of the country.  They believe that manufacturing is the foundation of the U.S. economy and that American jobs must be protected from being outsourced to other countries.

The reality is that we don’t really have free trade – we have negotiated trade agreements in which the United States has gotten “the short end of the stick” in most cases.  Instead of free trade, I would say that we have “dumb” or “stupid” trade instead of free trade.  What we need is “smart” trade.

For example, over 150 countries have a value added tax (VAT), and the United States doesn’t have a VAT.  A VAT is a tax on consumption – as opposed to income, wealth, property or wages.   It is s a tax only on the “value added” to a product, material or service, from an accounting view, at every stage of its manufacture or distribution.  VATs are “border adjustable” and average about 17%.  This means that virtually all foreign countries tax our exports with their 17% VATs, when our goods cross into their country.   While those countries tax their domestic production as well, they rebate their VAT when their companies export.  This means that American imports to our trading partners are charged a VAT while we don’t charge a similar VAT on imports of their products to our country.   Thus, American companies are victims of unfair competition when trying to penetrate foreign markets.

VATs are the biggest trade problem for the U.S. globally.  Trade agreements do not address VATs when tariffs are lowered. The WTO allows VATs.  During the last 40 years, the U.S. has lowered tariffs, and other countries lowered tariffs.  However, other countries implemented and raised their VATs.  The net result is that other countries replaced tariffs with VATs, but the U.S. did not.  No trade barrier costs us more money.  Our exports are double taxed – once in the U.S. and once upon arrival at a foreign country’s shores.  Foreign sales to us are partially tax free.

In addition, U.S. opponents of the agreement argue it doesn’t do enough to benefit American industry while it gives South Korean businesses greater rights in the United States.  The organizations taking the lead in opposing KORUS are:  Coalition for a Prosperous America (CPA), Alliance for American Manufacturing, Economy in Crisis, and the    U. S. Business & Industry Council.

What’s missing in the list of organizations that oppose trade agreements is one that truly represents American workers, who will suffer the most from the effects of KORUS just as they have from past agreements.  Today, union membership only represents 12 percent of the private sector workforce, which means that 88 percent of private sector workers have no organization to voice their opinions on trade issues.  Many small businesses and industries that have been harmed by past trade agreements were never unionized, such as high technology companies making computers, electronics equipment, medical devices, and biotech products.  Thus, a supermajority of American workers have no way to voice their opinion collectively.

While all of the above organizations have similar reasons for opposing KORUS, CPA’s reasons include:

1. Trade deficits:  The trade agreement would cause worsening trade deficits.  Trade deficits depress GDP growth and increase unemployment because U.S. facilities are offshored or because components and subassemblies are procured offshore.  Any foreign market share achieved is overwhelmed by domestic market share ceded.
2. Job loss:  The trade agreement would cause job losses.  Government data shows no support for a net job gain argument.  Third party studies are in accord with the historical data that net job losses will result from this trade agreement.
3. Non-tariff barriers:  The trade agreement fails to address foreign non-tariff barrier tactics by trade rivals.  These non-tariff barriers eviscerate hoped-for U.S. net export gains from tariff reductions.  Currency manipulation, border adjustable taxes, state subsidies are prime examples.  South Korea is a known currency manipulator.  South Korea has a 10% value added tax that is charged to virtually all imports and can increase that import charge without restriction.  Like China, South Korea practices a form of state managed capitalism.  South Korea is not a “free trading nation,” and this agreement does not change that fact.  Any concessions by South Korea are easy to negate through its pre-existing non-tariff tactics.
4. Sovereignty Loss:  The U.S. will be handicapped in domestic trade law enforcement.  South Korea would have special rights in our trade law systems.  The U.S. will be prevented from enacting tough financial industry reform, despite the need shown in the Great Recession, under these agreements.  Further, hundreds foreign companies will be given special standing to challenge U.S. laws that are claimed to interfere with those companies’ investment expectations, in unaccountable foreign tribunals.
5. Gateway from China/Transshipment through Korea:  The South Korea trade agreement allows Chinese companies to produce 65% of a products’ value, with 35% Korean content, and still qualify for low tariff rates.  China is Korea’s largest trading partner and has proven particularly aggressive in routing its products through third countries to either avoid antidumping duties or to achieve lower tariff rates.  The volume of future Chinese transshipments should not be underestimated.
6. Food and product safety:  The U.S. border control, food safety and product safety agencies will be hampered in verifying that imported food and other products are safe.  The inspections of imported products are nearly non-existent.  Yet U.S. companies must fully comply with food and product safety rules.

On the other hand, the organizations and companies comprising the U.S.-Korea FTA Business Coalition that strongly supports Congressional approval of the U.S.-Korea Free Trade Agreement includes but is not limited to:  American Insurance Association, Boeing Company, Caterpillar, Inc., Chevron, Citigroup, Inc., Entertainment Industry Coalition for Free Trade, General Electric, Goldman Sachs, FedEx Express, Johnson & Johnson, Motion Picture Association of America, National Association of Manufacturers, National Cattlemen’s Beef Association, National Pork Producers Council, MetLife, Microsoft Corporation, Pfizer, Inc., QUALCOMM, Inc., Securities Industry & Financial Markets Association, SPI: The Plastics Industry Trade Association, Telecommunications Industry Association, Time Warner, U.S. Chamber of Commerce, U.S. Council for International Business, and UPS.

Notice that virtually all of the above private companies have a global presence so that I refer to them as multinational globalist companies.  While they may still be headquartered in the United States, they have worldwide locations and may even have re-incorporated in tax haven countries.  They no longer have an inherent loyalty to the United States as American companies; instead, their loyalty is to the bottom line of their profitability.

Thus, my answer to the question posed in the title is “No, Congress shouldn’t ratify the Korea Free Trade Agreement.”  If you agree with me in opposing its ratification, make your voice heard before it is too late.  Contact your congressional representative or Senator and express your opinion on the Korea Free Trade Agreement.   If you don’t know who your representative in Congress is, you can find out by typing in your zip code at http://www.congress.org/