Posts Tagged ‘trade deficit’

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Market Access Charge Would Eliminate Trade Deficit & Increase GDP

Tuesday, October 6th, 2020

In July 2017, the Coalition for a Prosperous America (CPA) released a paper titled, “The Threat of U.S. Dollar Overvaluation: How to Calculate True Exchange Rate Misalignment & How to Fix It” by Michael Stumo (CEO), Jeff Ferry (Research Director) and Dr. John R. Hansen, a 30-year veteran of the World Bank and Advisory Board member.

The purpose of the paper is to explain the problem of the dollar overvaluation, to show how to accurately calculate the dollar’s misalignment against trading partner currencies, and to propose a solution this serious threat to America’s future. At the time, the dollar was overvalued by 25.5% compared to other major currencies.

The solution developed by Dr. Hansen is a Market Access Charge (MAC) “as a system to discourage overseas private investors and return-sensitive official investors such as sovereign wealth fund managers from excessive speculation and trading in U.S. dollar assets.” He believed that the MAC would reduce “the incentive for foreigners to invest in dollars, gradually and safely reduce its overvaluation, benefiting the U.S. economy and restoring control over our own currency.”

In February 2019, CPA released the working paper, “Quantifying Economic Growth and Job Creation from a competitive Dollar,” showing that a 27 percent realignment in the trade weighted US dollar exchange rate over five years would eliminate the US trade deficit, result in an additional $1 trillion in GDP and create 5.2 million new jobs.

The MAC was proposed in a Senate bill introduced in July 2019, S.2357, titled the

“Competitive Dollar for Jobs and Prosperity Act.” It was introduced by Sen. Tammy Baldwin (D-WI) and Josh Hawley (R-MO), and is languishing in the Senate Committee on Banking, Housing, and Urban Affairs.

On October 5, 2020, CPA released a working paper, “Modeling the Effect of the Market Access Charge on Exchange Rates, Interest Rates and the US Economy,” by Steven L Byers, PhD. and Jeff Ferry.

In Section 1, The Relationship Between International Capital Flows and the Exchange Rate, the authors state that “The standard open-economy macroeconomic models2 predict that under a floating exchange rate regime, when a country runs a trade deficit/surplus, the exchange rate will adjust to eliminate the imbalance. However, exchange rates have not adjusted and imbalances have persisted. The US trade and current account deficits have continued to run at some 2%-3% of US GDP for decades (Figure 1), suggesting that other forces are preventing the deficits from correcting themselves.”

The authors go into detailed economic models that establish the relationship between equity inflows and the currency dollar exchange rate.

In Section 2, The MAC, Capital Flows and the Dollar Exchange Rate, the authors examined how a charge on capital inflows is likely to impact inflows and the exchange rate, focusing on the Market Access Charge (MAC) discussed above. The authors state: “The MAC would be a one-time fee paid on the purchase of any U.S. dollar financial asset by a foreign entity or individual. The MAC is designed to moderate foreign demand for dollar assets and realign the US dollar exchange rate to a trade-balancing level. The Baldwin-Hawley bill specifies that the Federal Reserve Board would set and manage the MAC to achieve current account balance within a five-year time horizon. Once balance was achieved, the Fed would manage the MAC to keep the US economy close to current account balance over time. “The Baldwin-Hawley bill specifies that the Federal Reserve Board would set and manage the MAC to achieve current account balance within a five-year time horizon. Once balance was achieved, the Fed would manage the MAC to keep the US economy close to current account balance over time.”

This section covers detailed economic models on how the MAC would affect different kinds of equity flows, such as bonds, Treasury notes

In Section 3, How the MAC Impacts Interest Rates, the authors “sought to estimate the impact of the MAC on the financial sector with a focus upon interest rates and government debt service costs.” They investigated and modeled the effect of a 1%, 3%, and 5% MAC on the nominal exchange rate, 10-year interest rates, and interest rate on outstanding Federal debt.

With regard to revenue the MAC would generate for the US Treasury, the authors comment, “Though the MAC would reduce capital inflows significantly, our model suggests that even with a 5% MAC, gross equity inflows would continue at a rate in excess of $3 trillion a quarter, with inflows into debt securities at similar levels. MAC transaction fees, paid by foreign purchasers of US securities, would provide a large new source of revenue to the US Treasury. Table 4 shows that these revenues could reach $672 billion, equivalent to 19% of last year’s total federal tax revenue.”

In Section 4, Effects on the Economy, the authors state: “…US producers of goods and services would gain market share in the US market and export markets. Our model estimates the impact of increased domestic production over the five-year period on US GDP and employment. In the case of a 5% MAC, the dollar’s exchange value would fall by 27…the more competitive dollar would balance trade, increasing exports by $765 billion or 29.5% over the baseline, and reducing imports by $167 billion (5.1%). The fall in imports is modest because while imports lose share in the domestic market, the rise in economic growth from the more competitive exchange rate boosts GDP, which leads to higher imports. But trade would be balanced. The GDP would rise by $1.01 trillion or 4.6%. Compared to the baseline forecast, the economy would create 4.9 million new jobs by 2025… the new jobs would be weighted towards internationally competitive sectors, notably manufacturing and natural resources, which offer higher pay (and often better benefit packages) than the average US job.”

The authors conclude that “The model shows large benefits to the US economy and the US. Treasury. Further study is warranted and should be pursued.”  I would go one step further and say that the Baldwin-Hawley “Competitive Dollar for Jobs and Prosperity Act.” (S. 2357) should be released out of committee as soon as possible to be debated and then passed in the full session of the Senate.  Reducing our trade deficit, increasing our GDP, and creating more higher paying manufacturing jobs are important actions to be taken to create prosperity in America.

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Baldwin-Hawley Act Would Fix Overvalued U.S. Currency Problem

Tuesday, September 3rd, 2019

The Baldwin-Hawley Senate Bill, S.2357, titled the “Competitive Dollar for Jobs and Prosperity Act” was introduced by Sen. Tammy Baldwin (D-WI) and Josh Hawley (R-MO) on July, 31, 2019. The purpose of the Bill is “To establish a national goal and mechanism to achieve a trade-balancing exchange rate for the United States dollar, to impose a market access charge on certain purchases of United States assets, and for other purposes.”

This Bill is the legislative vehicle for the Market Access Charge (MAC) first proposed in a paper titled, “The Threat of U.S. Dollar Overvaluation: How to Calculate True Exchange Rate Misalignment & How to Fix It” released on July 11, 2017 by the Coalition for a Prosperous America and written by Michael Stumo (CEO), Jeff Ferry (Research Director) and Dr. John R. Hansen, a former Economic Advisor for the World Bank, CPA Advisory Board member, and founding  Editor of Americans Backing a Competitive Dollar (ABCD).

The paper explained the problem of the dollar overvaluation, showed how to accurately calculate the dollar’s misalignment against trading partner currencies, and proposed a solution to this serious threat to America’s future by means of a Market Access Charge (MAC). Dr. Hansen’s proposal was “to initiate the MAC with a 0.5% charge “on any purchase of U.S. dollar financial assets by a foreign entity or individual…As a one-time charge, the MAC will discourage would-be short-term investors, many of whom hold dollars or dollar-denominated securities overnight or even for minutes for the sake of a tiny profit.

The MAC rate would operate on a sliding scale, geared to the value of the trade deficit as a percentage of GDP. The MAC tax would rise if the trade deficit rose, and fall as the trade deficit falls… Most importantly, the MAC would have a substantial impact on the dollar’s value, moving it gradually and safely to a trade-balancing exchange rate and keeping it there, regardless of what other countries do. If the trade deficit goes to zero, so would the MAC.”

In an email to supporters on August 13, 2019, Dr. Hansen wrote, “A major milestone has just been reached in the battle to kill the U.S. trade deficit, stop the offshoring of U.S. industry, and put millions of Americans to work at well-paying jobs…The bill’s presentation to the Senate is indeed a major milestone – but only one of many that lie between where we are today and the bill’s ultimate passage. You support and advice would be most welcome as the process moves forward.”

The Bill’s summary cites the following ”Findings” by Congress:

 “(1) The strength, vitality, and stability of the United States economy and, more broadly, the effectiveness of the global trading system are critically dependent on an international monetary regime of exchange rates that respond appropriately to eliminate persistent trade surpluses or deficits by adjusting to changes in global trade and capital flows.

(2) In recent decades, the United States dollar has become persistently overvalued, in relation to its equilibrium price, because of excessive foreign capital inflows from both public and private sources.

(3) Countries with persistent trade surpluses maintain or benefit from undervalued currencies over a long period of time. As a result, those countries overproduce, underconsume, and excessively rely on consumers in countries with persistent trade deficits for growth. Those countries also export their unemployment and underemployment to countries with persistent trade deficits.

(4) Countries with persistent trade deficits, including the United States, absorb the overproduction of countries with persistent trade surpluses, thereby reducing domestic wages, manufacturing output and employment, economic growth, and innovation.

(5) The United States possesses fiscal and monetary tools to pursue national economic goals for employment, production, investment, income, price stability, and productivity. However, exchange rates that do not adjust to balance international trade can frustrate the achievement of those goals. The United States does not have a tool to manage exchange rates in the national interest.”

The Bill defines a “United States asset” as “(i) a security, stock, bond, note, swap, loan, or other financial instrument—

(I) the face value of which is denominated in United States dollars;

(II) that is registered or located in the United States; or

(III) that is an obligation of a United States person;

(ii) real property located in the United States;

(iii) any ownership interest in an entity that is a United States person;

(iv) intellectual property owned by a United States person; and

(v) any other asset class or transaction identified by the Board of Governors of the Federal Reserve as trading in sufficient volume to cause a risk of upward pressure on the exchange rate of the United States dollar.

It excludes:  “(i) a good being exported from the United States; or (ii) currency or noninterest bearing deposits.”

In the above mentioned paper, Dr. Hansen proposed that the MAC to be “a 0.5% charge on any purchase of U.S. dollar financial assets by a foreign entity or individual…As a one-time charge, the MAC will discourage would-be short-term investors, many of whom hold dollars or dollar-denominated securities overnight or even for minutes for the sake of a tiny profit. The MAC rate would operate on a sliding scale, geared to the value of the trade deficit as a percentage of GDP. The MAC tax would rise if the trade deficit rose, and fall as the trade deficit falls…”

The Balwin-Hawyley Bill stipulates that “On and after the date that is 180 days after the date of the enactment of this Act, there shall be imposed a market access charge on each covered buyer in a covered transaction…The Board of Governors of the Federal Reserve System shall establish and adjust the rate of the market access charge at a rate that— (A) achieves a current account balance not later than 5 years after the date of the enactment of this Act; and (B) maintains a current account balance thereafter.”

However, under the “ALTERNATE INITIAL MARKET ACCESS CHARGE” clause, “If, on the date that is 180 days after the date of the enactment of this Act, the Board of Governors has not established the initial rate for the market access charge, the initial market access charge shall be established at the rate of 50 basis points of the value of a covered transaction.”

The bill concludes with a description of how the Market Access Charge should be charged, collected, and reported to the U.S. Treasury.

At the time of the CPA paper cited above, the “The U.S. dollar was calculated at 25.5% overvalued compared to itsFundamental Equilibrium Exchange Rate (FEER). However, in an article titled “Why We Need Baldwin-Hawley Currency Reform Now,” by Jeff Ferry, CPA Chief Economist, published on August 21, 2019, he writes that the Coalition for a Prosperous America estimates “the dollar is overvalued today by 27 percent.” He points out that” that an overvalued currency makes it harder for a nation’s exports to compete in world markets and easier for foreign imports to take share in its domestic market.”

Mr. Ferry explains that “…overvaluation undermines our industrial base, makes our agricultural goods less competitive and tilts the income distribution in favor of the top 10 percent. Instead of an economy built on production and employment, we get growth built on consumption and debt. In fact, the only sector that favors overvaluation is the financial sector, because it helps Wall Street bankers sell stocks and bonds around the world. On Wall Street they like to call overvaluation the ‘strong dollar.’”

He concludes by saying that “Voltaire said the world is like a giant watch: it runs automatically according to an internal mechanism. If one of the settings is wrong, the watch won’t run properly. Our economy is a huge $21 trillion watch. If an exchange rate is set too high, a national economy runs down. If an economy doesn’t invest enough in its own industry, it becomes less competitive…On the international side, the US economy has been underproducing and overconsuming for some 40 years and adjustments are needed. Right now, Baldwin-Hawley is the most crucial adjustment Congress could enact.”

As a sales representative for American manufacturers, I can testify that America’s manufacturing industry is hurt by the overvalued dollar.  It hurts the ability for American companies to export products that are competitive in the world marketplace. It even hurts the ability for American manufacturers to compete against the low prices of Chinese imports in the domestic market.  I firmly endorse the passage of this critically needed bill by Congress in this session to reduce the U.S. dollar’s overvaluation, discourage unwanted investment in the dollar, and significantly reduce America’s trade deficit.

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Steel and Aluminum Tariffs Will Help Rebuild American Manufacturing

Tuesday, May 22nd, 2018

There has been quite a furor in financial and political circles since President Trump announced the that he would impose tariffs on steel and aluminum imports from all countries.  There has been an outcry that it would raise consumer prices, end “free trade”, and start a trade war.  The fact is that we have been in a trade war with China for nearly 20 years — from when China was granted Most Favored Nation status (PNTR) in the year 2000 under President Bill Clinton. We have been losing this trade war, and it’s about time that we stood up and fought back.

China has been cheating on what they agreed to do to attain their PNTR status within the World Trade Organization.  They have dumped products in the U. S. at below market prices to destroy American competition. The Chinese government has subsidized their steel, aluminum, and other industries. They have manipulated their currency to make it undervalued compared to the U. S. dollar.  They have stolen the Intellectual Property of American companies.  They have forced American companies to transfer technology to Chinese companies in order to establish manufacturing facilities in China.  This hasn’t been free trade or fair trade.

The U. S. trade deficit with China has increased from a small deficit of $6 million in 1985 to $375.2 billion in 2017.  China represented 40% of our total trade deficit in goods of $810 billion in 2017, and our trade deficit has already increased at a record pace for January 2018.

As I pointed out in my December 7, 2017 IndustryWeek column, “How Trade Policies Led to the Decline of American Manufacturing, “As a result of the escalated trade deficits from 2001 to 2010, the U.S. lost 5.8 million manufacturing jobs and 57,000 manufacturing firms closed… our domestic supply chain has weakened…We even lost whole industries…” This number of jobs lost represents about 30% of the manufacturing workforce we once had.  Actually, “the number of jobs in manufacturing has declined by 7,231,000–or 37 percent–since employment in manufacturing peaked in the United States in 1979, according to data published by the Bureau of Labor Statistics.

In the past three days, I’ve listened to conservative radio talk show hosts lambast President Trump’s National Trade Director, Peter Navarro.  I’m personally acquainted with him because of residing in San Diego where he resided for many years. I even remember when he ran for mayor of San Diego in 1992.  What these talk show hosts and their guests fail to mention is that he was a professor of Economics at the University of California, San Diego for many years, and was professor of Economics at the University of California, Irvine prior to becoming part of the Trump administration.  He knows what he is talking about.

Navarro was one of the first authors to point out the threat that China is to the U.S. I’ve read two of his three books:  The Coming China Wars, published in 2008, which I read when I was writing my own book, Can American Manufacturing be Saved?  Why we should and how we can.” Then I read the second book that he co-authored with Greg Autry, Death by China, in 2011. Greg Autry has spoken at several of the manufacturing summits I participated in producing in southern California on behalf of the Coalition for a Prosperous America.  Greg Autry and I also served together on the board of directors for the American Jobs Alliance from 2011 – 2016.

Navarro and Autry outline the eight ways China cheats in trade in cleverly worded phrases:

  1. The Export Subsidies’ Dagger to the Heart.
  2. The New “Great Game”: Chinese Currency Manipulation
  3. They Think It’s Not Stealing if They Don’t Get Caught.
  4. Trashing China’s Environment for a Few Pieces of Silver
  5. Maiming and Killing Chinese Laborers for No Fun but Lots of Profits
  6. The Neutron Bomb of Export Restrictions
  7. Predatory Pricing, Dumping and the Dragon’s Rare Earth Cartel
  8. Goodness Gracious, Great Walls of Protectionism

If you haven’t read either of these books, I can highly recommend them, and they are still available on Amazon.

The tariffs on steel and aluminum are long overdue and constitute only a single step in balancing our trade deficit.  I’m delighted that President Trump is keeping his campaign promise of imposing tariffs on steel and aluminum.  I was happy when he withdrew the U. S. from the Trans Pacific Partnership Agreement as I had written more than a dozen articles about the dangers of that agreement to the U. S.  It would have been the “nail” in the coffin of American manufacturing.

There are many more policies we need to put in place to eliminate the trade deficit and restore manufacturing jobs to create prosperity.  I have made recommendations in the last chapter of my new book, Rebuild Manufacturing – the Key to American Prosperity, based on the research I have done for the articles I have written in the past six years as a columnist for IndustryWeek, along with many recommendations that have been made by the board of directors of the Coalition for a Prosperous America, of which I have been a member since 2011. Check out these issue papers on their website.

We can win this trade war if we have the same kind of courage and insight we had when we won World War II and the Cold War with the Soviet Union with the help of our allies. Remember, China has a written plan to become the Super Power of the 21st Century. If we lose this war, we may lose our country.

 

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How Trade Policies Led to the Decline of American Manufacturing

Wednesday, January 24th, 2018

Many people think that the decline in American manufacturing started with American manufacturers sourcing manufacturing offshore in order to achieve lower labor costs, avoid regulations, and pay lower taxes. While the decline accelerated after China was granted the status of Permanent Normal Trade Relations (PNTR) and was allowed to join the World Trade Organization, it actually began decades earlier.

PNTR is a legal designation in the U. S. for free trade with a foreign nation and was called Most-Favored-Nation (MFN) until the name was changed in 1998. Thefreedictionary.com defines it as “A method of establishing equality of trading opportunity among states by guaranteeing that if one country is given better trade terms by another, then all other states must get the same terms.”

Thus, it is a method to prevent discriminatory treatment among members of an international trading organization. It provides trade equality among trading partners by ensuring that an importing country will not discriminate against another country’s goods in favor of those from a third. Once a country grants any type of concession to a third-party country, this concession must be given to all other countries.

At the end of World War II, the United States was the dominant manufacturing country of the world.  The American manufacturing base had enabled the U. S. to win the war with Germany and Japan by outproducing these two countries in implements of war from ships to tanks to weapons.

Over the next 20 years, American manufacturing became synonymous with quality and inventiveness.  Companies like Ford, General Motors, General Electric, Hewlett Packard, and Levi Straus became household names.

One of the main reasons why the United States became the dominant manufacturing country in the world was that for over 150 years, our government protected and fostered the growth of American industry through tariffs. The first tariff law passed by the Congress, was the Tariff of 1789.  The purpose was to generate revenue to fund the federal government, pay down the debt of the government, and also act as a protective barrier for domestic industries from imports from England and France in particular.

Tariffs played a key role in our country’s foreign trade policy and were the main source of revenue for the federal government from 1789 to 1914, the year after income taxes went into effect in 1913.  During this long period of time, tariffs averaged about 20% on foreign imports, and at times, tariff revenue approached 95% of federal revenue.

During the Truman Administration (1945-52), foreign trade policies began to focus on liberalizing trade through moving from protective tariffs to free trade. The instructions given from Congress to the U. S. Trade Representative were:  Remove barriers to trade. A key concept of the liberalization of trade was reciprocal tariffs and low tariff rates. Two of the main reasons for this change in trade policy were to help Europe and Japan rebuild after the war and engender closer relations with the U. S. as a deterrent to the spread of communism. This ended the use of tariffs as a significant source of Federal revenue and began the increase of corporate and personal income taxes.

In 1948, the General Agreement on Tariffs and Trade (GATT) treaty “was signed by 23 nations in Geneva on October 30, 1947, and took effect on January 1, 1948. It remained in effect until the signature by 123 nations in Marrakesh on April 14, 1994, of the Uruguay Round Agreements, which established the World Trade Organization (WTO) on January 1, 1995. The WTO is in some ways a successor to GATT, and the original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the modifications of GATT 1994. GATT, and its successor WTO, have successfully reduced tariffs. The average tariff levels for the major GATT participants were about 22% in 1947, but were 5% after the Uruguay Round in 1999.”

GATT requires that exports of all countries that are party to the treaty should be treated alike by other countries that are party to the treaty, and each member is granted Most Favored Nation status. Since GATT was first signed, MFN (now PNTR) status has been granted to about 180 countries. Only a handful of communist countries have been denied MFN status.

For over 20 years, American manufacturers experienced little competition from foreign exports, but in the 1970’s Japanese and German products began to significantly penetrate the U. S. market. Due to the focus on demilitarization and decentralization in the U. S.- directed rebuilding of the Japanese and German economies, producing consumers goods was the focus.

Japan focused on audio/stereo products, cameras, pianos/keyboards, and TVs, as well as low cost automobiles and motorcycles. Companies such as Panasonic, Sony, Sanyo, Yamaha, Toyota, Mitsubishi, and Datsun (now Nissan) became the new household names in America. Mitsubishi had produced aircraft in Japan before and during WWII, including the infamous fighter plane, the Zero. Nakajima was another aircraft manufacturer that was reformed as Fuji Heavy Industries after the war and began to produce the Subaru vehicles.

Germany started focusing on automobiles such as the Volkswagen “Bug” and bus, BMWs, and then Mercedes vehicles.  They expanded into manufacturing equipment, machine tools, and scientific and laboratory instruments and equipment. Volkswagen was instrumental in Germany’s industrial recovery as their plants have escaped damage from bombing. The Volkswagen plant had been offered to England after the war as reparations, but England turned it down. Without Volkswagen being able to start manufacturing autos in 1946 after the war, the reindustrialization of Germany would have been delayed considerably.

It didn’t take long for the increased imports from Japan and Germanys to take their toll on the U. S. trade balance.  As the below chart shows, the last year we had a positive trade balance in goods was 1975:

Source:  Coalition for a Prosperous America

As a developing country, imports from China didn’t become a significant factor until the beginning of the 21st Century. The development and growth of China’s manufacturing industry was essentially funded through American companies setting up manufacturing plants in China starting in the 1990s and transferring manufacturing to Chinese contract manufacturers. Foxconn, Apple’s contract manufacturer for the iPhone and iPad, is the only Chinese manufacturer to become well known in the U.S. While Foxconn has plants in mainland China, it is actually owned by Hon Hai Precision Industry Co., Ltd., a Taiwanese multinational electronics contract manufacturing company headquartered in Tucheng, New Taipei, Taiwan.

“In article titled “The Death of American Manufacturing,” published in the February 2006 Trumpet Print Edition, Robert Morley wrote: “Manufacturing loss is occurring because of globalization and outsourcing. Globalization is the increased mobility of goods, services, labor, technology and capital throughout the world; outsourcing is the performance of a production activity in another country that was previously done by a domestic firm or plant.

At the dawn of globalization, the elimination of trade barriers opened up access to foreign markets for American manufacturers in return for building factories abroad. In due course, more and more manufacturers set up shop overseas, producing goods to be sold to Americans.”

According to Yashen Huang author of Capitalism with Chinese Characteristics, China’s “indigenous private sector is conspicuously small.” The majority of urban companies are still State-Owned Enterprises (SOE’s). Other companies are privately owned, but the owner(s) are government employees, so they are still essentially government controlled.

China had lost its status as MFN through suspension in 1951 after the Communists took over control of the government in 1949. It was “restored in 1980 and was continued in effect through subsequent annual Presidential extensions. Following the massacre of pro-democracy demonstrators in Tiananmen Square in 1989, the annual renewal of China’s MFN status became a source of considerable debate in the Congress…Congress agreed to permanent normal trade relations (PNTR) status in P.L. 106-286, President Clinton signed into law on October 10, 2000.  PNTR paved the way for China’s accession to the WTO in December 2000…;”

  1. S. trade with China began to be measured in 1985 by the U. S. Census Bureau, and we had only a small deficit of $6 million. The trade deficit grew to $83.8 billion by the year 2000. However, after China was granted PNTR and became a member of the WTO, the trade deficit started to escalate. It doubled to $162.3 in 2002 and doubled again by 2014 to $344.8 billion. The 2016 trade deficit was $347 billion, down from $367 billion in 2015.  In 2016, China represented 38% of our overall trade deficit of $654.5 billion.

As a result of the escalated trade deficits from 2001 to 2010, the U.S. lost 5.8 million manufacturing jobs and 57,000 manufacturing firms closed. Where do all the jobs go?  Well, the U.S. Department of Commerce shows that “U.S. multinational corporations… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.” So, we lost about half to offshoring of manufacturing to China and other parts of Asia.

The real story is even worse than this data. In an article by Terence P. Jeffrey published on www.CBSNews.com on May 12, 2015, “The number of jobs in manufacturing has declined by 7,231,000–or 37 percent–since employment in manufacturing peaked in the United States in 1979, according to data published by the Bureau of Labor Statistics.

As a result of more and more American manufacturers setting up plants in China, our domestic supply chain was weakened. From 2001 to 2010:  The U. S. textile industry lost 63% of jobs since 2001. Communication equipment industry lost 47% of its jobs. Motor vehicles and parts industry lost 43% of its jobs. U. S. machine tool industry consumption fell 78% in 2008 and another 60% in 2009. U. S. printed circuit board industry has shrunk by 74% since 2000.  We even lost whole industries, such as:  fabless chips, compact fluorescent lighting, LCDs for monitors, TVs and handheld devices like mobile phones displays, Lithium ion, lithium polymer and NiMH batteries, low-end servers, hard-disk drives, and many others.

After over 40 years of trade policies that foster offshoring, it’s time to have a new goal for trade policies.  Instead of “remove barriers to trade,” we need to have a goal of “eliminating the trade deficit.”  The Coalition for a Prosperous America has recommended this goal for years, and on March, Representatives Brooks and Lipinski introduced House Congressional Resolution 37 for Congress to set a national goal to eliminate the trade deficit.  It is only one sentence long:  “Expressing the sense of Congress that Congress and the President should prioritize the reduction and elimination, over a reasonable period of time, of the overall trade deficit of the United States.”

As soon as the tax reform bill is signed by President Trump, Congress needs to pass this Resolution before the end of the year, so we can start 2018 on a new track.

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“Eliminate the Trade Deficit” Resonates in Halls of Congress

Tuesday, March 21st, 2017

 “You were ahead of the curve on trade.” This was the common refrain heard last week by members of the Coalition for a Prosperous America who attended our annual fly-in to Washington, D. C. We had eight teams of members visiting Congressional Representatives and Senators on March 14th and 15th. As Chair of our developing California chapter, it was my fifth year attending the CPA fly-in, and our simple message of eliminating the trade deficit resonated well in the halls of Congress.

No one could deny that we have a huge deficit as shown on the chart below:

 

The annual trade deficit has reduced our U. S. GDP by some 3% to 5.5% each year, and those reductions compound over time.

There is no historical record of any other country in history running 41 years of consecutive trade deficits. Why is this important? Because every billion dollars of net imports costs 4,500 American jobs according to conservative estimates. So last year’s $502 billion deficit equates to 2.25 million jobs lost.

As a result, our Labor Force Participation is in serious decline. The U. S. is the only G7 nation with a DECLINE in LFPR since 1998 for workers ages 15-64. It peaked at 77.4% in 1998 and dropped down five points to 72.6% in 2015, meaning that over 7 million people dropped out of labor force since 1998.

The remedy recommended by the Coalition for a Prosperous America is simple: Congress should establish a national goal to eliminate the trade deficit.

Balanced trade over time is the goal of free trade and of fair trade. Balanced trade will re-industrialize our country, enable massive job creation, grow our wealth and effectively neutralize foreign mercantilism. Trade policy must address true drivers of deficit, these countries and their practices. Many of these countries have export-oriented growth strategies in which they rely upon the US market to consume their exports rather than increasing their internal consumption. China, Germany, Japan and other countries pursue net exports through strategic mercantilism, not free trade. Currency manipulation, value added taxes, state influenced enterprises, and other
tactics are used.

The following top 10 countries account for 90% of America’s 2016 goods trade deficit:

Rank Country 1992 Deficit 2016 Deficit Change 1992-2016
1 China -$18B -$355B -$337B
2 Mexico -$6B -$115B -$121B
3 Japan -$50B -$75B -$25B
4 Germany -$8B -$70B -$62B
5 Canada -$15B -$58B -$53B
6 Ireland +5B -$36B -$37B
7 Vietnam $0B -$34B -$34B
8 South Korea -$2B -$30B -$30B
9 Italy -$4B -$30B -$26B
10 India -$2B -$30B -$28B

Note: These figures are based on U.S. Commerce Dept. data subtracting Imports for Consumption from Domestic Exports which are intended to strip out goods that enter and leave the U.S. simply for re-export, without having any significant value added to them inside the U.S.

Currency manipulation and misalignment are key tactics that the above countries use to gain an advantage in trade. Currency manipulation is trade cheating, because it is both an illegal tariff and a subsidy.

Foreign governments intervene in foreign exchange markets by buying dollars. More than 20 countries have intervened in foreign exchange markets to undervalue their currencies in the past ten years. These countries account for one-third of the world economy and two-thirds of the world’s current account surpluses. Gagnon has calculated that “A country’s current account balance increases between 60 and 100 cents for each dollar spent on intervention.”

“The largest loser is the United States, whose trade and current account deficits have been $200 billion to $500 billion per year larger as a result. The United States has thus suffered 1 million to 5 million job losses.” (Bergsten, 2012) The U. S. economy cannot produce jobs and wealth without addressing this problem. The Coalition for a Prosperous America proposes the following solutions:

• U.S. trade enforcement law should treat currency undervaluation as a countervailable subsidy
• Tariffs should be applied against currency manipulators to neutralize their unearned advantage
• Government policy should pursue a dollar priced at equilibrium rather than accept a persistently overvalued dollar
• Trade agreements should include effective controls on currency manipulation and misalignment

Border Adjustable Consumption Taxes (aka VATs) are a tariff by another name. They are allowed under WTO rules and range from 12% to 24% with the average being 17% globally. This means that virtually all foreign countries tax our exports at this average 17% VAT. They subsidize domestic shipments abroad with rebating the VAT to their manufacturers. The U.S. does not have a VAT to offset this advantage.

Consumption taxes are a tax on consumption as opposed to income, wealth, property, or wages. A Goods and Service Tax (GST) and a Value Added Tax (VAT) are consumption taxes. They are usually a tax only on the “value added” to a product, material, or service. Over 150 countries have such taxes, but the U. S. does not.

The U. S. negotiated tariff reductions or elimination in good faith with our trading partners under NAFTA and the Central America Free Trade Agreement (CAFTA, but Mexico instituted a 15% VAT, and Central America established a 12% VAT.

After 40 years of tariff reduction under various trade agreements, other countries replaced tariffs with VATs, but the U. S. did not. Thus, American exporters face nearly the same border taxes as they did in the early 1970s.

To solve this problem, the Coalition for a Prosperous America proposes that Congress implement a border adjustable consumption tax (VAT) and use the proceeds to credit against the payroll taxes paid by all workers and businesses. The benefits would be:

• Reduce the cost of labor in the U.S.
• Give every worker a raise
• Lower the price of U.S. exports
• Levy a tax on imports

In President Obama’s 2016 budget, Payroll Taxes were projected to be 31% of the revenue or $1.11 trillion. If a 12.9% VAT were set, it would produce approximately $1.45 trillion in tax revenue, completely offsetting the revenue from Payroll Taxes. All Payroll Taxes could be eliminated with a credit. With a 15% VAT, other tax reform or domestic production cost reduction could be funded. European Union countries use their VATs to provide another revenue stream to allow them to reduce their corporate taxes to be more globally competitive.

The benefit of giving a Payroll Tax credit out of VAT funds is that it would offset the regressiveness of a VAT by elimination of the regressive Payroll Tax. There would be no impact on prices of domestic goods and services, but prices of imported goods and services would increase. This would incentivize consumers to buy Made in USA products instead of imports. In addition, it would reduce the cost of production for U. S. producers enabling them to be more competitive in the global marketplace.

Our Coalition members also encouraged Congress to reinstate the Country of Origin Labeling (COOL) that was struck down by an unelected foreign tribunal of the World Trade Organization. Congress caved in to the WTO ruling and passed repeal legislation that exceeded the WTO ruling eliminating COOL for beef and pork, as well as for ground beef and ground pork.

Canada and Mexico want to export their cattle, hogs, beef, and pork to the U. S. without informational labeling that reveals where the cattle and hogs were born, raised, and slaughtered. Right now, meat packers are able to import cattle and hogs and slaughter them to get the USDA stamp. Consumers want to know where cattle and hogs were born and raised, not just slaughtered for reasons of food safety.

Congressional Representatives and Senators need to have the courage to reinstate COOL and vigorously defend our national sovereignty and consumer choice against international interference. COOL legislation enables consumers to Buy American in the grocery store. It prevents consumer deception and empowers consumers to buy food produced under the safety regime of their choosing. It would help to jumpstart America’s ailing rural economy through supporting domestic producers and preventing industry consolidation.

The final message that is critical is that the U. S. must modernize its foreign investment rules to protect American companies that are critical to our national security and economic security. Investors from countries like China, Japan, and South Korea are making strategic acquisitions of U. S. companies and land that threaten our security and future prosperity. These same countries either severely restrict or do not allow 100% acquisition of companies in their country. The Committee on Foreign Investment in the U.S. (CFIUS) can block incoming investment based upon national security concerns, but not for economic strategy reasons as other countries do.

Congress must update the laws governing foreign investment to include economic security and allow longer review periods, beyond 30 days, for CFIUS to review proposed investments. This would allow more time to gauge systemic threats to U. S. interests in addition to individual cases. The legislation should include a “net benefit” test to encompass American economic interests where proposed acquisitions of companies that are important to future U. S. technology and employment are concerned (both civilian and defense related).

The question now is – Will Congress have the courage to take the bold action needed to eliminate the trade deficit, address currency manipulation, reinstate COOL and control foreign investments? Time will tell.

 

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How Could the Trans Pacific Partnership Affect you or your Business

Tuesday, April 19th, 2016

On February 4, 2016, President Obama signed the Trans Pacific Partnership Agreement on behalf of the United States. The TPP agreement has been in negotiation behind closed doors since 2010 between the United States and 11 other countries around the Pacific Rim: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The TPP is a “docking agreement” so other countries could be added without the approval of Congress. India, China, and Korea have expressed interest in joining the TPP.

Our elected representatives in Congress had no involvement in writing the TPP – it was written by the staff of the U. S. Trade Representative office, with over 600 corporate advisors (think corporate lawyers) helping them write it. It contains more than 5,500 pages, and no member of Congress could view it as it was being negotiated until late 2014. Even then, they could not take any staff with them and were not allowed to take pen, pencil, paper, or a camera when they went to view it at the U. S. T. R.’s office.

The full text of the TPP was finally released to the public to review in November 2015, and it now awaits Congressional approval. According to the rules established by the Trade Promotion Authority (TPA) that passed Congress narrowly in June 2015, Congress will only be allowed 45 days for committee analysis after the bill is introduced, only 15 days after that is completed to bring it up for a floor vote, and only 20 hours of debate in the House and Senate. The TPA does not allow any amendments, filibuster, or cloture. Notice that the TPP is called an “Agreement,” as was NAFTA, CAFTA, KORUS, and every other trade deal in the past 22 years. The purpose for this is to get around the requirement of the two-thirds vote of the Senate to approve a Treaty that is required under Article 1, Section 8 of the Treaty clause in the U. S. Constitution. The TPP requires only a simple majority vote (50% + one.)

Supporters of the TPP say that it represents 40% of the world’s economic activity (GDP), but they fail to mention that the U. S. and its current trading partners represent 80% of that 40%. The other five countries represent the other 20%, with Japan alone being 17.7% of that total.

The current goal of trade agreements as given by Congress to the U.S.T.R is to “remove trade barriers,” such as tariffs, quotas, etc. and increase U. S. exports. The U. S. cut tariffs and opened our markets by means of these trade agreements. However, our trading partners didn’t really open their markets to us. They played another game ? mercantilism, featuring rampant global currency devaluation, consumption taxes called Value Added Taxes (VATs) that are tariffs by another name, massive subsidies to their industries, and industrial policies that favor their domestic supply chains.

In brief, the effect to the United States of this unbalanced trade has been:

  • Loss of >600,000 mfg. jobs from NAFTA
  • Loss of 3.2 million mfg. jobs between 2000 – 2010 from China’s entry into WTO
  • Loss of >60,000 mfg. jobs since Korea-US Agreement went into effect in 2012
  • Loss of an estimated 3.4 million U. S. service & call center jobs since 2000
  • Loss of an estimated 700,000 public sector jobs (2008-2013)
  • Racked up cumulative trade deficit of $12 trillion in goods (average $500 billion each year) since 1994

As a result, we now have the worst trade deficit in U. S. history, and we are off to even a higher deficit this year based on the trade figures released for January ($45.9 billion) and February ($47.1 billion). As a recent example of the effect of trade agreements on our total trade deficit, our trade deficit with Korea has nearly doubled in less than four years, increasing from $14.7 billion in 2012 to $28.4 billion in 2015. Proponents of KORUS promised that it would create 70,000 jobs and $10 billion in exports.

As mentioned in a previous article, proponents of the TPP aren’t even giving such rosy predictions. The Peterson Institute’s analysis of the TPP states: “…GDP is projected to fall slightly (-0.54 percent), employment to decline by 448,000 jobs…”

What are some of the ways the TPP could affect you or your business?

Buy American Act would essentially be made Null and Void: The worst effect would be to those businesses who sell to the government, whether it be local, state, or federal because under the TPP procurement chapter, the U.S. would have to agree to waive Buy America procurement policies for all companies operating in TPP countries. This means that all companies operating in any country signing the agreement would be provided access equal to domestic firms to bid on government procurement contracts at the local, state, and federal level. There are many companies that survived the recession and continue in business today because of the Buy American provisions for government procurement, especially defense and military. The TPP could be a deathblow for companies that rely on defense and military contracts. However, it would also affect procurement for infrastructure projects, such as bridges and freeways, as well as construction of local, state, or federal facilities.

Of course, this means that U. S. companies could bid on government procurement projects in TPP countries, but the trading benefit is miniscule. The U. S. government procurement market is 7X the size of current TPP partner countries (+550 billion vs. $55 -70 billion.) It is also highly unlikely that U. S. companies would be the low bidder against domestic companies in these TPP countries because of the vast difference in wages in countries such as Vietnam, where the average wage is 55 cents/hour. Past trade agreements has resulted in an average annual wage loss of 5.5% for full-time workers without college degrees, and U. S. wages have been stagnant for decades, growing by only about 2% per year since 2008. The result has been increased wage inequality from low to high wage earners.

Product Labeling could be Made Illegal: If you like to know if your food is safe, then you won’t like the fact that “Country of Origin,” “Non-GMO,” or “Organic” labeling could be viewed as a “barrier to trade” and thus be deemed illegal. According to Food & Water Watch, around 90% of the shrimp and catfish that Americans eat are imported. They warn, “The TPP will increase imports of potentially unsafe and minimally inspected fish and seafood products, exposing consumers to more and more dangerous seafood.” Many TPP countries are farm-raising seafood in polluted water using chemicals and antibiotics prohibited in the U. S. Farmed seafood from Malaysia, Vietnam, and China is being raised in water quality equivalent to U. S. sewers. Today, the FDA only inspects 2% of seafood, fruits and vegetables, and the USDA only inspects 4-5% of meat & poultry. Increased imports of food from TPP trading partners could swamp FDA and USDA inspections, so that even less is inspected.

TPP would Increase Immigration: If you are concerned about jobs for yourself or family members, then you won’t like the fact that the TPP increases “the number of L1 visas and the number of tourist visas, which can be used for business purposes.” Any service provider (phone service, security, engineers, lawyers, architects or any company providing a service) can enter into a TPP partner country and provide that service. Companies don’t have to hire Americans or pay American wages – they can bring in own workers and pay less than the American minimum wage.

TPP would Increase Job Losses in Key Industries: If you work in the automotive or textile industries, you may lose your job. The Center for Automotive Research projects a loss of 91,500 U. S. auto jobs to Japan with the reduction of 225,000 automobiles produced in the U. S. Also, the National Council of Textile Industries projects a loss of 522,000 jobs in the U. S. textile and related sectors to Vietnam.

TPP would Reduce Reshoring: Because TPP will reduce tariffs in trading partner countries, such as Vietnam, it will make the Total Cost of Ownership analysis to return manufacturing to America more difficult to justify. The high U. S. dollar has already diminished reshoring in the past year, so Harry Moser, Founder and President of the Reshoring Initiative, recently told me that “The combination of the high USD and TPP will reduce the rate of reshoring by an estimated 20 – 50%.”

Remember that the TPP is missing any provisions to address the mercantilist policies practiced by our trading partners: currency manipulation, Value Added Taxes that are both a hidden tariff and a hidden export subsidy, government subsidies/state owned enterprises, and “product dumping.”

 America is at a crossroads. We can either continue down the path of increasing trade deficits and increasing national debt by allowing anything mined, manufactured, grown, or serviced to be outsourced to countries with predatory trade policies. Or, we can forge a new path by developing and implementing a national strategy to win the international competition for good jobs, sustained economic growth and strong domestic supply chains. If you support the latter path, then add your voice to mine and millions of others in urging Congress not to approve the TPP in either the regular session before the Presidential election or the “lame duck” session after the election.

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CPA Releases Competitiveness Strategy for the United StatesCPA Releases Competitiveness Strategy for the United States

Friday, November 20th, 2015

For several years, organizations and elected representatives in Congress have proposed developing a national manufacturing strategy. For example, the Information Technology& Innovation Foundation (ITIF) released a report, “The Case for a National Manufacturing Strategy,” in April 2011 and the Alliance for American Manufacturing has repeatedly put forward a “Plan to Save Manufacturing,” calling for a national manufacturing strategy to reverse the decline in U.S. manufacturing and the good jobs that come with it. Bills sponsored by Illinois Rep. Dan Lipinski (D) have even passed the House of Representatives, but have died in the Senate.

On November 11th, the Coalition for a Prosperous America (CPA) released “A Competitiveness Strategy for the United States – America at a Crossroads,” which addresses other sectors of our economy in addition to manufacturing.

“America needs to start winning again,” said Michael Stumo, CEO of CPA. “That is why the mission of the Competitiveness Strategy is to:

‘Win the international competition for good jobs, sustained real economic growth and prosperity with a national strategy to counter foreign mercantilism, balance trade and grow strong domestic supply chains.’”

“Across the USA, localities and states employ plans to attract jobs,” said Brian O’Shaughnessy, CPA Chief Co-Chair and Chairman of Revere Copper Products. “Other countries have sophisticated national strategies to acquire industries and bring good paying jobs to their countries. The USA has no comprehensive national strategy for domestic production and good paying jobs to guide trade negotiators and administration officials.”

CPA’s Competitiveness Strategy argues that:

The United States is losing an economic competition against other nations whose mercantilist strategies are destroying our manufacturing jobs, critical industries, our standard of living, our national security, the security of our food supply, and our children’s futures.

The threat to the U. S. economy and national security is grave. Other trading nations are using comprehensive strategies to import jobs across all economic sectors, but are particularly focused on strategically significant technologies and industries. American companies in these sectors face not only wide-ranging mercantilist practices and non-tariff trade barriers such as currency manipulation, tariffs and subsidies, but also much more sophisticated and specific strategies aimed at identifying, acquiring, or otherwise controlling critical technologies.

CPA’s strategy holds out the promise that the U. S. is in control of its own destiny and can re-assert itself as a great manufacturing and producing nation with a rising standard of living for all. We can develop and implement a comprehensive strategy that retains and reinforces our leadership in innovation, locates investment and production in the United States, and raises employment by creating good paying jobs.

The ultimate mission of the strategy is to win the international competition for good jobs and sustained economic growth. The mission recognizes we are in competition with other countries. The Competitiveness Strategy includes nineteen action steps focused upon three interrelated goals:

  1. Identifying and countering foreign mercantilist strategies that grow their economies at the expense of other countries through achieving a persistent trade surplus
  2. Balancing the national trade deficit
  3. Growing domestic supply chains

“All three goals are interrelated and must be pursued together,” continued Stumo. “The President rightfully created the National Network for Manufacturing Innovation to grow domestic supply chains, but the effort cannot succeed unless we combat powerful foreign tactics to take those industries away. Further, a new effort to counter foreign mercantilism and trade cheating is essential, but must have the goal of balancing trade to be fully effective.”
“Additionally, balancing trade is essential, but merely exporting raw materials is insufficient. American must grow and retain a diverse array of industries that add value to our products and create good jobs, with special attention paid to advanced and critical industry supply chains,” Stumo concluded.

CPA’s competitiveness strategy shown below is succinct, yet comprehensive:

“Identify and counter foreign mercantilist strategies that grow their economies at the expense of other countries through achieving a persistent trade surplus

  1. End both currency exchange rate imbalances and the accumulation of excessive US dollar holdings by non-US public and private entities.
  2. Impose offsetting tariffs to neutralize foreign government subsidies to industries and supply chains that compete with ours.
  3. Counter foreign government policies that force offshoring by conditioning access to their markets on transfers of technology, research facilities and/or production to their countries, as well as compliance with export performance and domestic content requirements, while their exporters have access to US markets without these conditions.
  4. Ensure that foreign greenfield investments in the US and acquisitions of existing US companies provide a clear “net benefit” to the US with special scrutiny in cases of state influenced foreign entities.
  5. Protect US food security from foreign government tactics to seize markets.

Balance trade

  1. Offset cumulative trade deficits of recent decades and excessive accumulations of dollar reserves through sustained trade surplus to ultimately achieve a long term overall trade balance.
  2. Insure that the composition of trade includes a substantial trade surplus in high value added and advanced manufactured goods.
  3. Make the US workforce more cost competitive by promoting fair pay, rising living standards and safe working conditions for workers everywhere.
  4. Reduce US producers’ trade disadvantage through tax reform which finances the reduction of payroll taxes and health insurance costs with a border adjustable consumption tax in a revenue and distribution neutral manner.
  5. Lower corporate tax rates and end corporate inversion and profit shifting tax avoidance by taxing the income of unitary business groups, whether domestic or foreign, based upon proportion of global sales in the US.

Grow Domestic Supply Chains

  1. Preserve and develop domestic manufacturing and agricultural supply chains to maximize value added production in the US.
  2. Develop, build and maintain a world-class land, water, air, communications and energy infrastructure.
  3. Safeguard our military strength and national security by insuring that critical technologies, weapons & IT components are developed and manufactured in America by American controlled companies.
  4. Develop, commercialize and retain strategic and economically significant advanced technology and grow their manufacturing supply chains in the US.
  5. Increase public support for, and incentives for private investment in, basic and applied research, infra-technologies and new product and process technologies.
  6. Continually raise the competitiveness of American workers by improving Science, Technology, Engineering and Math (STEM) education available at all levels, systematically enhance lifelong learning for existing workers, and fostering a national system of apprenticeship and paid internships through collaborative public-private endeavors that are connected to actual opportunities in the labor market.
  7. Raise the competitiveness of small and medium sized domestic enterprises by increasing long-term private sector financing, the sharing of research on common issues and the diffusion of new technologies and production methods.
  8. Preserve our right to adopt and enforce domestic policies that insure the quality of our food and goods, and protect the health, safety and general welfare of our citizens without restrictions from international trade agreements.
  9. Ensure that domestic manufacturing and agriculture benefit fully from an expanded supply of low cost US produced energy”

Anyone involved in efforts to revitalize American manufacturing already has a bookshelf full of books, studies, and reports containing recommendations on a national manufacturing strategy. My book, Can American Manufacturing Be Saved? Why we should and how we can has a chapter on “How Can We Save American Manufacturing?” that contains a summary of the recommendations of many organizations as well as my own recommendations, which I incorporate into articles and presentations whenever possible. As chair of the California chapter of CPA, I plan to incorporate this competitiveness strategy into future articles and presentations whenever possible.

The brilliance of CPA’s strategy is that it is not limited to manufacturing and is not a “to do list” of actions to take. The Competitiveness Strategy will work best when pursued as a whole. The three objectives are interrelated because, for example, we cannot balance trade without growing domestic supply chains to produce more, and add more value in the U. S. We cannot grow domestic supply chains unless we neutralize foreign mercantilism (trade cheating) that offshores otherwise competitive industries that we started and developed in the U. S. We cannot address foreign mercantilism without the guidance of a balanced trade objective.

Businesses must have a strategic plan to start and grow. This strategic plan guides the business with regard to product development, finance, marketing, production, procurement, etc. Many other countries have an economic strategy to grow their economy. A country’s strategy guides their economic, fiscal, trade, innovation, finance and monetary policy, so that they all work together to enhance their competitiveness as a nation.

The United States has no comprehensive strategy ? just a hodgepodge of laws and rules. Trade negotiators have had no strategic plan to guide them, and neither do the administrative agencies relevant to manufacturing, agricultural, and use of natural resources. The United States needs a comprehensive competitiveness strategy that clearly expresses exactly what we want to achieve for our country… not for an industry or special interest… but our country as a whole.

We do not have to “keep reinventing the wheel.” It is time for our leaders to “stop fiddling while Rome burns” and show some real leadership. Action, not lip service is what we need now!

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How we could Create Jobs while Reducing the Trade Deficit and National Debt

Tuesday, March 26th, 2013

There are numerous ideas and recommendations on how we could create jobs but most job creation programs proposed involve either increased government spending or reductions in income or employment taxes at a time of soaring budget deficits and decreased government revenue. Other recommendations would require legislation to change policies on taxation, regulation, or trade that may be difficult to accomplish. The recommendations in this article focus on what could be done the fastest and most economically to create the most jobs while reducing our trade deficit and national debt.

Manufacturing is the foundation of the U. S. economy and the engine of economic growth. It has a higher multiplier effect than service jobs. Each manufacturing job creates an average of three to four other supporting jobs. So, if we focus on creating manufacturing jobs, we would be able to reduce the trade deficit and national debt at the same time.

The combined effects of an increasing trade deficit with China and other countries, as well as American manufacturers choosing to “offshore” manufacturing, has resulted in the loss of 5.7 million manufacturing jobs since the year 2000. If we calculate the multiplier effect, we have actually lost upwards of 17 to 22 million jobs, meaning that we have fewer taxpayers and more consumers of tax revenue in the form of unemployment benefits, food stamps, and Medicaid.

In 2012, the U.S. trade deficit with China reached a new record of $315 billion. According to a recent study by the Economic Policy Institute (EPI), the trade deficit with China cost 2.7 million U.S. jobs from 2001-2011. The Department of Commerce estimates that each $1 billion in trade deficit translates to about 13,000 lost jobs, so the $738 billion trade deficit in goods for 2012 cost upwards of 9,599,200 jobs.

What Congress Could Do

First, Congress should enact legislation that addresses China’s currency manipulation. Most economists believe that China’s currency is undervalued by 30-40% so their products may be cheaper than American products on that basis alone. To address China’s currency manipulation and provide a means for American companies to petition for countervailing duties, the Senate passed S. 1619 in 2011, but GOP leadership prevented the corresponding bill in the House, H. R. 639, from being brought up for a vote, even though it had bi-partisan support with 231 co-sponsors. On March 20, 2013, Sander Levin (D-MI), Tim Murphy (R-PA), Tim Ryan (D-OH), and Mo Brooks (R-AL) introduced the Currency Reform for Fair Trade Act in the House and a corresponding bill will be introduced in the Senate.

Second, Congress should strengthen and tighten procurement regulations to enforce “buying American” for all government agencies and not just the Department of Defense. All federal spending should have “buy America” provisions giving American workers and businesses the first opportunity at procurement contracts. New federal loan guarantees for energy projects should require the utilization of domestic supply chains for construction. No federal, state, or local government dollars should be spent buying materials, equipment, supplies, and workers from China.

My other recommendations for creating jobs are based on improving the competitiveness of American companies by improving the business climate of the United States so that there is less incentive for American manufacturing companies to outsource manufacturing offshore or build plants in foreign countries. The following proposed legislation would also prevent corporations from avoiding paying corporate income taxes:

  • Reduce corporate taxes to 25 percent
  • Make capital gains tax of 15 percent permanent
  • Increase and make permanent the R&D tax credit
  • Eliminate the estate tax (also called the Death Tax)
  • Improve intellectual property rights protection and increase criminal prosecution
  • Prevent sale of strategic U.S.-owned companies to foreign-owned companies
  • Enact legislation to prevent corporations from avoiding the U.S. income tax by reincorporating in a foreign country

It is also critical that we not approve any new Free Trade Agreements, such as the Trans-Pacific Partnership and Trans-Atlantic Partnership that are currently proposed. The U.S. has a trade deficit with every one of its trading partners from NAFTA forward, so Free Trade Agreements have hurt more than helped the U.S. economy.

What States and Regions Could Do

State and local government can work in partnership with economic development agencies, universities, trade associations, and non-profit organizations to facilitate the growth and success of startup manufacturing companies in a variety of means:

Improve the Business Climate – Each state should take an honest look at the business climate they provide businesses, but especially manufacturers since they provide more jobs than any other economic sector. The goal should be to facilitate the startup and success of manufacturers to create more jobs. I recommend the following actions:

  • Reduce corporate and individual taxes to as low a rate as possible
  • Increase R&D tax credit generosity and make the R&D tax credit permanent
  • Institute an investment tax credit on purchases of new capital equipment and software
  • Eliminate burdensome or onerous statutory and environmental regulations

Establish or Support Existing Business Incubation Programs, such as those provided by the members of the National Business Incubation Alliance. Business incubators provide a positive sharing-type environment for creative entrepreneurship, often offering counseling and peer review services, as well as shared office or laboratory facilities, and a generally strong bias toward growth and innovation.

Facilitate Returning Manufacturing to America – The Reshoring Initiative,  founded by Harry Moser in 2010, has a  mission to bring good, well-paying manufacturing jobs back to the United States by assisting companies to more accurately assess their total cost of offshoring, and shift collective thinking from “offshoring is cheaper” to “local reduces the total cost of ownership.” The top reasons for U. S. to reshore are:

  • Brings jobs back to the U.S.
  • Helps balance U.S., state and local budgets
  • Motivates recruits to enter the skilled manufacturing workforce
  • Strengthens the defense industrial base

According to Mr. Moser, the Initiative has documented case studies of companies reshoring showing that “about 220 to 250 organizations have brought manufacturing back to the U.S….with the heaviest migration from China. This represents about 50,000 jobs, which is 10% of job growth in manufacturing since January 2010.”

State and/or local government could facilitate “reshoring” for manufacturers in their region by conducting Reshoring Initiative conferences to teach participants the concept of Total Cost of Ownership, how to use Mr. Moser’s free Total Cost of Ownership Estimator™, and help them connect with local suppliers.

Establish Enterprise Zones and/or Free Trade Zones: Enterprise Zones provide special advantages or benefits to companies in these zones, such as:

  • Hiring Credits – Firms can earn state tax credits for each qualified employee hired (California’s is $37,440)
  • Up to 100% Net Operating Loss (NOL) carry-forward for up to 15 years under most circumstances.
  • Sales tax credits on purchases of up to $20 million per year of qualified machinery and machinery parts;
  • Up-front expensing of certain depreciable property
  • Apply unused tax credits to future tax years
  • Companies can earn preference points on state contracts.

States located on international borders could also establish Foreign Trade Zones (FTZs), which are sites in or near a U.S. Customs port of entry where foreign and domestic goods are considered to be in international trade. Goods can be brought into the zones without formal Customs entry or without incurring Customs duties/excise taxes until they are imported into the U. S. FTZs are intended to promote U.S. participation in trade and commerce by eliminating or reducing the unintended costs associated with U.S. trade laws

What Individuals Could Do

There are many things we could do as individuals to create jobs and reduce our trade deficits and national debt. You may feel that there is nothing you can do as an individual, but it’s not true! American activist and author, Sonia Johnson said, “We must remember that one determined person can make a significant difference, and that a small group of determined people can change the course of history.”

If you are an inventor ready to get a patent or license agreement for your product, select American companies to make parts and assemblies for your product as much as possible. There are some electronic components that are no longer made in the U. S., so it may not be possible to source all of the component parts with American companies. There are many hidden costs to doing business offshore, so in the long run, you may not save as much money as you expect by sourcing your product offshore. The cost savings is not worth the danger of having your Intellectual Property stolen by a foreign company that will use it to make a copycat or counterfeit product sold at a lower price.

If you are an entrepreneur starting a company, find a niche product for which customers will be willing to pay more for a “Made in USA” product. Plan to sell your product on the basis of its “distinct competitive advantage” rather than on the basis of lowest price. Select your suppliers from American companies as this will create jobs for other Americans.

If you are the owner of an existing manufacturing company, then conduct a Total Cost of Ownership analysis for your bill of materials to see if you could “reshore” some or all of the items to be made in the United States. You can use the free TCO worksheet estimator to conduct your analysis available from the Reshoring Initiative at www.reshorenow.org. Also, you could choose to keep R&D in the United States or bring it back to the United States if you have sourced it offshore.

If enough manufacturing is “reshored” from China, we would drastically reduce our over $700 billion trade deficit in goods. We could create as many as three million manufacturing jobs, which would, in turn, create 9 – 12 million total jobs, bringing our unemployment down to 4 percent.

You may not realize it, but you have tremendous power as a consumer. Even large corporations pay attention to trends in consumer buying, and there is beginning to be a trend to buy ‘Made in USA” products. As a result, on January 15, 2013, Walmart and Sam’s Club announced they will buy an additional $50 billion in U.S. products over the next 10 years.

U.S. voters supported Buy America policies by a 12-to-1 margin according to a survey of 1,200 likely general election voters conducted between June 28 and July 2, 2012 by the Mellman Group and North Star Opinion Research. The overwhelming support has grown since prior iterations of the same poll – Buy America received an 11-to-1 margin of support in 2011 and a 5-to-1 margin in 2010. A survey by Perception Services International of 1400 consumers in July 2012, found that 76% were more likely to buy a U.S. product and 57% were less likely to buy a Chinese product.

As a consumer, you should pay attention to the country of origin labels when they shop and buy “Made in USA” products whenever possible. Be willing to step out of your comfort zone and ask the store owner or manager to carry more “Made in USA” products. If you buy products online, there are now a plethora of online sources dedicated to selling only “Made in USA” products. Each time you choose to buy an American-made product, you help save or create an American job.

In his book, Buying America Back:  A Real-Deal Blueprint for Restoring American Prosperity, Alan Uke, recommends Country of Origin labeling for all manufactured products that “puts control in the hands of American consumers to make powerful buying choices to boost our economy and create jobs,” as well as reduce our trade deficit. The labels would be similar to the labels on autos, listing the percent of content by country of all of the major components of the product. This Country of Origin labeling would enable American consumers to make the decision to buy products that have most of their content “made in USA.”

If every American would make the decision to buy American products and avoid imports as much as possible, we could make a real difference in our nation’s economy. For example, if 200 million Americans bought $20 worth of American products instead of Chinese, it would reduce our trade imbalance with China by four billion dollars. During the ABC World News series called “Made in America,” Diane Sawyer has repeatedly said, “If every American spent an extra $3.33 on U. S.-made goods, it would create almost 10,000 new jobs in this country.”

In conclusion, if we want to create more jobs, reduce our trade deficit and national debt, we must support our manufacturing industry so that it could once again be the economic engine for economic growth. Following the suggestions in this article could make the “Great American Job Engine” roar once again.

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Congress Hasn’t Averted the Real Fiscal Cliff

Tuesday, January 15th, 2013

The “kick the can” legislation that passed in the wee hours of January 1st didn’t address the real economic issues threatening a fiscal cliff for the United States ? the massive trade deficit and the rapidly escalating national debt. This article will show how these two economic issues are interrelated.

The trade deficit grew from a low of $91 million in 1969 to a peak of $698.3 billion in 2008, dropping down to$379 billion in 2009 due to the worldwide recession before climbing back up to $559.8 billion in 2011. Final figures for 2012 are not available yet, but the trade deficit through the first 11 months of 2012 is running at an annual rate of $546.6 billion.

Our trade deficit with China grew from only $6 million in 1985 to a high of $295.4 billion in 2011, after it had dropped down to $226.8 billion in 2009 during the recession. China’s portion of America’s trade deficit has nearly tripled ? from 22 percent in 2000 to 60 percent in 2009 and 52.7 percent in 2011. In the 11 years since China joined the WTO, the U.S. trade deficit with China has grown by 330 percent.

The national debt has grown from $5.6 trillion in 2000 to $16.4 trillion on January 12th. As of July 2012, $5.3 trillion or approximately 48% of the debt held by the public was owned by foreign investors, the largest of which were China and Japan at just over $1.1 trillion each.

“The estimated population of the United States is 314,243,893 so each citizen’s share of this debt is $52,304.77. The National Debt has continued to increase an average of $3.84 billion per day since September 28, 2007!”

As you can see, the debt accelerated after the economic collapse in the fall of 2008 and has continued to accelerate since because of the recession, automatic increases in unemployment benefits, food stamps, and social security payments for early retirement, as well as stimulus spending. The all-time record of increasing the debt by $1.1 trillion was set by President Bush in 100 days between July 30 and Nov 9, 2008 to avert the economic collapse of major banks and Wall Street companies. “Recessions cut tax revenues—in this case, dramatically, which accounts for nearly half of the deficit.”

According to Tom Donohue, head of the U.S. Chamber of Commerce, the nation’s largest business lobbying group, “The single biggest threat to our economic future … is our exploding national debt, driven by runaway deficit spending, changing demographics and unsustainable entitlements,” he said in his annual “State of American Business” address.

The reason why our massive trade deficit and escalating national debt are interrelated is that they share a common factor:  the American manufacturing industry and the jobs it generates or the jobs it has lost.

According to the Information Technology and Innovation Foundation report, the U. S lost 5.7 million manufacturing jobs in the decade of 2000 to 2010, more than the total number of manufacturing jobs than the rate of loss in the Great Depression (33.1 % vs. 30.9%). Manufacturing jobs now only make up 9% of the American workforce, down from about 14% in 2000. Two million manufacturing jobs were lost in the Great Recession, adding to the 3.7 million we had already lost. Less than 10% have returned since the end of the recession. The report concludes:

  • A large share of manufacturing jobs was lost in the last decade because the United States lost its competitive edge for manufacturing. It was due to a failure of U.S. policy, not superior productivity.
  • The loss was cataclysmic and unprecedented, and it continues to severely impact the overall U.S. economy.
  • Regaining U.S. manufacturing competitiveness to the point where America has balanced its trade in manufacturing products is critical to restoring U.S. economic vibrancy.
  • Regaining manufacturing competitiveness will create millions of higher-than-average-wage manufacturing jobs, as well as an even greater number of jobs from the multiplier effect on other sectors of the economy.
  • The United States can restore manufacturing competitiveness and balance manufacturing goods trade within less than a decade if it adopts the right set of policies in what can be termed the “four T’s” (tax, trade, talent, and technology).

The Economic Policy Institute briefing paper, “The China Toll,” written by Robert Scott focuses on the effects of our trade deficit with China. He wrote, “Growing U.S. trade deficit with China cost more than 2.7 million jobs between 2001 and 2011, with job losses in every state.”

“Between 2001 and 2011, the trade deficit with China eliminated or displaced more than 2.7 million U.S. jobs, over 2.1 million of which (76.9 percent) were in manufacturing. These lost manufacturing jobs account for more than half of all U.S. manufacturing jobs lost or displaced between 2001 and 2011.”

The growing trade deficit with China has been a prime contributor to the crisis in U.S. manufacturing employment. When you take into account the multiplier effect of manufacturing jobs creating three to four other jobs, the U. S. has lost six to eight million jobs as a result of the trade deficit with China alone. The Department of Commerce estimates that each $1 billion in trade deficit translates to about 13,000 lost jobs, so the $559.8 billion in the total trade deficit for 2011 represents a loss of 7,277,400 jobs. This explains why we have had a virtually jobless recovery since the end of the recession and why the unemployment rate has stayed high for so long.

The average manufacturing job nationwide pays about $40,000 per year ($20/hour). According to the 2012 federal tax table, a person making that amount of money would pay about $4,000 to $5,000 per year in taxes, depending on whether they are single or have one dependent. Without doing the complicated math to calculate the number of lost manufacturing jobs each year times the taxes those workers would have paid, you can see that the result could be trillions of dollars in lost tax revenue since the year 2000.

Adding this lost tax revenue to the cost of an unemployed worker in the form of unemployment benefits (about $15,000 year for a $40,000/year job) and possibly food stamps, you can understand the major cause of why our national debt has escalated so dramatically in the last ten years. We could raise income taxes to the highest rates of European countries such as Sweden (75%) and still not be able to pay down our national debt. The solution is not raising taxes, it is creating more tax payers, especially those employed in the higher paying jobs of the manufacturing industry. Our trade policies that result in such huge trade deficits and loss of manufacturing jobs have transformed taxpayers into tax consumers.

Because of our trade deficit with China and our national debt, we are essentially writing two checks to China every month:  one to pay for the cost of the imports we buy and the other to pay for the cost of borrowing money from China to pay for the cost of running our government.  By maintaining this trade deficit, we are sending our tax revenue to China; then, we borrow a portion of it back to pay our expenses. This is unsustainable!

We are at a cross roads in our country. We must change our tax, trade, and regulatory policies to rebuild our manufacturing industry to increase the number of taxpayers if we ever want to pay down our national debt, reduce our unemployment rates, and avoid economic collapse.

 

 

 

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