Is the US moving toward a future of “zero net offshoring” for manufacturing?

manufacturingIncreasing competition from manufacturers abroad has led many  to conclude that manufacturing industries have no place in a relatively high wage, knowledge-driven economy like that of the United States. Others contend that manufacturing will be the key to reestablishing prosperity and bringing high paying jobs back to the United States. Various plans have been put forward for cooperation between businesses, governments, and organizations that will spur investment, production, and innovation at home, while boosting exports abroad.

Experts disagree on whether America has lost its edge in manufacturing merely due to emerging foreign competitors or due to a combination of foreign competition and domestic policies that stifle manufacturing efficiency. A certain amount of outsourcing assembly or production of inputs is expected due to specialization, but the real blow to American manufacturing came as final goods production moved overseas. Benefits have accrued to consumers due to lower prices for foreign manufactured goods, although these benefits must be weighed against the costs of lower employment and income in America. Profits are often higher for offshored businesses, but these profits are often accompanied by unforeseen transaction costs. Offshoring can also ensure access in emerging markets.

The Manufacturing Institute reports that US policy towards taxing and regulating businesses has exacerbated the movement of companies overseas, and that changes could be made to promote the “re-shoring movement”. Their studies estimate that, “it is 20 percent more expensive to manufacture in the United States than it is among out major trading partners, excluding the cost of labor” and “the regulatory burden on manufacturers is equivalent to an 11 percent tax on their businesses.”  The statutory and effective corporate tax rates, at 40.0% and 34.6% respectively, are among the highest in the world. These structural costs disadvantage American manufacturers and encourage offshoring.

President Obama’s State of the Union address and a recent white paper outline a plan to remedy some of these issues, although the success of any proposal in today’s fiscal climate is uncertain. The plan calls for the creation of fifteen Manufacturing Innovation Institutes to attract R&D funding and speed the process from basic research to product development. It encourages states and cities to offer incentives to companies that will produce in America, lowers the corporate tax rate for manufacturers to 25%, and provides tax credits for clean energy research and production. Additionally, opening markets through trade agreements such as the Trans-Pacific Partnership and proposed talks with the European Union could either lead to a manufacturing boost, or encourage even more production to move overseas depending on the markets’ reaction and the language of the agreements.

Although offshoring is a rational choice for many businesses to cut costs, the combination of hidden costs to foreign production, rising foreign labor costs, complex supply chains, and business-friendly policy changes may serve to reverse some offshoring. The nascent re-shoring movement is a testament to this fact, and strong economic trends are making such moves more desirable. If policy does not hamper these developments the US could see “zero net offshoring” in the near future, where businesses make decisions about where to locate production facilities based on a more level assessment of costs and benefits.

Posted by: Ben Copper

Sources: Manufacturing.net, The Manufacturing Institute, White House press release, The Economist

Photo Credit: courtesy of flickr user The U.S. National Archives

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The Consequences of Sequestration

budget signWith Congress once again unable to reach any type of deal, it appears as though the US was able to vault the fiscal cliff only to fall right back into the pit of sequestration. This threat of the budget sequester—in other words, automatic, across-the-board cuts in funding—is soon to become a painful reality that would significantly hamper US economic growth.

The cuts were born of the epic 2011 fight over the debt ceiling. The idea was to create a “trigger” so onerous and indiscriminate that both parties would have an incentive to devise a smarter way to reduce deficits. Instead, the bipartisan committee was unable to reach an agreement and now Congress is faced with the undesirable but increasingly likely prospect of sequestration. This would mean $109 billion in automatic spending cuts, with defense spending being cut by 13 percent. The sequester would also lead to a short term contraction in GDP, since government spending is a component of GDP calculation. This contraction in growth would be compounded by Federal Reserve policy. For example, IMF research suggests that under current conditions, with slack in the economy and the central bank’s policy rate close to zero, the multiplier on government spending may be higher than normal. Moreover, the substantial cuts in spending would force the federal government to decrease pay and lay off government employees, an event that is highly adverse to both US economy and morale.

All this could be avoided if Republicans and Democrats can concede on issues closest to them. For Republicans, that would be tax increases, whereas for Democrats, that would be entitlement spending. Despite both sides wanting to avoid the sequester, it seems that Republicans and Democrats are unwavering in their stubbornness and it is becoming less and less likely that a deal will be struck before the March 1st deadline. It is a testament to the ineptitude of the Congress if they allow the sequester to inflict economic harm that could have been circumvented through logic and compromise. Instead, it remains to be seen whether the sequester will take effect or if another down to the wire political spectacle awaits.

Posted by: Matthew Goldberg

Sources: Economist, CNN Money, Forbes

Photo Credit: budget courtesy of flickr user 401(K) 2013

Guest Contributor William Krist: Exchange Rate Manipulation

gold coins from skyNegotiators for a Trans-Pacific Partnership Free Trade Agreement need to address currency manipulation when they meet March 4th in Singapore.  Deliberate manipulation of foreign exchange rates by a number of countries is one of the most egregious of all unfair trade practices today.  By maintaining an artificially low exchange rate, a country in effect imposes an extra charge on imports (equivalent to a tariff) and also gains an unfair trade advantage in the U.S. and third country markets.  While this practice has long been recognized as an unfair trade practice, international trade rules have no effective provisions to address this issue.  The U.S. wants the Trans-Pacific Partnership agreement to be a template for future trade agreements.  To achieve this goal, currency manipulation must be addressed in the agreement.  (To read the entire paper, click here)

William K. Krist is a Senior Policy Scholar at the Woodrow Wilson Center.  He is a former Senior Vice President of the American Electronics Association.  He has written extensively on trade, development, and the environment.

Global Trade and the State of the Union

SOTUUnsurprisingly, the State of the Union address focused primarily on the domestic economy. President Obama emphasized issues such as the looming sequester and the need for immigration, entitlement, and tax reform. In terms of major announcements on the international trade front, the President revealed that the US aims to start talks with the EU towards creating a “comprehensive transatlantic trade and investment partnership.” This is a significant development for a multitude of reasons. A free trade partnership between the US and the EU would streamline trade by reducing regulatory barriers and tariffs, thereby expanding the already huge amounts of exchange. Not only would a transatlantic free trade agreement heighten the interconnectedness of these two massive markets, it would drive growth, deflect increasing competition from China, and would help reestablish the authority of the United States and Europe as leaders of the global economy.

The President also announced that the US is on course to finish negotiations over the Trans-Pacific Partnership, an agreement that will substantially increase US trade presence in the Pacific. There was no date given about when the talks would be complete, but it appears that things are falling into place. In addition, the President outlined some domestic economic policies that were relevant to global trade issues. For instance, President Obama’s unveiling of the “Fix-It-First” program, which intends to put people to work on urgent infrastructure repairs, could improve US trade performance through more efficient and faster travel times. Smart Grid enhancement would make the US a more appealing place to do business and it would protect vital information trade-lanes from cyber disruptions. The energy boom, both through enhanced fossil fuel production and clean energy development, will allow the US to dramatically increase its energy exports and could fundamentally transform the global energy trade. Through the creation of innovation centers, President Obama wants to accelerate the continuing trend of re-shoring in order to increase US export trade.

While domestic issues were clearly the main theme of the address, it is vital that President Obama address the larger context issues of global trade to enact policy that will take advantage of new economic opportunities. It would also be a mistake to underestimate the potential of trade as a key engine of economic growth for the US and the global community. A secure and healthy global economic structure is important in order to maintain further international stability.

Posted by: Matthew Goldberg

Sources: Wilson Center, United States Trade Representative, ABC News, Department of Energy

Photo Credit: Presidential Seal courtesy of flickr user Dave Newman

Currency Devaluation and the Threat of Global Currency War

moneyThe rapid devaluation of the Japanese yen has created fresh fears of global currency instability. Citing perennially slow economic growth, Shinzo Abe—the newly elected Prime Minister of Japan—decided to crackdown on deflation through aggressive monetary policy easing that would significantly devalue the yen. However, policy-makers from the EU and the US have decried Japan’s move as an attempt to gain a competitive trade advantage by cheapening its currency so that its goods and services cost less, thereby increasing export trade. The Euro in particular has seen a marked rise that may hurt the EU’s economic recovery if growth and demand for European goods were to slow down.  Japan has stressed that it is not deliberately trying to devalue its currency, saying the yen’s decline has more to do with a market correction following a period of strength. Nevertheless, there has been heated rhetoric demanding that Japan halt, or at least slow down, yen devaluation.

In order to diffuse tensions, the G7 (Group of Seven) countries—comprising the US, the UK, France, Germany, Italy, Canada, and Japan—said they would “consult closely” on any action in foreign exchange markets. Furthermore, the G7 avoided criticizing Japan and stated that “We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates.” Japanese policy-makers were reassured by the announcement and according to Taro Aso, the Japanese finance minister, the statement “properly recognizes that steps we are taking to beat deflation are not aimed at influencing currency markets.”

The statement by the G7 comes ahead of a meeting of G20 finance ministers and central bankers in Moscow on Friday. It is expected that Japan will come under scrutiny for its currency policy. Hopefully, the members of the G20 will be able to reach some sort of agreement to regulate and resolve tensions that have arisen from exchange rate discord in order to avoid a potential currency war.

Posted by: Matthew Goldberg

Sources: New York Times, Reuters, Financial Times, CNN Money, Finance Enquiry

Photo Credit: Forex Money for Exchange in Currency Bank courtesy of flickr user epSos. de

Graduation Rates: the Good, the Bad, and the Ugly

graduationOne of the main goals President Barack Obama laid out during his first term was to return America to its previously held position as the country with the highest number of college graduates per capita by 2020. This American Graduation Initiative (AGI) requires increasing the percentage of college graduates in the US workforce by 50% by the end of the decade. In order for the AGI to be accomplished, the number of college graduates would have to increase by an annual 16% every year from 2010-2020. However, the problem in reaching this goal may be rooted in low graduation rates, rather than low enrollment numbers.

America2020 is a private sector approach to the same problem, focusing specifically on STEM (Science, Technology, Engineering, and Math) graduates. Their plan is to encourage STEM degree completion by committing industry professionals to volunteer their time mentoring and teaching students in these fields. There will be an estimated 10 million STEM job openings by the year 2020, and OECD data reports that US students tend to have a low interest in science. This approach has already seen significant improvements in graduation rates with the schools involved and those students who have participated in the program are far better prepared for college.  Citizen Schools, one of the major forces behind the America2020 initiative, along with representatives from the White House and several big-name companies recently convened here at the Wilson Center to discuss details of its implementation and how they could be involved.

The American Dream 2.0 is an initiative by the Bill & Melinda Gates Foundation that, “offers a comprehensive framework for how the hundreds of billions invested in the financial aid system can increase college access, affordability, and completion”. According to the Foundation’s findings, 46% of students enrolled in higher education institutions fail to graduate within six years. This rate increases to 63% for African Americans and 57% for Hispanics. In addition, total annual borrowing for college has more than doubled in the past ten years, as tuition rises faster than family income or inflation. These statistics are worrying, because those who borrow money for school but end up dropping-out without earning a degree have higher unemployment rates than those who graduate.

Good news comes from high school completion rates, which reached a record high in 2010 at 78.6%. While this is certainly heartening, fewer than half of those in the class of 2012 were ‘college ready’ as determined by the College Board last fall. In order to meet the challenges of President Obama’s AGI, education policymakers need to focus not only on college enrollment rates, but also on access, affordability, completion rates, and high school rigor. Although in the current fiscal climate, large scale investments in education may be harder and harder to implement, the effects of education investment on the productivity and success of our nation’s young people are immeasurably important.

By: Ben Copper

Sources: Huffington Post, PR Newswire, White House records, EducationSector.org, Citizenschools.org

Photo Credit: flickr user: Smithsonian Institution

Supply & Safety: Monitoring Imported Food

WWC_page_C_v1On Tuesday, February 5th 2013, the Program on America and the Global Economy (PAGE) hosted a discussion about how international trade policy affects the safety standards for imported food. The panel consisted of Lori Wallach, director of the Public Citizen’s Global Trade Watch, Ted Poplawski, special assistant to the director on Import Operations and Policy at the FDA, Carmen Stacy, director of Global Issues & Multilateral Affairs at the Grocery Manufacturers Association, and Les Glick, partner at Porter Wright Morris & Arthur. The event was moderated by Kent Hughes, director of the Program on America and the Global Economy at the Wilson Center.

Lori Wallach was the first to present on the topic and began by outlining how current trade agreements, combined with growing food imports, erode the safety standards for imported food. She stated, “Consumer groups did not get into trade; trade agreements invaded food safety policy.” One of the main points that she emphasized was that the World Trade Organization sanitary and phyto-sanitary (“WTO-SPS”) standards for promoting food safety are ineffective. Prior to the formation of the WTO, imported food safety was regulated on a plant by plant basis, which allowed for more quality control. However, under SPS, a WTO country is generally allowed to import food to the US if their sanitary and phyto-sanitary measures are deemed to be “equivalent”. Wallach expressed concern that “equivalence” is very vague and has led to food safety violations and increasingly infrequent USDA spot checks. She invoked the example of the “Chinese Chicken Incident,” in which the WTO stated that the US ban on Chinese poultry was unfair, to show how international trade policy threatens US domestic food safety. Wallach also expressed the view that food safety standards in the Trans-Pacific Partnership (“TPP”) are not stringent enough to protect consumer welfare, especially since the US imports large amounts of seafood from TPP members.

Lori_Wallach

The next speaker, Carmen Stacy explained the views of the food import industry and its goal to make sure products are safe, while also keeping global supply chains open and flexible. She spoke about the need for transparency in the food import market to make sure that firms and consumers know the origin of the food. Overall, the industry view was largely consistent with current international trade expectations. However, in terms of the TPP, Stacy stated that the food import industry supports a WTO+ food safety policy that is stricter than traditional WTO-SPS standards.

Carmen_Stacy

Ted Poplawski spoke about the FDA’s role in regulating imported foods. He noted that the FDA’s main responsibilities towards imported foods were ensuring food safety and administering correct labeling. Poplawski illustrated that 15-20% of US foods come from foreign countries, including 35% of produce, 60% of spices, and 80% of seafood, while less than 2% is inspected. In addition, the FDA has introduced some new food safety framework rules to protect consumers. The most important are: the Produce Safety Standards, which focuses on identified routes of microbial contamination, and the Preventative Controls for Human Foods, which attempts to ascertain risk to prevent hazards. He also described the Voluntary Qualified Importer Program, which gives FDA approved certification to importers that monitor food safety and perform risk based analysis to reach a certain standard. This newly introduced safety framework could greatly improve the food import situation if enforced properly.

Ted_Poplawski

The final panelist, Les Glick, presented an alarming video about the lack of regulation for imported foods and the threat of contamination. He then went on express his view that China is the number one problem when it comes to imported food safety.

Les_Glick

According to Glick, China’s WTO membership has helped it break into US markets even though it is a known violator of food safety standards. Glick expressed concern that the WTO is hampering the US ability to fully enforce domestic regulation. He pointed to WTO rulings against the US in its attempts to uphold domestic food safety regulations because they  violate the MFN (most favored nation) principle in regards to the SPS standards. Glick stated that it might be a wise idea to take food and agriculture out of the WTO. This would allow countries to enter into bilateral agriculture agreements with their own imported food safety standards and it would also accelerate the Doha round of multilateral trade negotiations, which has been stalled due to disagreements over agricultural trade.

Questions for the panel included clarification over the country of origin labeling (COOL) verdict involving Mexico, Canada and the United States, possible food safety enforcement mechanisms in the TPP, and the issue over how to define a food that is “high risk.”

Posted by Matthew Goldberg