Don't Forget America's Non-China Trade Problems!

Alan Tonelson |

Hats off to the unlikely duo of General Electric (GE) and The Atlantic magazine for recent reminders that, for all their importance, China-related trade issues aren’t the only important trade issues facing the U.S. economy – and requiring outside-the-box thinking.

General Electric’s contribution owes to its heavy-handed response to Congress’ decision to shut down the Export-Import Bank. Like most U.S.-owned multinational manufacturers, GE claims that the Bank has been crucial to its hopes for overseas sales – and for the whole country’s. I recently showed that the share of U.S. exports aided by Exim financing has been trivial (in the context of depicting its closure as a minor Washington mistake), but GE CEO Jeffrey Immelt seems determined to make American lawmakers and the country at large pay the piper.

On September 15, the company announced that it would create 400 manufacturing jobs in France rather than in the United States to enable it to benefit from France’s version of Exim support, and that it would move 100 such existing American positions to China and Hungary for similar reasons. Just today, the company reported that it had secured access to export financing of up to $12 billion from Britain, and would create up to 1,000 jobs in the UK if this credit led to contracts.

Lots of the conservatives who favored Exim’s demise have responded byfulminating about GE “bullying.” (Boeing, the biggest recipient of Exim financing, has played this game, too, but more subtly.) They also, however, insist that these corporate arguments are phony, and that the threatened and actual job moves either would have been made anyway, or represent shifty numbers-shuffling – which logically weakens the basis of their ire. But these avowed corporate welfare foes can hit back at corporate blackmail, and support valuable domestic jobs and production if the companies aren’t bluffing or fudging, by intelligently using trade policy.

For example, they could support tariffs on any GE or Boeing products built overseas thanks to foreign government financial subsidies to ensure that those products can’t be imported back into the United States – the world’s most important single national market. They could also back tariffs on many or all foreign-made goods by these companies if the foreign government subsidies enable the blackmail-happy firms beat out domestic goods for sales in third countries. Alternatively (or in addition to these measures), Exim opponents could tell the world’s GE’s and Boeing’s that their possibilities for selling to the U.S. government – a huge customer – will look pretty dim unless their behavior improves.

As must be clear to anyone following business and economic new these days, foreign governments like China’s discipline other countries’ businesses like this as a matter of course. It seems high time for Washington to get a clue.

The Atlantic magazine spotlighted non-China trade issues less directly. It’s just published a long article about an American manufacturing company moving high-value jobs to Mexico without once mentioning the North American Free Trade Agreement (NAFTA), or even trade policy. (“Globalization” was referred to once.) This is like publishing a long article about the civil rights movement without mentioning segregation. Here’s why.

NAFTA’s creation (which technically resulted from Mexico being added to an existing U.S.-Canada free trade agreement) created decisive incentives for American manufacturers to shift factories and employment across the Rio Grande. Mexico’s workers had always been very cheap compared with their U.S. counterparts. Moreover, Mexico’s environmental and worker safety regulations had always been lightly enforced – when they were enforced at all – which further reduced production costs. So in principle, boosting profits while supplying the high price U.S. market from Mexico was long an appealing option for American industry.

But NAFTA made such arrangements an out-and-out no-brainer by offering U.S.-based companies a guarantee that neither American presidents nor Congresses could slap tariffs on Mexico-origin imports in the future, and thereby reduce and even destroy all the benefits of Mexico offshoring. This guarantee in turn was the product of NAFTA’s dispute-resolution mechanism, which gave Mexico an equal say with the United States (and Canada) in dealing with charges of treaty violations and authorized retaliation, even though the U.S. economy represents some 90 percent of the newly integrated North American economy.

This Atlantic article makes some valuable points – noting, for example, that the offshored product it examined wasn’t the kind of labor-intensive good that NAFTA’s supporters promised would dominate any job and production lossesresulting from the agreement. Author Chad Broughton also usefully highlights how lax and often indulgent U.S. regulation of private equity firms – one of which owned the factory in question – can create its own significant spurs to offshoring. But that financial issue would have meant little had American trade policy decisions not made such employment and output shifts a practically irresistible option for so much of U.S.-based industry.

But if NAFTA did indeed generate such a “giant sucking sound” (as Ross Perot so memorably predicted during his 1992 independent presidential campaign) of jobs moving south, why hasn’t Mexico become an even more important manufacturing power and exporter to the United States? Actually, trade policy provides the main answer to that question, too. Almost immediately after practically inviting domestic manufacturers to move to Mexico, the U.S. government decided to make many other third world offshoring opportunities available as well, via trade deals with Central America, South America’s Andean countries, and sub-Saharan Africa. Most important, Bill Clinton and his successors have worked overtime to expand U.S. trade with China dramatically.

The offshoring companies have thus been able to play different low-income countries off against each other in a worldwide investment competition that’s been great for business (although it also contributed to the global imbalances thathelped set off the financial crisis from which even many of them didn’t escape). But the losers – which have included much of Mexico – have hardly been confined to America.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
GE General Electric Co 31.34 -0.05 -0.16 21,401,028

Comments

Emerging Growth

CMX Gold & Silver Corp.

CMX Gold & Silver Corp is an exploration stage company. The Company is engaged in the acquisition, exploration and development of silver and copper/gold properties in the USA.

Private Markets

Cross Campus

With over 500 members and operating 80,000 square feet by summer 2016, Cross Campus is one of the country’s top ten shared, collaborative office or "coworking" operators in the US.…

Dropbox, Inc.

Dropbox is a service that allows their users to bring all photos, docs, and videos anywhere, and share them easily. Any file saved to Dropbox will automatically save to all…