The China Threat that Isn't, Ctd.

Remember how China, armed with a "manipulated currency" and massive government subsidies, was allegedly taking all of America's manufacturing jobs?  Well, it looks like the Chinese are in a giving mood all of a sudden.  First, the FT reports on a new study by Boston Consulting Group (available here) showing that the "re-shoring" phenomenon (discussed frequently here) is picking up speed:

Rising Chinese labour costs are changing the economics of global manufacturing and could contribute to the creation of 3m jobs in the US by 2020, according to a study being released on Friday.

The Boston Consulting Group analysis says the new jobs will be generated by a “re-shoring” of manufacturing activity lost to China over the past decade.

“Re-shoring is part of a broad trend that will emerge as ... production gradually swings back to the US,” Hal Sirkin, a senior partner at the consultancy, told the Financial Times.

The Boston Consulting Group estimates that the trend could cut the US’s merchandise trade deficit with the rest of the world, excluding oil, from $360bn in 2010 to about $260bn by the end of the decade. The shift would also reduce its soaring deficit with China, which reached $273bn in 2010 and has triggered an intense political controversy over China’s exchange rate policies.

“While Chinese labour costs are rising, US competitiveness has been improving,” says Mei Xu, the Chinese-born co-owner of Chesapeake Bay Candle, which makes candles and other home fragrance products. “We can invest in automation to make our candles in a factory near Baltimore for a similar cost to doing the same job in China.”

Chesapeake Bay Candle has created 50 jobs, with another 50 likely next year, since it invested in US production. Half of the company’s production is now US-based. Last year all of its products were made in China.

According to Ms Xu, her company can now react more rapidly to customer design requests, while cutting out hold-ups due to transport delays and customs bureaucracy....

John Heppner, of the security division of Fortune Brands, a US consumer goods company, said its Wisconsin padlock factory hired 100 workers after “a reappraisal of whether it makes sense to base as much of our manufacturing in China”.

The BCG study is definitely worth reading in full, so be sure to check it out.  And according to another article out today, this time in the Wall Street Journal, Chesapeake Bay Candle and Fortune Brands definitely aren't alone:

Globalization has come full circle at Otis Elevator Co.

The U.S. manufacturer, whose elevators zip up and down structures as diverse as the Empire State Building and the Eiffel Tower, is moving production from its factory in Nogales, Mexico, to a new plant in South Carolina.

Fifteen years ago, Otis Elevator joined the stampede of U.S. manufacturers who moved production to Mexico in a bid to save money. Now they're moving it all back. Tim Aeppel explains why on The News Hub.

More startling: Otis says the move will save it money.

What's happening at Otis is part of a broader shift in the way manufacturers tally costs.

Their outlook has been changing as the cost of producing abroad has risen and they have devised more efficient ways to make things close to where they want to sell them.

International companies ranging from Ford Motor Co. to General Electric Co. have started returning to the U.S. some jobs that they had previously shipped offshore, a process sometimes dubbed as "reshoring."...

A number of forces are behind the modest influx. Wages and other costs are going up in foreign countries—especially China—while pay in many industrial sectors inside the U.S. has risen slowly or even fallen in many cases. Transportation costs have grown, as have the costs of holding large stocks of inventory, a common precaution when producing goods far from their end market.

Companies also recognize how moving jobs to the U.S. at a time of high unemployment can enhance their image. "A lot of companies still don't publicize plant closures in the U.S.-which they're still doing," says Mr. Paul, while going out of their way to tout moving jobs back into the country. But longer term, he says, there should be genuine gains for the American economy and workers.

Stephen Maurer, the head of the manufacturing practice at consultants AlixPartners LLP, says some things will always be made in low-cost places, like clothes, "because they involve tons of labor."

But for many other goods, the numbers are shifting. In new study, Mr. Maurer found that it's still cheaper to make a long list of basic industrial goods in places like Vietnam, Russia, or Mexico, but the gap has shrunk. Some analysts say this trend is accelerating and will eventually make the U.S. the cheapest place to produce a wider range of goods. Otis thinks that's already the case for its elevators....

Among other things, the [South Carolina] plant will be closer to many of the company's customers, about 70% of whom are on the East Coast of the U.S.

The company figures that will lower its freight and logistics costs 17.3%.

Another 20% of savings, the company says, will come from "efficiencies" of having all its white-collar workers associated with elevator design and production located at the new factory....

It also will be easier for customers to visit the plant. Nogales is 65 miles from the nearest U.S. commercial airport, in Tucson, Ariz.

That AlixPartners study on what they call "near-shoring" is here.  The WSJ article goes on to say that not all jobs leaving China are coming to the states - other, low-cost, labor-intensive ones are heading to Mexico.  But regardless of whether the manufacturing jobs are heading to the United States or to Mexico, three things are abundantly clear: (i) rising costs in China are causing more than a trickle of manufacturers to leave the country and move elsewhere; (ii) many companies are discovering that its actually better for their bottom lines to manufacture in the United States; and (iii) the idea that China is going to inevitably take all of the United States' manufacturing jobs is, once again, proving to be a somewhat misguided prognostication.

Maybe it's news like this that caused AEI's Dan Blumenthal to list in a new FP op-ed the following items among his "top ten unicorns about China policy":

3. China will inevitably overtake America, and America must manage its decline elegantly. This is a new China-policy unicorn. Until a few years ago, most analysts were certain there was no need to worry about China. The new intellectual fad tells us there is nothing we can do about China. Its rise and America's decline are inevitable. But inevitability in international affairs should remain the preserve of rigid ideological theorists who still cannot explain why a unified Europe has not posed a problem for the United States, why postwar Japan never really challenged U.S. primacy, or why the rising United States and the declining Britain have not gone to war since 1812. The fact is, China has tremendous, seemingly insurmountable problems. It has badly misallocated its capital thanks to a distorted financial system characterized by capital controls and a non-market based currency. It may have a debt-to-GDP ratio as high as 80 percent, thanks again to a badly distorted economy. And it has created a demographic nightmare with a shrinking productive population, a senior tsunami, and millions of males who will be unmarriageable (see the pioneering work of my colleague Nick Eberstadt).

The United States also has big problems. But Americans are debating them vigorously, know what they are, and are now looking to elect the leaders to fix them. China's political structure does not yet allow for fixing big problems....

4 (related to 3). China is America's banker. America cannot anger its banker. In fact, China is more like a depositor. It deposits money in U.S. Treasurys because its economy does not allow investors to put money elsewhere. There is nothing else it can do with its surpluses unless it changes its financial system radically (see above). It makes a pittance on its deposits. If the United States starts to bring down its debts and deficits, China will have even fewer options. China is desperate for U.S. investment, U.S. Treasurys, and the U.S. market. The balance of leverage leans toward the United States....

6. America's greatest challenge is managing China's rise. Actually, America's greatest challenge will probably be managing China's long decline. Unless it enacts substantial reforms, China's growth model may sputter out soon. There is little if nothing it can do about its demographic disaster (will it enact a pro-immigration policy?). And its political system is too risk averse and calcified to make any real reforms.

Good stuff.  (Bluementhal's foreign policy insights are also worth checking out, of course.)

So given all of this news and analysis (and plenty more like it), can someone please explain to me again why so many US politicians and unions are blaming China for all of America's economic problems and lashing out at the Chinese in order to allegedly prevent China's inevitable destruction of the US economy?

Oh, right.

Can America Compete with Cheap Labor Countries?

One of the constant refrains you hear from people opposing trade liberalization is that, sure, it sounds good in theory, but in reality free trade is a disaster for America because the USA simply cannot compete with low-wage countries like China, and thus "outsourcing" will crush the American worker while enriching fat-cat industrialists.  But does this argument jibe with reality?

In short, no.

Thomas Heffner of Economy in Crisis provides a good example of the protectionists' most basic outsourcing argument:

American workers can not and should not have to compete with third world wage rates. Some Chinese manufacturers are paid 33 cents an hour according to a 2005 AFLCIO report. This cents-an-hour pay in many countries around the world has caused American companies and entire industries to move abroad (see the lost industry list here). It also led Princeton economist Alan Blinder to estimate 42-56 million jobs could potentially be sent overseas.

And trust me, Heffner is not alone - instances of this argument literally flood the interwebs (and our political discourse).  But unfortunately for the folks using such simplistic defeatism to justify their protectionist policies, their arguments simply cannot withstand scrutiny when checked against the actual facts on the ground, which show that labor costs are only one of many factors that executives consider when deciding where to locate a factory.  That fact is made abundantly clear in this new FT story:

Most big US manufacturing companies are considering relocating factories from low-cost Asian countries to the US or Latin America as they face rising logistics and transport costs, according to a report being released today by Accenture, the consultants.

The earthquake and tsunami in Japan, which have wreaked havoc on global supply chains, have underlined how multinational manufacturers can find themselves stranded without critical components.

For example, General Motors, the US carmaker, plans to stop production today at a factory in Louisiana that makes pick-up trucks, due to lack of parts normally supplied from Japan.

Boeing, the aircraft-maker whose 787 Dreamliner relies on Japanese manufacturers for more than a third of its parts, said it had enough inventory of components for the next few weeks, but was unsure of supplies beyond that. Jamco, the Japanese company that makes the 787’s galleys, warned that deliveries could be affected by fuel shortages.

Caterpillar, the world’s largest manufacturer of earthmoving equipment by revenues, said its factories around the world could be “sporadically impacted” by the disruption to its Japanese supply chain. The company has already located alternative sources for components produced by its Japanese suppliers.

The problems in Japan could prompt big manufacturers to reassess the risks in their global supply chains. The Accenture report suggests that, long before the earthquake, such companies were already looking at simplifying supply chains by bringing them closer to end-markets.

Some 61 per cent of manufacturing executives surveyed by the consultancy said they were considering more closely matching supply location with demand location by onshoring or “nearshoring” manufacturing and supply.

Matt Reilly, Accenture’s managing director of process and innovation performance, said that this could lead to a wave of factory relocations in the next three years as big US manufacturers move production from Asia to the US and Latin America. “In the past five years, companies were driving at labour cost arbitrage and lower material costs,” Mr Reilly said.

“But now that oil and transportation prices have gone up, productivity gains are not as big as they were, and there are issues around risk in supply chains, companies are starting to go where the customers are, instead of where the raw materials are.” He said the shift was also being driven by customer demands for quicker supply times and greater customisation.

“A lot of what’s going on in manufacturing innovation is about trying to get customer feedback quickly and injecting that back into the supply chain, so that features and functions can be changed quickly,” he said. “It’s tough to do that when you’ve got stuff going on in Thailand or Japan.”

A string of other international companies have also cautioned that their supply chains could be disrupted by the Japan quake, including Sony Ericsson, Volkswagen, Volvo and GKN, the UK car and aerospace components manufacturer.

In short, yes, labor costs are a factor in corporate sourcing, and sometimes a big one (especially for low-end manufacturing), but the idea that America simply can't compete with low-wage nations based solely on the wage differential is a huge fallacy.  And it's been a fallacy for a long time now (especially when fuel costs are on the rise).  Of course, anyone with a good grasp of basic economics coulda told you that, but it's certainly nice when reality so neatly tracks theory, isn't it?

Lots more on the outsourcing myth here, if you're interested.

Tuesday Quick Hits

Here are several headlines that are well worth your time:

• So the US and Mexico have apparently resolved their cross-border trucking dispute.  By my math, it only took the President two years - and many millions of dollars worth of needless tariffs on US exports - to "end" (only half the tariffs were immediately lifted) the dispute, and his big "solution" actually appears to be worse (i.e., more trade-limiting) than the program his party unlawfully eliminated back in 2009.  In that way this new "fix" is just like the President's solution to the US-Korea FTA - long delays, tons of lost export opportunities, and a worse agreement than the one his predecessor negotiated many years prior.  (Hey, are we seeing the emergence of an "Obama doctrine" on trade?)

• Simon Lester absolutely dismantles the latest trade-skeptical piece from Princeton's Uwe Reinhardt, which bizarrely characterizes the free trader's view of the world as "a giant cattle farm to be managed in ways that maximize the collective weight of the cattle."   Lester also gets in a good shot on everyone's favorite protectionist punching bag, Ian Fletcher.

• Speaking of Fletcher, Cafe Hayek's Don Boudreaux pens yet another devastating-yet-simple criticism of Flether's latest protectionist screed (be sure to read Don's enlightening follow-ups in the comments section);  AEI's Mark Perry follows-up by pointing out the basic economic ignorance of protectionism.  (I'd also note the utter insanity of Fletcher's assertion that mainstream media journalists "are well-paid and 'lean right' on trade."  Umm, WHAT?)

• Cato's Sallie James heartily fisks Sen. Sessions' silly press release extolling his new legislative "fix" to the GSP program.  I'd only add that, according to the his presser, Sessions is apparently proud to be aligned with this guy on the GSP issue.  (Err, congrats, Senator.  Way to think that one through.)

• Mark Perry highlights a fascinating study on the changing dynamics of the American and Chinese manufacturing sectors, and the fact that "some manufacturing is being brought back to the U.S. from China, especially for smaller American firms, because of: a) rising labor costs in China, b) inconsistent quality, c) shipping costs that have doubled in the last year (see chart above), and d) the lack of safeguards on intellectual property."  Put another nail in the "outsourcing" coffin. (Note: as I've previously noted, these "in-sourcing" and "re-shoring" phenomena have been happening for a while and seem to gain steam when energy prices are high.)

• EconLog's David Henderson efficiently undermines the misguided notion that unionization promotes the "middle class."  (Of course, one need only notice the unions' uniform opposition to free trade to realize the absurdity of that notion, but still....)

• The Examiner's invaluable Tim Carney mercilessly details how all those super-neato green subsidies aren't "driven by tree-hugging activists, earnest liberal bloggers, or ecologically minded citizens" and instead flow "from the lobbyists and executives of well-connected multinational corporations and built-for-subsidy startups that see profit in the loan guarantees, handouts, mandates, and tax credits Congress creates in the name of saving the planet." Shocking, I know.
  
• I think I'll be passing on this, uh, interesting business opportunity, thanks.

Enjoy, everyone.

Tuesday Quick Hits

A lot of very interesting things have come across my (virtual) desk over the last few days, and many of them support the things I've been discussing here over the last few months.  I highly recommend reading some, if not all, of these in full:

• Harvard's Edward Glaeser discusses why the "morality" of modern economics is rooted in human freedom (h/t Fred Smalkin).  In so doing, he underscores one of the big themes of Dan Ikenson's and my new paper on the broader case for free trade, its inherent morality: "Improvements in welfare occur when there are improvements in utility, and those occur only when an individual gets an option that wasn’t previously available. We typically prove that someone’s welfare has increased when the person has an increased set of choices. When we make that assumption (which is hotly contested by some people, especially psychologists), we essentially assume that the fundamental objective of public policy is to increase freedom of choice. Our opponents have every right to contend that economists are unwisely idolizing liberty, but they err by saying we sail without a moral North Star. Economists’ fondness for freedom rarely implies any particular policy program. A fondness for freedom is perfectly compatible with favoring redistribution, which can be seen as increasing one person’s choices at the expense of the choices of another, or with Keynesianism and its emphasis on anticyclical public spending. Many regulations can even be seen as force for freedom, like financial rules that help give all investors the freedom to invest in stocks by trying to level the playing field.  The belief in freedom does, however, create a predilection for human interaction and trade.  As [Milton] Friedman wrote, 'The most important single central fact about a free market is that no exchange takes place unless both parties benefit.' For many economists, defending free trade isn’t just about gross domestic product; it’s fighting for core values of freedom and human interdependence.  As [Adam] Smith said, 'To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation.'  Economists are often wary of moral exhortation, as many see the harm so often wrought by arguments that are long on passion and short on sense. But don’t think that our discipline doesn’t have a moral spine beneath all the algebra. That spine is a fundamental belief in freedom."

• The Economist: based on a rough (but very reasonable and scholarly) esitmate, trade with China has saved American consumers approximately $780 billion(!) between 2001 and 2010.  Chinese President Hu Jintao said it was around $600 billion, and the magazine's back-of-the-envelope confirmation of Hu's claim definitely calls for more research.  Nevertheless, WOW!

• Dallas Fed further confirms what we already knew: China's currency policy is not the primary driver of the US-China current account balance: "Normally, a fast-growing economy such as China would borrow money from the rest of the world instead of lending. An obvious suspect in China’s mounting current account surplus is the fixed exchange rate between its yuan and the dollar. An undervalued yuan makes Chinese products cheaper than those of competitors in international markets. As a result, China exports more than it imports. According to this explanation, yuan appreciation could rebalance the global economy. This argument has at least two flaws. First, the durability of the U.S.–China imbalance is difficult to explain. In order for the exchange rate to affect import prices, those prices can’t adjust.... Although in reality prices cannot change instantly, they do adjust over the long run; therefore, the exchange rate has only short-term effects on import prices and the current account. China has run a significant trade surplus against the U.S. for about 10 years (Chart 2). It is hard to imagine that prices have not fully adjusted to offset the exchange rate after such a long period. Second, an appreciating yuan may only minimally reduce the imbalance. Even in the short run, the exchange rate’s impact on import prices would be quite limited, studies have shown. Exporters usually pass on only a fraction of exchange rate movements when setting prices. About 20 percent of exchange rate changes were reflected in U.S. import prices during the past decade, Federal Reserve economists Mario Marazzi and Nathan Sheets found. Profit margins usually absorb some of exchange rate movement as exporters seek to maintain market share. Additionally, the currency under which import prices are invoiced also affects the exchange rate pass-through. Most U.S. imports from China are priced in dollars, and their prices are fixed in the short run. In this case, depreciation of the dollar against the yuan has no short-run effect on import prices from China."

• The FT's Clive Crook (rightly) dismantles Obama's State of the Union Address (h/t Phil Levy).  He hits on many of the problems with "competitiveness" and "investment" that I've discussed here at length.  My favorite lines: "The metaphor of growth as a race with winners and losers – all that stuff in the speech about Sputnik moments, falling behind, winning the 21st century – is nonsense. Over the long haul, if US productivity rises, so will US living standards. Why should growth in China or India hold back US productivity? No reason at all. Once conditioned to think “productivity” whenever a politician says “competitiveness”, you look at economic policy differently. Winning begins to seem overrated. What exactly do we win, you wonder? Being number one in worldwide production of solar panels would be nice, but how would that raise economy-wide productivity? The key to improving living standards lies not in winning the race to develop showcase technologies, but in accumulating capital, diffusing knowledge and accommodating the disruption that this entails."

• China is starting to experience some pretty significant trade diversion, but (unsurprisingly) very little of the sourcing is heading to the United States: "More than half of international buyers have tended to increase their sourcing from India and Vietnam due to continuous export price hikes from China, according to a recent survey by the Global Sources, a trade information provider.... Workers in Vietnam, however, are said to need twice as much time to finish one task, the Global Sources said. 30% of respondents said they plan to increase sourcing from Thailand. However, export price may not be the polled buyers' sole consideration, for 7% of them are considering increasing imports from countries that have higher production costs than China, including South Korea, Japan, the United States and the European Union."

• Meanwhile, the NYT notices (again) that Chinese inflation may shrink the US-China trade deficit.  Color me shockedtotally and utterly unsurprised.  Although most of this article just updates what we've already known for a while now, I think it's worthwhile to note this passage about the deleterious effects of higher Chinese import prices on US consumers: "The higher Chinese prices will tend to show up mainly in products like inexpensive clothing and other commodity goods in which labor and raw materials represent a bigger part of the final value — rather than in sophisticated electronics like Apple iPads, in which Chinese assembly is only a small fraction of the cost."  In short, the pain will mainly be felt by poorer American consumers and US manufacturers.  Wealthier Americans?  Not so much.  And yet it's the politicians who claim to "care" most about America's poor and the US manufacturing sector - and who demonize America's "rich" - that have for years now been demanding more expensive Chinese imports.  Maybe they're not telling us the whole story, huh?

• WTO Director General Pascal Lamy, channeling Cato's Dan Ikenson, explains in the FT why "Made in China’ tells us little about global trade": "As recently as 30 years ago, products were assembled in one country, using inputs from that same country. Measuring trade was thus easy. 2011 is very different. Manufacturing is driven by global supply chains, while most imports should be stamped “made globally”, not “made in China”, or similar. This is not an academic distinction. With trade imbalance causing friction between leading economies, the measures we use can gravely exacerbate geopolitical tensions at a time when co-operation is more vital than ever."  Good stuff from DG Lamy, but, yes, it should all sound very familiar.  However, I did find this stat to be new and interesting: "Measures we use also change the way trade affects jobs too. Research on Apple’s iPod shows that out of the 41,000 jobs its manufacture created in 2006, 14,000 were located in the US. Some 6,000 were professional posts. Yet since US workers are better paid, they earned $750m, while only $320m went to workers abroad. Indeed, the iPod may have never existed if Apple had not known that Asian companies could supply components, while both Asian workers and Asian consumers would manufacture and buy it. Statistics that measure value added can provide a more reliable way of seeing how trade affects employment."  And speaking of the WTO and trade statistics, the trade body is hosting a big seminar on the subject this week.

• The Heritage Foundation's Anthony Kim explains just how far Colombia has come in terms of economic and political freedom.  Maybe it's time we implemented that FTA, huh?

• China expert Lee Miller explains why the conventional wisdom (and hope?) that China's banking sector will be more, ahem, reserved in 2011 may be misguided.  Bizarre stuff.

• America is silly rich and relatively equal.  Also from the NYT's Economix blog comes your chart of the day on global income inequality, which shows that (i) contrary to the breathless claims of certain lefty bloggers out there, the United States is absolutely nothing like Brazil (or other major developing countries) when it comes to income inequality;and (ii) the "bottom 5 percent of the American income distribution is still richer than 68 percent of the world’s inhabitants" and "about as rich as India's richest."  Check it out:

• The always-great Becker-Posner Blog has more on inequality here (and here).  It's nothing groundbreaking, but definitely worth a read.

• More of the same: US manufacturing sector expands for the 18th straight month. Yawn. BUT, there is this little nugget: "The ISM Employment Index increased in January to 61.7%, which is the 16th consecutive month of growth in manufacturing employment and the highest reading for the ISM manufacturing employment index since April of 1973."  Don Boudreaux has more insights, including a link to a neat new story from MSNBC on the state of US manufacturing, here.

That should keep you busy for a while.  Now get to reading!

The Daily Show on US-China Trade and Manufacturing

H/T IELP Blog:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Wham-O Moves to America
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

I know I'm a total killjoy loser for commenting on this very funny segment, but I can't help it.  There's actually a very good real-world lesson or two in there.  One is why Wham-O is "re-sourcing" its manufacturing from China back to the US and why the company just doesn't establish manufacturing operations in the lowest-cost world labor market - because, contrary to the "race to the bottom" folks, labor costs aren't the only factor that a business considers when deciding where to establish its operations.  They also care about quality, reliability, rule of law, logistics and other things, and thus often decide that it's better to build and invest in the United States than China (or Bangladesh or elsewhere).  This is something that Dan Ikenson and I discussed at length last year (see. p. 14).

Second, Wham-O's experience in China - with its rising labor costs and focus on higher-value manufacturing - is a great, concrete example of a very important dynamic over there and further proof that the whole "race to the bottom" is complete nonsense.

Most importantly, however, the sketch is flat-out hilarious.

PC4D: Dirty Foreign Cheaters and Deja Vu All Over Again

As I noted yesterday, the latest in my new blogseries (fake word!) "Protectionist Campaigning for Dummies" involves Senate legislation (S. 3080) sponsored by Sens. Arlen Specter (RD-PA), Bob Casey (D-PA) and Sherrod Brown (D-OH) that would allow domestic firms involved in US trade remedies investigations of directly competitive foreign imports to go to US courts instead of the US International Trade Commission (ITC) for a determination of whether such imports "injure" the domestic industry at issue.  As I briefly explained, under US law and WTO rules, "injury" must be found before the United States can impose remedial tariffs on imports in order to protect domestic industries.

I hoped to discuss the actual legislation tonight, but the full text of the bill still isn't available (ed. note: the bill was published on 3/12).  Thus, for now I'm just going to rebut the blatant misrepresentations in the Senators' joint press release and Sen. Specter's floor statement introducing the legislation (the "Unfair Foreign Competition Act of 2010").  And I have a special - almost surreal - surprise at the end of this entry, so be sure to read all the way through.  Here's the key text of the press release:

“Job creation and job retention in this country depend, in large part, on our ability to enforce existing trade laws,” Senator Specter said. “This legislation would give an injured industry the opportunity to seek reliable enforcement in federal court so that we can stop anticompetitive, predatory trade practices which steal jobs from our workers, profits from our companies, and growth from our economy.”

“Unfair trade practices have shipped Pennsylvania jobs oversees and increased our trade deficit," said Senator Casey. “One of the best job creations strategies is to make foreign governments play by the rules and create a level playing field for American workers.”

Senator Brown said: “If we’re going to create manufacturing jobs, we need to start enforcing trade law. American manufacturers can compete with anyone – but they need a level playing field. This bill would prevent a flood of unfairly-subsidized imports from shuttering our factories.”...

The legislation comes as China continues to engage in trade and market-distorting practices in violation of WTO rules and U.S. laws. By allowing countries like China to ignore international trade rules, the U.S. has lost countless manufacturing jobs and has a skyrocketing trade deficit. The latest trade numbers indicate that imports from China have exceeded U.S. exports by a staggering $208.6 billion.

Sen. Specter's floor statement echoes some of these assertions and adds a few others.  (Again, please note that I'll deal with the "injury" issues and the legislation's actual "substance" later and for now am only focusing on Specter's other misstatements):

The latest trade numbers demonstrate that the U.S. trade deficit with China in November 2009 was $20.2 billion. Over the years, imports from China have exceeded our imports by a staggering $208.6 billion. This is not evidence that American manufacturers cannot produce goods efficiently or compete with foreign markets; rather, it is evidence of unlawful behavior on the part of China. Such behavior is tantamount to international banditry, and it must not be tolerated....

The enforcement of trade laws should not be a partisan issue. To those who decry our enforcement mechanisms as unabashedly protectionist, let me be clear. I believe in free trade. International trade and open markets are crucial to the economic prosperity of this country. But the essence of free trade is selling goods at a price equal to the cost of production and a reasonable profit. When one country engages in dumping or subsidization at the expense of other countries, it is the antithesis of free trade....

China's succession to the WTO accelerated a "race to the bottom" in wages and environmental quality.

Given these factors, in addition to China's mixed record on providing market access to the United States and its failure to provide protection of U.S. intellectual property rights, I urge that the Congress reexamine our trade agreement the United States signed with China and, if necessary, seek to withdraw permanent normal trade relations status from China. Such a withdrawal would be a serious measure, but we must be willing to demonstrate that we are serious about holding China to its international commitments.

When the United States granted most-favored-nation status to China in 2000, we lost our ability to demand that China play by the rules. We may have to regain this leverage if we are to maintain an equitable trading relationship with China and keep our domestic industry strong.

As President Obama recently noted in his remarks at the Senate Democratic Conference, the United States is home to some of the most innovative, skilled, and efficient workers in the world. But advances in efficiency and innovation by our producers cannot make up for the unfair advantage held by countries that engage in illegal trade practices. Our industries can compete if the playing field is level, but if foreign exporters are not held accountable, and can freely undercut American producers with dumped goods and government subsidies, this country's economic future will be at risk. We must take a stand and we must do it now.

Very scary!   Well, not if you know the facts and recognize that the Senators here are just employing several of the same protectionist myths and rhetorical tricks that I've already gone over.  They're also adding a few new ones that I've covered elsewhere, so I'll quickly dispense of the old ones and devote more time to debunking the new ones.  Now let's get started.

Recycled Myth #1: America's manufacturing sector is disappearing.  Umm, totally untrue, Sen. Brown.  Indeed, US manufacturing was setting all sorts of performance records before the recession, and is leading the economy out of recession now.  Oh, and American industrial output is still about 2.5 times larger than China's output (by value).  So much for those "shuttered factories," huh? 

Recycled Myth #2: Free trade has destroyed US manufacturing jobs.  As we already know, this myth a time-honored classic and is totally and utterly false - manufacturing jobs have decreased in the United States, in most other developed countries (several with trade surpluses) and in China because of productivity gains and changing consumer tastes, not free trade.  And as I noted last week, US manufacturing jobs have been declining in total since 1979 and as a share of GDP since the 1950s - long before trade was little more than a rounding error as a part of the US economy.

New (Sorta) Myth #1: The US trade deficit is a sign of economic weakness.  This myth is partially new because I only discussed it in passing last week.  However, I've certainly dismantled it in previous blog entries.  As I stated last week, "[R]ecent government statistics show that 2009 witnessed a very significant contraction in US imports, total US trade (exports and imports), and the US trade deficit.  And do you know what else characterized 2009?  Cripplingly high unemployment!"  In fact, there's a strong, positive correlation between the trade deficit and the US economy - as the US economy grows, so does the trade deficit, and as I just noted above, as the US economy shrinks (i.e., in recessions), the trade deficit contracts along with it.  Why?  Well, as Cato's Dan Griswold noted in a recent Free Trade Bulletin, rising imports are not a drag on growth but in fact usually signal rising demand in the domestic economy, just as falling imports are a reliable sign of slumping demand.  And if you needed any more data to back up that statement, here's Dan Ikenson's and my 2009 Cato Institute paper:

Between 1983 and 2007, the annual U.S. trade deficit increased from $67.1 billion to around $819.4 billion— or by nearly six-fold in real terms.  During that same period real GDP grew at an average annual rate of 3.2 percent and employers added an average of 1.8 million net new jobs to payrolls every year.  The unemployment rate also declined over the period: the average rate in the 1980s was 7.2 percent; in the 1990s it was 5.7 percent; and, between 2000 and 2007 it averaged 5.0 percent.

I'd say that ends that debate, wouldn't you?  Nevertheless, Ikenson and I also discuss on pp. 20-22 of that same paper how it's even dumber to point to a bilateral trade deficit with China as a harbinger of economic doom (as the Senators do above).  First of all, such accounting is completely nonsensical in this era of global supply chains where Chinese exports contain only 30%-50% value-add.  Just consider the iPod: it's designed, marketed and sold in the US; its parts are made all over the world (including Japan, Taiwan, Korea and some in the US); it's assembled in China; and then it's shipped to the United States (as a $149 product from China).  Looking at the US-China trade deficit alone, you'd think that the US was "losing at iPods" by $149 per unit.  Yet because Apple sells the iPod for $299, its American designers, engineers, marketers, executives and shareholders reap the majority of the iPod's profits, not China.  As such, that "iPod trade deficit" is totally meaningless.  Second, the US-China trade deficit is rendered even more meaningless by the fact that imports from East Asia have remained remarkably steady over the last 15 years or so, and China's increasing share of US imports came at the expense of other Asian countries, not US manufacturers.

So the next time a politician tries to use the trade deficit as a reason to support his legislation, just stop listening.

(Note also that the Senators' discussion of the trade deficit uses the classic "causation-correlation" rhetorical trick - claiming that simply because the US trade deficit increased while US manufacturing jobs declined, the deficit actually caused those job losses.  As I've clearly demonstrated above, that's complete economic fiction.)

New Myth #2: We're losing at trade because our trading partners cheat with impunity and because we're not enforcing our trade laws.  The Senators really try to sell us on the idea that China's a big cheater and we need "tougher laws" to help reverse (a) the "bad" trade deficit; and (b) the "decline" of US manufacturing.  We've already gone over how (a) and (b) are dead wrong, but the underlying issue - cheating and enforcement - is also completely false.  First, this myth clearly implies that there are no "enforcement mechanisms" in place right now, despite the fact that we have domestic "unfair trade" laws (antidumping, countervailing duty, safeguards, etc.), WTO dispute settlement procedures, and even bilateral dispute mechanisms in all of our FTAs.  Second, it implies that we're currently not enforcing the trade rules that are in place, when in reality the United States has been a complainant in almost 100 WTO cases in the trade body's 15 year history, and there are literally hundreds of duties in force against "unfairly traded" foreign imports as a result of our domestic trade laws.  That's a lot of "enforcement."

Furthermore, the idea that our trading partners are all cheaters, and that the only reason we have trade deficits is because China and others are illegally dumping/subsidizing their imports, is just poppycock.  While it's undeniable that some countries are engaging in illegal behavior, the reality is that such chicanery affects a tiny fraction of overall global tradeflows.  For example, in our 2009 paper, Dan Ikenson and I calculated that the combined trade volumes affected by the current US anti-subsidy cases against China represented less than one percent of the entire US-China trade deficit.  For the sake of argument, let's assume that the Senators' new legislation would triple the number of "illegal" Chinese imports subject to US trade laws - that would only mean that less than three percent of the bilateral trade deficit is made up of unfairly traded products, and that the remaining 97% of those imports are fairly traded!  So while "China cheats" makes for a great soundbite, it certainly isn't the driving force behind the US-China trade relationship.  The same holds true for other markets - cheating simply doesn't define or drive global trade.

(It should also be noted that in talking about enforcement on the Senate floor, Senator Specter used the classic rhetorical trick "I'm a free trader, but..."  Sure you are, Senator, surrrrrre you are.)

New Myth #3: free trade leads to a "race to the bottom." The final protectionist myth - glancingly referenced in Specter's floor speech - is the oft-referenced idea that free trade creates a desperate race to the bottom in terms of wages and environmental standards.  Yet as Ikenson and I note:

[I]t is incomplete and misleading to speak of the “advantages” held by foreign-based producers in the realm of international competition without speaking of the advantages held by American-based producers. Sure, lower wages abroad can serve as an incentive to off-shore manufacturing or to outsource services functions, but wages are neither the only—nor the most important—consideration in these production/investment decisions. If wage differentials were determinative, there would be very little manufacturing or services activities in the United States. It would all be gone.

Instead, we see large and increasing foreign direct investment flowing into the U.S. industrial base year after year. Why is ThyssenKrupp building a $3.7 billion green field steel production facility in Alabama? Why do foreign nameplate automakers continue to invest in U.S. manufacturing facilities?  Why do the 5.3 million Americans employed by U.S. subsidiaries of foreign-owned companies earn on average 32 percent higher compensation than workers at U.S.-owned companies?  Because there is no race to the bottom in pursuit of lower wages and lax standards, as some suggest. Rather, there is a race to the top—for skilled workers, for access to production facilities closer to markets, for investment in countries where the rule of law is clear and abided, where there is greater predictability to the business climate, where tax rates are more favorable, where the specter of asset expropriation is negligible, where physical and administrative infrastructure is in good shape, and so on.  Labor costs are but one of a multitude of considerations driving investment decisions. With respect to virtually all of the other factors, the United States fares extremely well relative to most other countries.

Indeed, a recent study by McKinsey & Company found that in 2008 rising oil prices, the declining value of the U.S. dollar, and logistics concerns, among others, could cause many investors to rethink off-shoring strategies and even to consider “re-shoring” manufacturing facilities in the United States.  The study makes clear that sourcing decisions require a complex calculation in which labor costs are one of many factors.

That McKinsey study proved prescient.  For example, according to a recent article in the Detroit News, several Michigan firms have "insourced" jobs that were formerly sent offshore.  So much for that giant sucking sound, huh?   And just in case you need any more evidence about the "race to the bottom myth," just read Jagdish Bhagwati's awesome book In Defense of Globalization.  Dan Griswold summarizes Bhagwati's findings on trade and the environment:

In two meaty chapters, Bhagwati chops the legs out of the argument — heard frequently in the Democratic primary debates — that the U.S. must impose labor and environmental standards on poor countries in any future trade agreements. He points to evidence establishing that U.S. multinationals do not seek out less developed countries with low standards; they locate most of their affiliates in other high-wage, high-standard countries, and when they do invest in poor countries, they invariably pay wages and maintain standards far above those prevailing in the local economy. The result is not a "race to the bottom," but a race to the top. An inescapable implication is that if the Democrats succeed in withholding U.S. trade and investment from poor countries because they are poor, it will mean slower growth in those countries: fewer girls studying in school, and more working in farms, factories, and brothels.

'Nuff said.

Finally tonight, I'd like to discuss a, umm, familiar-sounding comment that I received on last night's blog post about the new Specter/Brown/Casey legislation.  As you'll recall, the primary impetus for my original "Protectionist Campaigning for Dummies" series on Congressman Gene Taylor's anti-NAFTA legislation was an anonymous and provocative comment from someone named "Researcher" that was chock-full of protectionist myths.  When I discovered (via my visitor log) that "Researcher" worked in the US House of Representatives, he revealed himself in a subsequent blog comment to be Rep. Taylor's policy director (Brian Martin), and his "big reveal" utilized a lot of the rhetorical tricks that protectionists often use to debate free traders.  I then proceeded to dismantle those tricks and assumed that that would be the end of my interactions with anonymous congressional staffers.

Boy, was I wrong.

The comment I received this morning on the new Senate "injury" legislation - from a "john" - was similarly substanceless/vitriolic and, to my extreme surprise, came from:

IP Address: 156.33.70.181; Location:  Washington, D.C.; ISP:  United States Senate.

You cannot make this stuff up.  Now, I have no proof that the comment came from a staffer in the office of one of the Senators who sponsored S. 3080, but "john" received a direct link to last night's post from an email (a Google news alert, perhaps?), and both the comment's timing, tone and circumstances sure seem to match those of the esteemed "Researcher" from last week (who, again, turned out to work for the sponsor of the legislation I had criticized).  And just like last week, john's comment is chock-full of rhetorical tricks and protectionist myths, so without further adieu, here it is, typos and all:

Do you have a rebuttal? Have you seen the trade deficit? Have you see the job losses? Do you recognize the importance of manufacturing to national security and middle class creation at all? The idea of county might be a quaint concept to you but it is the only thing that can protect us from the disaster capitalism you preach.

Well, john.  Here's my rebuttal, line-by line.

john: Have you seen the trade deficit? 
Scott:  Yes, I have.  And, as noted above ("New Protectionist Myth #1"), I've also seen the high economic growth and low unemployment accompanying the trade deficit.  You, john, obviously have not.

john: Have you see {sic} the job losses?
Scott: Yes, I have.  And, as noted above ("Recycled Protectionist Myth #2"), I've also seen that US manufacturing jobs have been declining for decades - in the US, in Germany, in China, and elsewhere - and that productivity, technology and consumer preferences are the primary causes of these job losses, not trade.  I also see that you are trying to employ the "correlation-causation" rhetorical trick by trying to claim that the rising trade deficit caused US manufacturing job losses.  Of course, the deficit declined last year, and we lost millions of American jobs, so your trick is actually pretty lame, john.

(As an aside, john's heavy-handed use of such misleading rhetoric definitely qualifies him for designation as an "Unfrozen Caveman Politician":

Awesome.)

john: Do you recognize the importance of manufacturing to national security and middle class creation at all? 
Scott: But, john, as I note above ("Recycled Protectionist Myth #1"), US manufacturing (i) is on the upswing and leading us out of recovery, (ii) was just dominating prior to the current recession, and (iii) remains over two-and-a-half times bigger than its counterpart in China.  And as for trade and "national security," I covered that protectionist myth last week.  In short: it's completely bogus, john.

john: The idea of county {sic, I think} might be a quaint concept to you but it is the only thing that can protect us from the disaster capitalism you preach.
Scott: And what protectionist comment would be complete without the ad hominem attack?  Of course, if john had just taken a moment to read this blog, he would have seen that my "disaster capitalism" isn't based on name-calling or baseless assertions about the "concept of country."  It's based on tons of hard data and historical evidence which clearly demonstrate that the pernicious, political protectionism advocated by john and his Senate boss (or neighbors) would be as economically harmful as it is immoral and misleading.

So thanks, john, for your enlightening, if typo-ridden, comments.  And since I was kind enough to respond to your comment, maybe you could answer one quick question for me:

Given how closely your commenting behavior tracks that of your predecessor in the House (Brian "Researcher" Martin), just how common is is for congressional staffers, on the taxpayer's dime, to comment anonymously on blogs critical of their bosses' legislation?  And is there a protectionist staffer commenting handbook or something?  Because it sure seems like it.

Final note to the general audience: is it just me, or do the House and Senate really need to talk more?  I mean, I thought that the stories about cross-chamber disconnect were just conventional wisdom, but sheesh!