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.

New ITC Report: Investment Abroad by US Services Firms Supports 700k US Jobs (UPDATED)

From the non-partisan US International Trade Commission comes further proof that political promises to "end tax breaks for companies that ship jobs overseas" are utterly nonsensical and potentially destructive:

This working paper examines the effect that U.S. services firms’ establishment abroad has on domestic employment. Whereas many papers have explored the employment effects of foreign direct investment in manufacturing, few have explored the effects of services investment.  We find that services multinationals’ activities abroad increase U.S. employment by promoting intrafirm exports from parent firms to their foreign affiliates.  These exports support jobs at the parents’ headquarters and throughout their U.S. supply chains. Our findings are principally based on economic research and econometric analysis performed by Commission staff, services trade and investment data published by the Bureau of Economic Analysis, and employment data collected by the Bureau of Labor Statistics. In the aggregate, we find that services activities abroad support nearly 700,000 U.S. jobs. Case studies of U.S. multinationals in the banking, computer, logistics, and retail industries provide the global dimensions of U.S. MNC operations and identify domestic employment effects associated with foreign affiliate activity in each industry.

Those gosh-darn outsourcers and their totally-helpful economic activity!

UPDATE:  A friend emails with the following anecdote:

Couldn't agree more. Before returning to the States as an adult, I helped an Indian BPO offshore [a Fortune 500 Retailer's] English- and Spanish-language customer contact solutions from Texas to Guatemala. Not only did the customer service quality improve (for USD 12/hour in San Antonio, TX, [the Company] could only higher monoligual ex-drug addicts and parollees to answer the phones but, for USD 5/hour in Guatemala City, we could hire bilingual college grads, many of them with enginerring degrees) but Sears also expressed to us that, had it not been for the cost savings of moving to Central America, it would have likely sold off its home repair service line of business (thus leading to a massive lay off of thousands of repair technicians). While it is unclear whether those technicians would have found work with third-party service providers or not, the offshoring we did helped save that industry from an even more precipitous decline and/or painful structural changes.


The math was as such:


A few call center operators lost their job in TX = thousands of repair technicians held onto their jobs (and [Retailer] conserved one of its oldest and most trusted lines of business which is home repair service).

Pining Away for an America of Protectionism, Socks, Ironing Boards and Poverty

When I first read this recent Yahoo Finance article on "10 American Industries Still Hanging On" by Donn Fresard, Matthew Mallon, and Justin Rohrlich, I really thought it was a parody.  On further review, however, I'm pretty sure that the piece, which laments the demise of American manufacturing and praises a few plucky upstarts clinging to survival against a pernicious onslaught of foreign competition, is real.  And you'll never guess how many of the highlighted companies manage to "survive."   Yep, good ol' fashioned protectionism:

For most of the last century, the United States dominated global manufacturing -- no country could compete with America's output.

In recent years, however, the news about domestic manufacturing has been discouraging, if not devastating. Industry surveys have shown a decline in most sectors as the US continues to lose its factories to cheaper labor markets overseas, and especially to China.

In 2010, the last remaining American flatware factory shut its doors. So did the nation's last sardine cannery. Recent years have seen the shuttering of America's last coat hanger factory, last button down shirt factory, and the entire sheetrock-producing town of Empire, Nevada -- which fell victim to the desiccated US housing market.

Surprisingly, however, there remains a handful of heroic holdouts. Bloodied, battered, but not yet down for the count, there are still pockets of US manufacturing scrappy enough to keep the lights on in the face of overseas competition. Here's a look at 10 survivors worth celebrating....

SPARKLERS: Few products say summer in America like the sparkler. But without Diamond Sparkler of Youngstown, Ohio, it would be a cold winter for domestic sparkler production. Diamond has been in Youngstown since 1985, when Phantom Fireworks operator B.J. Alan bought Chicago's Acme sparkler manufacturer and brought its operations to Ohio. At that point, cheaper Chinese sparklers had snuffed out all but three US producers. By 1999, Diamond would be the lone holdout that hadn't shifted to imports. Not because it found a way to profits, however. Besides a brief tariff-related windfall, Diamond Sparkler never been a moneymaker for its parent firm, whose owner said he bought the division because he couldn't "envision something as American as sparklers, with its association with the (Fourth) of July, not being made in this country."...

SOCKS: To get an idea of what's happened to the American sock industry, take a look at Fort Payne, Alabama. Until a few years ago, the town of about 14,000 billed itself as the "Sock Capital of the World." They weren't spinning a yarn, either: As late as 2007, according to the Hosiery Association, if an American put on a pair of socks, the odds were about 1 in 8 they'd be rolling a product of Fort Payne/DeKalb County onto their hooves. Most of the area's workforce was employed in its sock mills, which then numbered 125 to 150. Today only 20 remain, providing roughly 600 jobs, down from 8,000 just a decade ago....

What started pulling out the thread was -- you guessed it -- globalization. An influx of cheaper hosiery, imported from the likes of China, Pakistan, and Honduras, started around the turn of the 2000s. It flipped the American sock industry on its head faster than argyle came back and again went out of style. Domestically made socks went from three-quarters of US sales to one-quarter between 1999 and 2006.

Thanks to a quirk of national politics, Fort Payne caught a break in 2005, when then-President Bush needed to swing a single vote in Congress to get his Central American Free Trade Agreement out of deadlock. The city's congressman, Robert Aderholt, was a holdout against the deal, and he took the opportunity to hold the bill hostage with a single demand: Restore the tariffs, which had been lifted in 1984, against socks seamed in Honduras. The White House complied, and the duty returned at the end of 2007. The move had little effect in the long run, and sock factories are still fleeing Fort Payne for Honduras.

IRONING BOARDS: The fact that there's only one ironing board manufacturing plant left in the Unites States has nothing to do with changing tastes in laundry after-care, or the viral spread of track-suits and t-shirts, and everything to do with retail consolidation and globalization.

Located in Seymour Indiana, HPI Seymour, owned by Chicago-based Home Products International, has been around since 1942, when it started as a tool-and-engineering shop. In the 1950s it switched to ironing-board only mode, successfully marketing a range of high-end ironing boards around the world.

But today the plant, which employs 200 people (down from 400 in 2000) and pumps out 720 boards an hour, is fighting the same stiff winds that have wiped out so much of U.S. manufacturing, despite a market that sees some 7 million ironing boards sold every year. Big chains like Wal-Mart (WMT) and Target (TGT) are still customers and anti-dumping tariffs as high as 157% against its rapacious Chinese competitors have kept the lines rolling at the plant so far. But with the chains increasingly sourcing cheaper and cheaper products from Asia, and with the tariffs coming under pressure from observers who wonder if artificially high ironing board costs for 7 million consumers are worth 200 jobs in Indiana, HPI Seymour's 69-year-old history is probably nearing its end.

PENCILS: Without tariffs against Chinese imports, you might as well erase pencil manufacturing from the ledger of American industry. And even since the US government took anti-dumping action against Chinese exporters in 1993, China's dominance of the industry here has barely slowed: American companies in 2008 produced only 14% of pencils sold stateside, whittled down by half from just four years prior.

Newell Rubbermaid's Sanford, have closed plants that employed hundreds in the past few years as they shifted production to Mexico and elsewhere. Other companies largely retreated into specialty graphite utensils, like colored and drawing pencils. "The yellow pencil basically became a Chinese commodity," Jim Weissenborn, whose family has owned General Pencil for 150 years, explained to Bloomberg news in June. "We've had to become a very boutique type of business in order to survive."

SNEAKERS: New Balance is the only major player in athletic footwear that still operates American factories, and it's hanging on by a shoestring as free-trade negotiations with Vietnam loom. The privately held Boston company has 1,000 US workers in its five New England plants, whose $10-and-up hourly wages are a quaint holdover in an industry that imports 99 percent of its product. "The company already could make more money by going overseas, and they know it," 35-year-old floor leader Scott Boulette told the Washington Post. "So we hustle."

But all the elbow grease in Norridgewock, Maine, won't keep New Balance competitive if an expected agreement with Vietnam eliminates the tariff on imported shoes, typically around 20%. The region's legislators are trying to carve out an exemption to keep New Balance's factories open. The firm's competitors like Nike and Reebok, though, seeing an opportunity for higher profits on imports and, displaying little sympathy for the scrappy northeastern holdouts, have banded together to fight the duty – or "shoe tax," as they call it. "For products that are no longer produced here and haven't been produced here for decades, there's no sense for consumers to be paying it." said Nate Herman, of the industry's lobbying group....

Sigh.  Where to begin?  Well, first let's start with the little fact that the American manufacturing sector as a whole is actually doing quite well, as these two charts (recently mentioned here) make perfectly clear:

Source: BEA

Second, let's recall that lots of American manufacturers, particularly those like Caterpillar who use low-cost imported inputs and depend on foreign demand, remain very successful.   Indeed, IndustryWeek's recently-released "2011 IW 50 Best Manufacturing Companies" lists plenty of American manufacturers who are dominating, even in this tough economy.  And although some of these companies utilize foreign facilities, many of them, like #1 ranked hard-drive manufacturer Western Digital out of California, have significant US production facilities and are hiring.  And considering that most high-tech goods are duty free because of the Information Technology Agreement, we can be pretty darn sure that Western Digital didn't make it to the top of the IW list by lobbying for government protection from foreign competition.

Odd that the authors didn't think to mention these globally-dominant firms, eh?

Third, the authors fail to mention that many manufacturers are returning to the United States because cheap labor couldn't trump the myriad benefits of domestic production.  Meanwhile, many US companies depend on  exports and foreign demand, particularly in this anemic US economic recovery, to keep their domestic doors open.  In short, "American" manufacturers are coming back to the states, and the very "globalization" that the authors repeatedly deride is actually a boon to the US economy.

Finally, the article above makes clear that many of the companies that the authors praise only exist here in the United States because of ridiculously high tariffs.  Thus, their "success" is government-induced and comes at the expense of American families and businesses who have been forced by the US government to pay higher prices for shoes, socks and other basic goods.  And even with massive government protection, the companies still can't compete.  Thus, we've all been forced to subsidize (through higher prices) failing US companies that will never, ever be competitive again.

By contrast, many of the globally-dominant companies listed in the IW 50 (or the broader IW 500) don't require government tariffs or subsidies.  But these companies aren't manufacturing basic, labor-intensive things like socks and pencils; they're mainly in high-end, high-tech, capital-intensive industries like aerospace, IT, pharmaceuticals, chemicals, biotech and heavy machinery.  And they're doing it very, very well.

I don't mean to disparage America's sock/pencil-makers, but the basic and obvious reality is that US companies have an extremely difficult - if not impossible - time competing on the lower-end of the manufacturing spectrum (even with massive government assistance).  At the same time, they're succeeding at the industrial top-end where education, technology and productivity - things at which the United States still excels - are more important than things like cheap manual labor.  And, of course, they're also succeeding through globalization and, yes, even outsourcing (see, e.g., Apple).  So to glorify the uncompetitive industries and the government protectionism that keeps them (barely) alive, while ignoring the successful American firms that don't need state assistance is more than just misleading and nonsensical, it's also harmful - if the authors somehow convince Americans to embrace protectionism and uncompetitive, inefficient American industries, we'd all be worse off.

As Cafe Hayek's Russ Roberts eloquently put it today in response to a trite NYT op-ed on the same subject: "Making stuff the cheapest way is the road to prosperity. Trying to find expensive ways to make stuff (because it once was a good idea but no longer is) is the road to poverty."

Why do Fresard, Mallon, and Rohrlich want us to run down that road?

Supporters of TAA Expansion Need to Find Another Myth

As I noted last week, the White House has refused to submit implementing legislation on pending FTAs with Colombia, Panama and South Korea until House Republicans agree to extend now-expired provisions of the Trade Adjustment Assistance program.  These provisions, included in the 2009 Stimulus* Bill, dramatically expanded the scope and coverage (and expense!) of the TAA program to include, among other things, services workers whose jobs were allegedly lost because of trade.  Here's how Sen. Debbie Stabenow (D-MI) - of the loudest proponents of the TAA expansion - described the provisions back in February:

In 2009, an update to TAA was enacted to help the program reflect the realities of today's global economy. Created in 1974, TAA originally did not allow service workers to take part in the program, and only those whose jobs were shipped to a country with which the United States has a free trade agreement qualified-in other words, workers whose jobs were sent to China and India were turned away. The 2009 update allowed service workers and those whose jobs were offshored to any country to apply.

Today Sen. Stabenow and some of her Senate colleagues repeated this refrain as they announced their support for the White House's latest FTA extortion demands.  But does their call for expanded TAA coverage to protect American services workers from outsourcing to India, China and elsewhere actually jibe with the global economic "realities" about which the Senators allegedly care so dearly?

In short, no.  Not at all.

As I recently noted, politicians' breathless claims about the rampant outsourcing of American services (and manufacturing) jobs to places like India and China are far more myth than reality.  Indeed, the United States actually ran a trade surplus in services with China (and many other countries) in 2010 and has been a net "insourcer" overall for several years now:

The US ran a relatively tiny services deficit with India in 2010 and a small surplus in 2009, but today comes eye-opening news that Indian corporations might be turning even more often to the US workforce:

[I]n a reversal of fortunes it now appears that large Indian companies are actually now themselves outsourcing - to U.S. shores.

Large corporations that have boomed in India amid the country's nimble economy have been drawn to the U.S. where unemployment has soared....

Experts said that the phenomenon, which could become more widespread in the coming years, is partly due to Indian workers demanding higher wages and higher living standards.

'The U.S. became the fastest-growing location for us last year. We expect that to continue this year,' Genpact chief executive V.N. 'Tiger' Tyagarajan said.

Joseph Vafi, an analyst at Jefferies & Co. in San Francisco told the Washington Post: 'What you have going on in India are salary hikes. As these companies get larger and larger, it just makes sense for them to do some hiring in the States.'

The Indian economy - boosted by a savings culture of large cash deposits - has boomed and is this year predicted to outpace China.

Businesses around the world have targeted India - part of the 'BRIC' emerging economies - for their global expansion.

Residents there have seen an increase in living standards and higher wages, which has led to higher spending.

In short, all that dastardly outsourcing has enriched Indian companies and workers, and now they're looking to the United States for not just new customers but also new employees.  Very cool.  The article even lists the biggest Indian companies that have outsourced work to the United States:

• Tata Consultancy Services.  Tata Consultancy Service is based in Mumbai and had a turnover of $8bn in 2011. They employ more than 200,000 worldwide with a significant number of those, believed to be around 15,000 based as outsourced jobs in the U.S.

• Aegis Communications.  Technology firm Aegis is part of the Essar group based in Mumbai with an annual revenue of $15bn. Aegis employs 9,000 in the U.S. at offices throughout the country.

• Wipro.  Based in Bangalore, IT specialists Wipro employ around 4,000 people in jobs that have been outsourced to the U.S.

• Genpact.  The IT outsourcing company employs 1,500 people in the U.S. but that is expected to triple over the next two years as bosses find it cheaper than employing Indian staff at home.

• Infosys.  The company is based in Bangalore with an annual revenue of $100m. They have 130,000 employees worldwide.

Sen. Stabenow and her colleagues claim that a massive expansion of TAA is absolutely necessary to "reflect the realities of today's global economy," so I'm sure when confronted with these indisputable facts about the global dominance of the American services sector (and its workers) - and the obvious benefits of globalization at home and abroad - these caring Senators will stop holding our pending FTAs hostage to a needless and costly TAA expansion, right?

Rrrrriiiight.

Given the fact that these TAA-loving Senators, as well as the politicians in the White House and elsewhere, desperately want to subsidize America's globally-dominant services workers with (even more) borrowed money, it seems to me that they, not those opposed to TAA expansion/extension, are the ones in dire need of a "reality check."

UPDATE: Mark Perry has more on the rapidly changing global labor market.

Audio: Talking Trade, Outsourcing and China on the Laura Ingraham Show

After lots of trial and error, I've finally managed to upload yesterday's informative - and frustrating! - segments on international trade from the Laura Ingraham Show.  (Who knew it was so tough to record streaming audio, convert it to a video file and upload it to your blog?  Yet another lesson in specialization and comparative advantage, I guess.)  There's a commercial break in there somewhere, but you can just fast forward through the dead air.

Many thanks to Laura for giving me (and the very smart Matthew Slaughter from CFR) the significant airtime.  It's nice not to try to explain multinational production decisions in a 15-second soundbite.  However, considering that I thought I was just going to be talking about outsourcing, I really want a re-match to talk about China trade with the misguided Ms. Ingraham.   Now, I'm not so sure that even my most-prepared day will ever convince Laura of the error of her ways, but I definitely, definitely want to give it another try.

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.

On Outsourcing, Protectionism and Robot Insurance

About a week ago, Princeton's Uwe Reinhardt wrote in the New York Times about the amazing victory that is the almost-universal acceptance among economists of "the theory that every country gains by unfettered international trade."  Reinhardt explains:

Relative to a status quo of no or limited international trade, permitting full free trade across borders will leave in its wake some immediate losers, but citizens who gain from such trade gain much more than the losers lose. On a net basis, therefore, each nation gains over all from such trade.

Economists assert that over the longer run, the owners of businesses that lose their markets in international competition and their employees will shift into new economic endeavors in which they can function more competitively.

Yet despite these benefits, Reinhardt asserts that there may be a problem with free trade, even among some economists, when national boundaries and identity are considered:

In their work, economists are typically are not nationalistic. National boundaries mean little to them, other than that much data happen to be collected on a national basis. Whether a fellow American gains from a trade or someone in Shanghai does not make any difference to most economists, nor does it matter to them where the losers from global competition live, in America or elsewhere.

I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade.

In a widely noted column in The Washington Post, “Free Trade’s Great, but Offshoring Rattles Me,” for example, my Princeton colleague Alan Blinder wrote:

"I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation. When I say this, many of my fellow free traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind?"

Professor Blinder has estimated that 30 million to 40 million jobs in the United States are potentially offshorable — including those of scientists, mathematicians, radiologists and editors on the high end of the market, and those of telephone operators, clerks and typists on the low end. He says he is rattled by the question of how our country will cope with this phenomenon, especially in view of our tattered social safety net.

“That is why I am going public with my concerns now,” he concludes. “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate. Compared with that, a little apostasy should be welcome.”

While Blinder's concerns certainly sound plausible enough, they're actually rife with problems.  First, I don't know what free traders Blinder's been talking to, but I simply can't imagine that a single one of them would react with shock and horror at the basic idea that an increasing number of Americans will face international competitive pressures in the next few years.  It seems far more plausible, however, that those free traders would respond with the totally obvious observation that, while those job pressures might occur and might make many Americans nervous, the economist's job is to explain, through empirical, anecdotal and historical evidence, why such anxiety is unfounded.  Of course, this is a difficult challenge, but it's no different from what occurs now with respect to American manufacturing jobs, and the alternative (protectionism) has proven again and again to be an abject failure.

Second, Blinder's concerns ignore reality: while there might be 30-40 million "potentially offshorable" services jobs out there, those jobs aren't, you know, actually being outsourced.  For example, the WSJ's political diary noted last week that fears of Indian outsourcing are far more fiction than fact:

NBC's "Outsourced" is a situation-comedy about an American call center that's been relocated to India. The show is ranked No. 85 on Nielsen's recent list of prime-time network television programs, suggesting perhaps that the theme of jobs shipped to India isn't resonating with American viewers. Maybe that's because the Indians are sending us more work than we're sending to them.

During a recent visit to The Wall Street Journal, Indian Ambassador to the U.S. Meera Shankar pointed out that America actually runs a small trade surplus -- yes, a surplus -- in services with India. Total two-way trade between the countries amounts to roughly $38 billion annually in services, with U.S. exports of financial, accounting and other business services slightly exceeding India's famous provisioning of information technology assistance, call centers and the like. Meanwhile, the roughly $50 billion two-way trade in goods yields a modest surplus for India, putting the overall U.S.-India trading relationship in almost perfect balance, for those who fret about such things.

Yet Washington continues to restrict a particular Indian import that carries enormous benefits for America: talent. Ms. Shankar reports that for Indian engineers applying for a so-called H-1B visa, reserved for those with high-tech skills wishing to work in the U.S., the application is so lengthy that "it's almost a novel that you have to write." Policy makers would be wise to give skilled engineers an easier path to join our labor force. The innovations they create will encourage India and the rest of the world to outsource even more production to the U.S.

Other studies show that outsourcing has proven, in the aggregate, to be beneficial for the American economy.  In short: yes, outsourcing occurs, but it's nothing to be worried about from both a theoretical and practical perspective.  So any attempts to stop or mitigate it waste valuable resources and distract us from far more important issues (like our very real failures re: education or high-skilled immigration).

In this way, Blinder's dire warnings, and any protectionist responses based on them, remind me of that classic SNL skit where Old Glory Insurance shows horrible/hilarious scenes of robot attacks in order to sell elderly citizens insurance against such acts of (again, hilarious) robo-violence.  Blinder and many protectionists are peddling fake anxiety and, unsurprisingly, the only solutions are the unnecessary (indeed, costly!) insurance that they're selling.



Awesome.  The same goes for outsourcing and trade (although not nearly as humorously).  Yes, it's real and it happens every day, but it's hardly the great menace that some would have us believe, and in both theory and practice it's a net plus for the American economy.  So until economists have some actual proof that free trade is harmful, maybe it's best for them to, you know, tell the American people the truth about trade and outsourcing rather than placate their misplaced fears and sell them insurance against an extremely unlikely calamity.

Monday Quick Hits

Here are some headlines to tide you over until tomorrow's big State of the Union address and its inevitably depressing depiction of "free trade" and "competitiveness" as "exports" and "subsidies," respectively:

• CHINA INFLATION ALERT!  Asia expert Lee Miller sends me tons of juicy news on China's (possibly) skyrocketing inflation.  Here are some highlights:  First, AmCham China's 2010-2011 China's Business Report finds that "Finding enough qualified staff is the No. 1 business challenge, and competition is picking up not only between U.S. and other foreign companies but between U.S. and Chinese companies -- both private and state-owned enterprises (SOEs)."  Second, Diana Choyleva writes a must-read op-ed in the WSJ Asia, concluding: "It's not just the prices of consumer goods and services. Asset price inflation, most famously in real estate, has been accelerating; as has wage inflation. All of this should make the thousands of investors looking to jump onto the China bandwagon skeptical of what they're being told. Regardless of Beijing's claims of prudent economic management, excess money is sloshing around and overheating China's economy, thanks to the huge monetary overhang from China's post-2008 stimulus. Beijing clearly panicked when the global financial crisis hit and stepped on the monetary accelerator. It halted the ascent of the yuan by re-pegging to the dollar in mid-2008 (so that exports could become cheaper), it stopped sterilizing the still-massive foreign exchange inflows (so these inflows directly entered the money supply) and ordered banks to lend historic amounts of credit. The increase in broad money was a massive 39% of GDP in 2009 and 30% in 2010, compared with a previous peak of 27% in 2003. The Chinese express alarm over Western quantitative easing efforts these days, but China's own monetary loosening beats all that."  Third, AFP reports that "China's main export region in the south will raise minimum wages by an average 18.6 percent, marking the second hike in less than a year as soaring food costs hit the country's millions of poor."  Finally, the Global Times reports that "The People's Bank of China (PBC) will print 1 trillion yuan ($151 billion) worth of new bank notes this year, but officials refuted claims that the announcement had anything to do with inflation, the Xinhua News Agency reported Wednesday." That last story might be nothing, but after reading the first three, are you willing to bet on it?

• David Harsanyi cites "Red Dawn" in his op-ed on the baselessness of the current Sino-phobic hysteria in the US.  Thus, he gets a shout-out from this Red Dawn-loving blogger.

• Joseph Sternberg provides in the WSJ a rather convincing argument as to why we shouldn't expect China to "re-balance" anytime soon.  Sternberg points out several aspects of China's banking sector that lead to a bias against domestic consumption in favor of export industries (especially state-owned ones).  His conclusion: "China's investment-driven growth has paid off so far but may already be witnessing declining marginal returns. McKinsey estimates that China now needs to invest $4.90 to produce each dollar of GDP growth, up from $3.30 in the early 1990s. Shifting to a new model will require changes at every level, right down to the bank branch. That's hard to do when you're preoccupied asserting economic might you may not have."

• Cato's Mark Calabria provides a really simple solution to White House complaints about China's preventing the appreciation of its currency by purchasing US government debt: stop borrowing money!  He states, "When China receives dollars for the many goods it sells us, instead of recycling those dollars into the purchase of US goods, it uses that money mostly to buy US Treasuries and Agencies (Fannie/Freddie securities).  These large Treasury/Agency purchases (foreign holdings of GSE debt are over $1 trillion) have the effect of increasing the demand for dollars and depressing that for yuan, resulting in an appreciation of the dollar relative to the yuan. This connection exposes the hypocrisy of President Obama’s complaints about China currency manipulation – without massive US budget deficits, China would not be able to manipulate its currency to the extent it does. If the US wants to end that manipulation, it can do so by simply reducing the outstanding supply of Treasuries and Agency debt."  Exactly.

• A new study on outsourcing from Duke University's business school shows that "American companies opting to hire offshore labor are doing so because of a domestic shortage of skilled workers, not a desire to save on labor costs."  Do you hear that hissing sound?  Yep, it's the deflation of yet another protectionist narrative.  (Oh snap.)

• AEI's Mark Perry provides our annual reminder that those preaching the "death of American manufacturing" are not just greatly exaggerating but also flat-wrong.  In so doing, Perry provides two charts-of-the-day (below) and smartly concludes: "America still makes a ton of stuff, and we make more of it now than ever before in history, but we’re able to do it with a fraction of the workers that would have been required in the past. We’re still the world’s leading manufacturing economy by far, thanks to the world-class productivity of American manufacturing workers, the most productive in the world. Instead of bashing China, Korea, and Mexico for competing against our manufacturing sector and exaggerating the decline of our manufacturing sector, Americans should take more pride and celebrate our status as the world’s leading manufacturer."  Amen.  I'd only add one thing: is it really good policy to rest the hopes of the US labor force on a sector (manufacturing) that has experienced awesome and steadily improving productivity (i.e., increasing output with a shrinking workforce) over the last few decades?  Hmmm...

That's all for tonight, folks.

Monday Quick Hits

Lots of interesting stuff went down while everyone was vacationing.  Here's a quick rundown:

• The Wall Street Journal's editorial board explains how a US antidumping order on magnesium has destroyed American manufacturing jobs in industries that rely on the metal to produce downstream inputs.  The money lines: "In 2005, at the behest of America's monopoly magnesium producer—U.S. Magnesium of Utah—the Commerce Department imposed antidumping duties on magnesium from Russia and magnesium alloy from Russia and China. Five years later magnesium alloy is in short supply in the U.S., leading to much higher prices than in the rest of the world and a crisis for die casters, alloy producers and recyclers.... In a December 6 letter to the ITC, Arkansas Congressman Mike Ross spelled out the problem: 'U.S. manufacturers pay $2.30 per pound on average for magnesium alloy while manufacturers in Mexico, Canada and Europe pay $1.50 per pound and Chinese manufacturers pay $1.36 per pound.' Die casters who have tried shifting to aluminum have lost orders to overseas producers."  Cato's Dan Ikenson piles on by citing the magnesium case as a prime example of US trade policy's cognitive dissonance.

• The Chinese are starting to really hammer home the fact that, as your humble correspondent keeps screaming aboutcalmly mentioning, global supply chains have rendered old school trade stats obsolete tools for measuring actual tradeflows and the efficacy of existing trade policies.  Most of the information cited here is old news for readers of this blog, but here's a new one: "Sheng Guangzu, head of China's General Administration of Customs, told Xinhua in an interview in April that much of China's trade surplus was 'transferred' from foreign-funded enterprises operating in China. In the first 11 months this year, exports of foreign-funded enterprises totaled 779.14 billion U.S. dollars, accounting for 54.7 percent of China's total exports, according to China's customs authorities.  The data also showed that, during the same period, foreign-funded firms generated 112.51 billion U.S. dollars of trade surplus, accounting for 66 percent of China's total surplus."

• In case you missed it, GMU's Walter Williams deftly explains that (a) trade is among individuals, not countries, and (b) free trade is by definition "fair trade."

• The WSJ's Liam Denning discusses why "national rivalry always lurks around an industry as dependent on government support as renewable energy."  His first example: the heavily subsidized United Steelworkers's "Section 301" petition against Chinese green subsidies.  Sounds familiar, eh?

• Heritage's Jim Roberts gives us a quick reminder that free trade is a prime contributor to the dramatic increase in all Americans' living standards over the last 50 years.

• Behold, the stunning incompetence of the federal government: "The U.S. Government Accountability Office said it could not render an opinion on the 2010 consolidated financial statements of the federal government, because of widespread material internal control weaknesses, significant uncertainties, and other limitations.... [Acting Comptroller General] Dodaro also cited material weaknesses involving an estimated $125.4 billion in improper payments, information security across government, and tax collection activities. He noted that three major agencies — the DOD, the Department of Homeland Security, and the Department of Labor — did not get clean opinions. Nineteen of 24 major agencies did get clean opinions on all their statements."

• Cato's Dan Griswold destroys the canard that US multi-nationals corporations' overseas hires are responsible for high domestic unemployment.  In short, companies follow economic growth, not lower wages; and the US still benefits when they do. I'd only add that we'd be even better off if the US adopted more pro-growth tax and regulatory policies.  (More on that point in a great IBD editorial here.)

• It's time for the US to stop futzing around and implement the US-Colombia FTA.  Seriously.

• The US manufacturing sector is cranking.  Fearmongering American politicians were shockingly unavailable for comment.

• A free trader's new year's resolution.

• This is absolutely hilarious (mild content warning).  So is this.

Enjoy.

Monday Quick Hits

Lots of interesting links over the last few days, so let's get right to 'em:

• Lifelong Democrat laments his party's anti-innovation agenda.

• WSJ's Strassel: why the GOP needs to take on the government's misguided "green energy" movement.

• AEI's Nick Schulz on why a revised American immigration policy must be a central feature of its future competitiveness policy.

• Korean negotiators to their US counterparts: "Hey, if you guys want to re-open the KORUS FTA for autos and beef, then we'd like to re-visit some of your most important/untouchable issues."

• Not all Dems are against free trade and American competitiveness; unfortunately, this important Dem isn't, you know, an elected official anymore.

• Don Boudreaux quickly explains the illogic of mercantilism.

• Russ Roberts so wants to explain the problems with Ben Bernanke's recent China criticisms that he's willing to give away part of his new book for free.

Now, if you'll excuse me, I need to get back to my intense turkey-ingestion training regimen.

A Big Reason Why Politicians Attack "Outsourcing"

Many campaigning politicians love to blame "outsourcing" for the woes of the US job market, and to brand their opponents as supporting policies - like US FTAs and blanket opposition to tax hikes on US multinational corporations - that "send American jobs overseas."  Indeed, the "outsourcing" bogeyman has become an express part of the Democratic Party's "Make It in America" campaign platform, and "pro-outsourcing" accusations are a staple of Democrats' campaign advertisements for the 2010 mid-term elections.

Now, there are plenty of economic and historical facts undermining these politicians' anti-outsourcing demagoguery - something that Democrats themselves have recently admitted.  And these same Democrats have also acknowledged that one of their primary motivations for pushing the outsourcing meme - despite its, ahem, factual limitations - is because the issue polls well (i.e., most Americans are scared of, and/or confused about, outsourcing).

But that's not the only reason our elected officials like to blame outsourcing for the troubled American economy.  Indeed, as today's IBD editorial demonstrates, pols also like to focus on offshoring because it diverts voters' attention away from what actually causes American companies to move offshore: a startling decline in the American economy's global competitiveness caused by our elected officials' awful tax and regulatory policies.  IBD makes this clear in its comparison of Sen. Barbara Boxer's (D-CA) attempts to tar her opponent, Carly Fiorina, as a dirty rotten outsourcer with Boxer's actual record of uniform support for policies that destroy American companies' ability to compete in the global economy.  Among Boxer's biggest "job-killing votes":

The corporate tax. Boxer claimed in Wednesday's debate that she wants to "incentivize" U.S. companies not to ship jobs overseas. Maybe she was referring to her yes vote on S. 3816, which ends the tax deferral for multinational firms. The idea was to hike taxes on companies' overseas operations so they would hire more here. Instead, we've "incentivized" companies to move headquarters and jobs to low-tax countries. Even the Democrat-led Senate knew it was a job killer. Boxer didn't.

Free trade. In the debate, Boxer patronizingly said Mexico was important to California because it was a top trading partner. No kidding. California's economy is steeped in foreign trade, accounting for 11.4% of U.S. exports, which underperforms its 14% slice of the economy.

Maybe that's because Boxer has steadfastly kept California out of foreign trade. She opposed NAFTA with Mexico and Canada in 1993 and continues to oppose all free trade. She voted no on trade deals with some of the state's most logical, natural trading partners — Singapore, Chile, Peru, the Dominican Republic, El Salvador, Honduras, Guatemala and Costa Rica, to name a few.

In last year's supplemental stimulus package she voted to shut Mexican trucks out of the U.S., a move that so angered Mexico it imposed retaliatory tariffs on states like California because of her stance. Even today, Boxer opposes selling her state's goods tariff-free in new markets like Colombia, Panama and Korea.

Radical environmentalism. Boxer says her top priority is cap-and-trade legislation, an energy tax that would saddle California's businesses with high costs based on questionable science. California will pay for this in thousands of lost jobs and billions of dollars of investment that will move to friendlier states and countries.

Boxer also opposes offshore drilling on environmental grounds — and the jobs it would create. Fiorina "stands with Big Oil; she doesn't stand with the people of California," Boxer declared, not getting that Big Oil and its suppliers could provide 70,000 new and well-paid jobs for her state if it could drill from the vast 10.5 billion barrels of oil reserves sitting idle off California's coast.

Worst of all, Boxer has declined to waive the Endangered Species Act against California's own breadbasket, the Central Valley. She approved a waiver for a similar case in New Mexico, but denied it to California. Fiorina condemned Boxer's callous indifference, pointing out that "a nameless, faceless bureaucrat decided the smelt was endangered" and 90,000 jobs were lost.

As water was cut to the southwest Central Valley in 2007, unemployment rates rose above 16% in Fresno and as high as 40% in Mendota; agricultural operations fled to Mexico. Mendota's jobless farmworkers were reduced to accepting charity food from China — outsourcing that came because of Boxer's vote.

One big thing that IBD failed to mention (although with a competitiveness-killing laundry list like that, maybe they just ran out of space) was Boxer's vote for ObamaCare.  As I've noted several times, that law's new tax burdens on American businesses, when coupled with the fact that we already have the world's second-highest corporate tax rate, are a recipe for the further erosion of these businesses' global competitiveness and the loss of companies and jobs to an increasing number of countries that understand simple economics and have thus adopted more business-friendly tax and regulatory policies.

In short, Boxer and her buddies in Congress have squeezed the US economy as hard as they can, and they then have the audacity to complain when American jobs and companies overflow to other, less-pressurized markets.  They refuse to acknowledge that their hyper-aggressive tax and regulatory actions have caused these natural, opposite reactions, and they instead propose physics-defying ways to "seal" the economy (through protectionism) that either are totally unworkable or exacerbate the job/company-losses they're allegedly trying to stop.

It'd be funny if it weren't so darn devastating for the US economy.

But, hey, maybe Sen. Boxer and her buddies will learn this simple lesson when American voters outsource their jobs to more qualified candidates.

Monday Quick Hits

Lots of interesting stuff over the last two weeks, so let's get right to it:

• FedGov economists: Increasing exports won't increase US manufacturing jobs.  Three economists from the US International Trade Commission write, "While export promotion is often seen as a strategy of increasing manufacturing employment, in the past decade US employment growth has all been in the services sectors. Even though manufacturing is important in itself, the promotion of US exports is likely to generate more indirect jobs in wholesaling, transport, and professional services than direct jobs in manufacturing."  Of course, you already knew this because you read my post on the issue last November(!).

• While loudly demagoguing manufacturers that ship jobs overseas, the administration is spending millions of taxpayer dollars to train foreign IT workers.  Holy policy disconnect, Batman!

• On the bright side, lousy US trade policy can't hold back global trade.  From The Economist: "Trade has not been devastated by the raft of protectionist actions taken during the downturn. According to the World Bank, the rise in tariffs and anti-dumping duties explains less than one-fiftieth of the collapse in world trade during the recession. For the most part, the fall in trade reflected a drop in demand." Even better, early evidence suggests that "re-balancing" is occurring: "There is even some evidence that activity has rebalanced from the lopsided trade pattern that existed just before the crisis. Then, the share of emerging-world imports that came from rich countries had been on a steadily declining path. But now demand from emerging economies is helping to prop up rich-world exports to a larger degree than is commonly realised. According to IMF figures, of nine emerging markets in the G20, seven got a higher share of their imports from rich countries in 2009 than they did a year earlier. Just 59% of China’s imports came from rich countries in 2008, but this rose sharply to 66% in 2009. India obtained 42% of its imports from rich countries in 2008, but last year this rose to 47%."  Gee, and we didn't even have to impose self-flagellating 35% tariffs on China to do it! (Paul Krugman was unavailable for comment.)

• Sen. Lincoln may be going down in flames, but she's gonna subsidize everything on her way out.  Behold, desperation efforts from Arkansas' queen of farm subsidies: "Large-scale farms would disproportionately benefit from a $1.5 billion disaster aid package for which Sen. Blanche Lincoln says she's secured funding, an advocacy group said in a report released Thursday. Lincoln, who is in a tough re-election fight in Arkansas, has said she's received assurances from the White House that the Agriculture Department would fund $1.5 billion administratively for farmers who lost crops in 2009. Democrats agreed to cut the aid from a small business lending bill last week. The Environmental Working Group on Thursday projected that the largest share of the aid — $210 million — could go to Lincoln's home state with 270 farms collecting more than $100,000 each in disaster subsidies."

• Shocker: BMW outpaces its European rivals by making cars that people actually want.  From the WSJ (subscription): "Making cars people want to buy is a better investment proposition than making cars governments have to bribe people to buy. Just look at BMW, the top-performing European auto stock this year even as rivals received a substantial boost from scrapping incentives. Through design and good fortune, an expectation-beating second quarter could be a harbinger of further outperformance by the German company."

• Something to remember the next time you hear your congressman/senator badmouthing China and/or pining for a trade war.  The US China Business Council recently released its annual report on US exports to China (helpfully broken down by congressional district).  Their overall conclusions: "'Even with a global recession, American businesses and American workers continue to benefit from expanding opportunities to sell high-value manufactured goods to the China market, the world’s fastest growing economy,' USCBC President John Frisbie said. 'A clear trend that began in 2000 continued in 2009: Exports to China continued to outpace export growth to other global markets,” Frisbie continued. “US exports to China have jumped 330 percent since 2000, compared to 29 percent to the rest of the world.'”

• The Obama administration celebrates CAFTA's 5th birthday by filing a labor complaint against Guatemala.... naturally.  My favorite quote: "In a statement released yesterday by the Guatemalan Ministry for Foreign Affairs, the Central American country expressed surprise at the complaint, and was even more taken aback by Washington’s decision to announce the dispute in such a public fashion. The Ministry’s statement also alluded to Guatemala’s concerns that the complaint could be politically motivated."  Playing politics with US trade policy?  This administration?  Never!

• Leaked: WTO sides with China in dispute over US barriers to chicken imports.  Per Reuters: "A World Trade Organization panel has ruled in favor of China in its dispute with the United States over an effective U.S. ban on imports of Chinese chicken, a Chinese source said on Tuesday. The WTO issued a ruling in the poultry dispute to the two parties on Monday, but it remains confidential until it is published in a couple of months time. There was no official comment from Chinese or U.S. authorities. Asked whether China had won the case, the source, who is familiar with the ruling, told Reuters: 'You could say that ... It went well.'"

• Video: Vietnam continues to take market share from China.  Bloomberg: "The communist nation drew 13.5 percent of the Association of Southeast Asian Nations' foreign direct investment pool in 2008, up from 4.4 percent two years earlier, according to the 10-member group."

Democrats Give Us a Very Good Reason to Doubt Them on Trade

Last week the Washington Post ran a front page story on the Democratic Party's big strategy for winning (or, more accurately, losing less badly) in this November's midterm elections, and you'll never guess the focal point of their big plan.  Yep, rampant protectionism:

President Obama and congressional Democrats -- out of options for another quick shot of stimulus spending to revive the sluggish economy -- are shifting toward a longer-term strategy that promises to tackle persistently high unemployment by engineering a renaissance in American manufacturing.

That approach, heralded by Obama last week in Detroit and sketched out in a memo to House Democrats as they headed home for the August break, is still evolving and so far focuses primarily on raising taxes on multinational corporations that Democrats accuse of shipping jobs overseas.

Sigh.  Now, I've repeatedly discussed just how wrongheaded this plan is, and several good folks stepped up last week to do the same.  And for those of you who don't remember, here's a good summary from a recent blog post of mine:

As I've noted here (and here and here and here), this standard trope is complete drivel for (at least) four basic reasons: (i) the idea that hordes of American jobs are being outsourced to Mexico or China or India is a complete economic fiction; (ii) those evil "tax breaks" for US multinational corporations actually increase American jobs; (iii) raising these taxes on American companies would be devastating for the US economy (great WSJ op-ed here on this point); and (iv) the candidates' proposed "solution" - ending tax breaks for companies that ship jobs overseas - is utterly unworkable.  In sum: this is hackneyed political demagoguery and little more.

And as Hot Air's Ed Morrissey helpfully reminds us, the Democrats' "strategy" is hardly novel:

Obama and the Democrats plan to take a page out of John Kerry’s playbook from 2004. Remember “Benedict Arnold CEOs,” the companies that moved out of US jurisdiction to save money on taxes and regulation? Even though Kerry did much the same thing with his yacht (and took money from the very same CEOs in that election), he railed against the companies when it was the taxes and regulation that created the situation.

So given that these plans are recycled nonsense that I (and many others) have repeatedly dismantled, why am I talking about it now?  Why not just ignore the story and move on?  Well, as the Post story makes clear, even Democrats themselves are now acknowledging that their plan is, well, hackneyed political demagoguery and nothing more:

Republicans mock the endeavor, dubbed "Make It in America," as blatantly political, designed primarily to save the jobs of endangered Rust Belt Democrats whose races could determine the balance of power in the November congressional elections. Senior Democrats acknowledge that the strategy emerged after the issue of off-shoring jobs figured prominently in a Pennsylvania special election earlier this year and a recent poll.

Some independent analysts are also skeptical. U.S. manufacturing jobs have been disappearing since 1979, in part because of the heightened productivity of American workers but also because of cheaper labor abroad. During the past decade, the sector lost a third of its workers, falling to 11.7 million last year from 17.3 million people in 1999, according to the most recent figures from the Bureau of Labor Statistics.

Many of the ideas being promoted by Democrats to stop the slide are hardly new. House Republican Whip Eric Cantor (Va.) called the strategy "more meaningless than harmful" after voting for one Democratic proposal, a resolution to encourage packers of domestic fruits and vegetables to display the American flag on their labels....

The seeds of the "Make It in America" campaign were planted earlier this year, when Rep. Mark Critz (D-Pa.) won an unexpectedly large special-election victory by campaigning against tax breaks for companies that move jobs offshore. Then in late June, House Democrats were briefed on a poll conducted this spring for the Alliance for American Manufacturing, which found that voters are anxious about the nation's mounting debt to China. Key voting blocs -- including independents and older people with no college education -- named the loss of manufacturing jobs as a top worry, the survey found.

The poll "crystallized" Democratic thinking, said Rep. Chris Van Hollen (D-Md.), who leads the political committee in charge of electing Democrats to Congress.

In short, Democrats are pursuing these old, bad trade policies not because they'll actually help the struggling US economy, expand our manufacturing sector or lower the unemployment rate, but instead because they poll well.  Awesome, huh?  (Obvious aside: too bad the Democrats didn't look at the polls when they forced healthcare "reform" down our throats.)  But hey, that's just the politicos.  I'm sure that liberal bloggers, journalists and wonks are totally on board with the Dems' trade plans, right?  Right?

Umm, not so much.

As part of their ongoing (and juicy!) series on the liberal email listserv "JournoList," the Daily Caller released emails documenting a dialog between the White House and JournoList members which clearly demonstrates that most of the Democrats' own supporters oppose their protectionist plans and recognize them as a dishonest political stunt:

Two of the administration’s chief economic advisors, Jared Bernstein, the vice president’s top economist, and Jason Furman, deputy director of the National Economic Council, were members of Journolist until they began working officially for Obama.

Even after the campaign ended, and he had joined the Obama administration, Bernstein continued his contact with the group. In May of 2009, Bernstein contacted Ezra Klein to pass a message along to list members.

“Calling all Journos,” Bernstein wrote in a message relayed by Klein. “I thought we got too little love from progressive types re our tax changes targeted at businesses with overseas operations. We’re maybe going for another bite at the apple this Monday,” he wrote. Bernstein invited members of the list to join him on a conference call on the issue a few days later.

Not everyone was sold. A couple of members on the list, including Greg Anrig of the Century Foundation and Bloomberg’s Ryan Donmoyer, panned the administration’s plan to crack down on offshore tax havens as a misleading political stunt.

Dean Baker, at the time a blogger at the American Prospect, agreed the policy was dishonest, but defended it anyway. “Sure, some of the things they are saying are not true (the jobs story first and foremost),” he wrote, “but the industry groups have this town blanketed with lobbyists and own a large portion of Congress outright. … There has to be some counterforce to the industry groups and that is the populist rabble. It might not be pretty, but that’s Washington.”

In the end, 14 journalists expressed interest in the conference call with Bernstein, including Donmoyer and Washington Post reporter Alec MacGillis. The effort appeared to be wasted on Donmoyer, who in the coming weeks wrote a couple of stories for Bloomberg expressing skepticism about the idea.

Bernstein’s effort did appear to bear fruit elsewhere, however. “I’ve heard that there’s some disappointment in the administration that they haven’t gotten the level of progressive love they feel they deserve for their ambitious proposals to curb abusive corporate tax loopholes,” wrote influential liberal blogger Matt Yglesias the next day. Yglesias went on to attack opponents of the plan, noting “how absurd some of the abuses the administration is trying to curb are.”

Bernstein, as you may know, worked for the union-backed-and-run Economic Policy Institute, a think tank with, ahem, a less-than-stellar track record on trade.  And when he approached his fellow travelers seeking support for the administration's "new" protectionist plans, they mostly blew him off and criticized the plans.  Good for them, and shame on the White House and congressional Democrats for pursuing trade policies that are, in Dean Baker's own words, based on lies.

Such dishonesty and overt political pandering also raise broader questions about all Democrat trade policies, not just those on multinational taxation.  In short: after seeing this, why on earth should we trust anything Democrats say on trade?  As I've repeatedly noted, lots of polls show that a majority of Americans are uncertain about (or downright hostile to) free trade.  And if polls - rather than economics or a desire to, you know, actually increase American jobs - motivate the Dems' dishonest  "Make It in America" plan, then what, pray tell, motivates their opposition to US FTAs with Colombia, Panama and South Korea or their breathless demands about China's currency policies?   Those same polls?  Or are we to believe that their dishonesty only extends to the tax policies, and that the Dems' other trade policies are as pure as the driven snow?

I don't know about you, but I'm finding the latter option to be increasingly hard to believe.

ObamaCare and America's Global Competitiveness

As part of my ongoing examination of the effects of American healthcare "reform" (aka ObamaCare) on the United States' global economic competitiveness comes this interesting news out of Raleigh, North Carolina:

Blue Cross and Blue Shield of North Carolina is testing a plan that would outsource some information technology work to India.

The state's largest health insurer is looking for ways to reduce costs as the recession has slowed membership growth and health reform looms. This week, Blue Cross started a "small pilot project" with Keane, a Boston-based information technology firm, to extract and analyze data from the insurer's massive electronic repository. Some of the work will likely be handled at a Keane facility in India, said Blue Cross spokesman Lew Borman.

"It does not affect any current jobs, but I can't speak to down the road," Borman said. "We're looking at a variety of ways to operate more efficiently and keep premiums affordable. It's about costs and cost savings for North Carolinians."...

Outsourcing or offshoring has been a trend in corporate America for years, but has come under fire from lawmakers and other critics as unemployment remains stubbornly high. When any company does it for the first time, there's the potential for a backlash from consumers and others, said Jim Johnson, a professor of strategy and entrepreneurship at UNC's Kenan-Flagler Business School....

[H]ealth reform is forcing many medical companies to find ways to cut costs, Johnson said. Reform will also bring a host of data-management challenges. Last year's federal stimulus bill included billions of dollars to entice physicians, hospitals and others to adopt electronic medical records, which can improve efficiency and reduce errors.

As some companies hire outside firms to handle that work, they have to look to global information technology providers with operations in cheaper countries. "The cost differential is just too wide," Johnson said....

What's most interesting about this news is that, unlike those billions in new tax costs that US companies were forced to incur (and report) after ObamaCare became law, the moves by BCBS are not in response to actual higher costs, but only the threat of such costs in the future.  Yet each demonstrates a clear pattern: ObamaCare is placing more artificial burdens on American companies and workers - already some of the most heavily burdened in the world.  These tax and regulatory burdens reduce America's global competitiveness and, where those costs outweigh the benefits of staying onshore (i.e., the "tipping point"), companies and/or jobs are forced offshore.

Of course, one of the biggest criticisms of the US healthcare "reform" legislation was that it would actually increase costs for health insurers and American businesses, so BCBS' response here is totally and utterly expected - it's what good businesses do to, you know, stay in business.  Nevertheless, you really must wonder how many other insurers and other companies are already researching and or/employing similar cost-saving measures in order to absorb ObamaCare's current or future burdens and remain operational. 

And it's all to the detriment of American companies, workers and the overall economy.