The End of Free-Trade Globalization
US corporations and banks remain free to move jobs and production whenever and wherever corporate strategy dictates, regardless of the consequences for the economy. Government can stop this by forcing them to serve the broader national interest. This is not as radical as it may sound. Every other leading industrial nation does it, one way or another. They impose limits on corporate strategy, either in formally binding ways or through political and cultural pressure, to ensure that good jobs and the best value-added production remains at home.
Washington can accomplish this only through unilateral action, not free-trade agreements. It has to rewrite trade law, tax law and policies on workforce development and subsidy. Resistance will be fierce, given the power and influence of big-name banks and corporations, but the public will surely support efforts to make the big guys serve the country's well-being.
If Washington doesn't make these broad structural changes, another popular idea will prove illusory—that US manufacturing can be rebuilt around green technologies. China is already doing this, and is far ahead. It has 35 percent of the global market in solar panels and is poised to dominate other green technologies. The United States, in fact, has swelling trade deficits in this sector. American companies work both sides of the competition, collecting subsidies on both ends.
Doubters may say that Obama doesn't have the nerve to tackle this problem. They may be right. But the president is clearly thinking along these lines. He is the first president in thirty years to call for restoration of US manufacturing. This past summer he pushed modest tax measures that give a small advantage to home-based producers. The impact was so meager that Republicans didn't bother to object. But the GOP may also have grasped that measures favoring US factories over foreign ones will be wildly popular with voters. Obama repeated the message before a Labor Day audience in Milwaukee, saying, "I don't want to see solar panels and wind turbines and electric cars made in China. I want them made right here in the United States of America."
The best evidence for Obama's potential comes from liberal-labor reformers fighting the trench warfare on trade cases while advocating far more fundamental reforms. "The president has been true to his word and very supportive on trade-law enforcement—better than any president since before NAFTA," says Leo Gerard, president of the United Steelworkers. "The president is trying to do the right thing on outsourcing, on taking away tax breaks from multinationals."
Senator Sherrod Brown of Ohio cites a series of White House decisions on trade and stimulus spending that saved 400 jobs in Youngstown, more jobs in Lorain and 1,000 steel industry jobs overall. "On each case, we had to beat the hell out of the White House," Brown allows, "but this White House is more open to manufacturing than any in memory. When the president focuses on the facts, he comes down on our side." Brown and Gerard hope to build visibility and mobilize popular support that will push the president and Congress to embrace more ambitious reforms. "They have a manufacturing strategy, but it is not yet a manufacturing policy," Brown says.
The president's familiar style of wanting to split the difference in a tough fight is evident on trade. Obama appointed Ron Bloom, a Wall Street veteran close to the Steelworkers, as a special adviser on manufacturing—but the president continues to support more trade agreements. And Bloom, I was told, has been walled off from trade policy by Larry Summers, the departing economic adviser. The president talks up his goal of doubling exports but neglects to mention that imports are again swelling. "You can't get this economy out of the ditch doubling exports," Gerard says, "if at the same time you are tripling imports."
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Another leading indicator for potential change is that a few influential industry leaders are deviating from the standard corporate line. Jeffrey Immelt, CEO of General Electric, has called for the revitalization of manufacturing and suggests that the United States can become the leading exporter. "In some areas, we have outsourced too much," Immelt admitted in a speech last year to the Detroit Economic Club. "We plan to 'insource' capabilities like aviation component manufacturing and software development." GE's strategic shift sounds shocking (and unreal to union leaders) because the company has been the most notorious player in offshoring assembly lines and jobs. GE's 288,000 worldwide employment is now 53 percent foreign. The unions that represent workers at GE had more than 100,000 members there in the 1970s; they are now reduced to about 15,000.
A more persuasive break from past dogma was expressed by Andrew Grove, former CEO, now senior adviser, of Intel and a revered figure in Silicon Valley. Grove wrote a blunt confessional essay for Bloomberg titled "How to Make an American Job Before It's Too Late." The government, he urged, must intervene to end the offshoring game his semiconductor firm and other computer giants have played for many years. Tax the product of offshore labor, Grove proposed, and use the money to help other US companies scale up production at home. "If the result is a trade war, treat it like other wars—fight to win," he declared.
Grove took a shot at New York Times columnist and globalization cheerleader Thomas Friedman, who claims "innovation" will keep America on top. Not if US inventions do not lead to US production, Grove argued. Friedman and other free-traders, he said, don't seem to understand that the computer industry adheres to its own exit-to-China strategy for dumping US workers. When a start-up is in development, investors insist even before the product becomes a big seller that executives work out the timing for offshoring jobs.
The US computer industry, Grove observed, employs only 166,000—fewer than in 1975, when the first PC was assembled—while the industry in Asia employs 1.5 million workers, engineers and managers. The world's largest computer maker, China's Foxcon, employs 800,000. They make the products Americans know as Dell, Apple, Microsoft, Hewlett-Packard and Intel.
Union leaders suspect that the same story is playing out at GE. The company was founded on Edison's invention of the incandescent bulb, but this past summer GE closed its last US light-bulb factory, a highly automated, nonunion plant in Winchester, Virginia. Old-style bulbs will still be made in Latin America and Asia, where wages and healthcare are cheaper, and for a time they will still be sold in the United States with the GE label. But the company is moving on, shifting to two new green-tech products that promise vast reductions in energy consumption. Congress is effectively banning US production of incandescents by mandating efficiency standards, starting in 2012.
Both of the new light-bulb technologies were invented in America. But the new bulbs, GE said, will be made overseas, and for the usual reasons: US workers are considered too expensive. They face the same grim choice that has prevailed for decades: either wages get busted from $25–$30 an hour to $13–$15, or the jobs disappear. That trend has been gradually eroding the American middle class.
Stephen Tormey, representative of the United Electrical Workers (UE) at GE, sees a shrewd corporate strategy. "I think GE saw they could make more money with these new technologies and get subsidized by the government as energy-efficient if they became born-again believers in American manufacturing," he says. "I'm all for that. I will stand on the sidelines and cheer—if it's true. So far we haven't seen it. You see these little moves here and there, but so far they are still a globalizing company."
GE is bringing some jobs home. With lots of fanfare, it has announced new moves to restore jobs at various US plants, sometimes to make products like more expensive, energy-saving home water heaters. But union officials are not impressed. They read GE's vaguely worded promises and produce a list of plant closings and job losses. "Press releases do not create jobs," says Chris Townsend, UE's Washington representative.
GE is a brilliant example of how a globalizing company manages its worldwide supply chain, moving elements of production based on costs and market demand. Divided loyalty comes with the territory. GE assembles wind turbines in South Carolina and China. It harvests tax breaks and subsidies from Washington as well as Beijing. Which side is GE on? Its own, and it will go wherever profits are highest. But this race to the bottom undermines standards in both rich and poor countries. The downward pressure on wages, and the obsessive search for lower prices and greater profits, destroys aggregate demand for the entire system. It feeds the deflation that threatens to bring down the world economy.
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Multinationals drive the destructive cycle but are also its prisoners. They cannot quit on their own without losing out to other companies. Only governments, acting together and individually, have the power to reverse the cycle before it is too late. The US government can confront these negative forces by altering bottom-line incentives for multinationals based here. It can do this through the tax code, by levying a stiff penalty on corporations that continue to offshore more production than they create at home.
Public subsidies are another leverage point. Instead of competing with other nations to provide the biggest subsidies, Washington could disqualify companies from any form of subsidy unless they agree to accept concrete performance terms reflecting national loyalty. The obvious means of enforcement is a staple device of American capitalism—the enforceable contract. When GE gets capital and other financial support from taxpayers, it makes no promises about how long the jobs will stay at home or even if jobs will be created. The government should get it in writing: if the company is unwilling to make such commitments, it won't receive any money. If GE decides to break the promise, the contract will make the company return the money or surrender the security bond required up front. Government, in other words, should mimic practices that are routine on Wall Street and in corporate finance.
If Washington also adopts sterner measures to reduce its trade deficits, the discipline will alter strategic decision-making by firms like GE. A collar that steadily closes the trade gap would create risks for offshoring companies and capital investment abroad, since foreign production would lose its assured access to the American consumer. A border tax on social costs would provide a similar way to defend American standards from free riders overseas. If, for example, the United States decides it must raise costs for domestic producers to reduce pollution or hydrocarbon consumption, foreign factories should be required to pay an equivalent border tax on imports if their country of origin does not impose similar costs on production. An emergency general tariff would be a more extreme version of the same principle.
All these suggestions are deeply disruptive to global commerce, and, yes, many would raise prices for Americans. But the country's predicament is a historic emergency that cannot wait for market solutions. The United States must, in effect, decide that its role as Goliath is over. It's time to act like a nation again rather than as the global overseer. If Barack Obama doesn't find the nerve to act, maybe the next president will.