Tag Archive | "Outsourcing"

Notre Dame Says No to ‘Made in China’

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The following article by Mark Drajem appeared at the Bloomberg site here.

The University of Notre Dame’s campus bookstore sells “Fighting Irish” lettermen jackets, “ND” license plate frames and stadium cups picturing the school’s leprechaun mascot. Not for sale: anything made in China.

Ten years after adopting the policy, Notre Dame remains the only major U.S. university that forbids license holders such as Adidas AG (ADS) to put the school logo on any product from China, according to groups that track college merchandising.

Notre Dame prohibits the goods because China, the top source of U.S. imports, doesn’t permit independent labor unions, according to a college policy document. The ban is attracting fresh attention from Washington lawmakers who say China has begun a renewed crackdown on dissidents.

“What Notre Dame is doing is very, very important,” Representative Frank Wolf, a Virginia Republican and chairman of the Appropriations Committee panel that oversees trade, said in an interview. “China is a particularly bad place to do outsourcing, and the American people are totally opposed to it.”

Wolf said he will press Virginia universities to impose a similar ban and ask colleagues in Congress to get their constituent groups to follow the lead of South Bend, Indiana- based Notre Dame.

$4.3 Billion Market

College-branded products are a $4.3 billion-a-year business, according to Collegiate Licensing Co., which helps schools manage their trademarks. In its most recent rankings, Notre Dame was 11th in licensing revenue among almost 200 colleges tracked by the Atlanta-based unit of sports agency IMG Worldwide Inc.

The University of Texas tops the list with $10.15 million in revenue from licensing in the last fiscal year. Notre Dame doesn’t disclose how much it makes. Among leading suppliers are Electronic Arts Inc. (ERTS), the video-game publisher, and Nike Inc. (NKE), the largest maker of athletic shoes.

Under pressure from students protesting conditions for workers sewing shirts or stitching soccer balls in nations such as Honduras and the Dominican Republic, about half of major universities in the past decade have adopted codes of conduct for suppliers of companies that license their brands, including Texas and Notre Dame, according to Collegiate Licensing.

“This was galvanized by campus action,” Liz Kennedy, vice president of the company, said in an interview. While many institutions have standards for purchases, only Notre Dame has a countrywide boycott, she said.

Consumer Backlash

Chinese-made products dominate U.S. consumer goods such as sports equipment, shoes and clothing. The nation sent $26.9 billion of toys and sports items, $16.7 billion of footwear and $33.5 billion of apparel to the U.S. in 2010, according to Commerce Department data.

Imports from China have prompted a backlash among some consumers and lawmakers worried about job losses in the U.S. and the competitiveness of American-made products.

“The issue that we are dealing with now is: What is not going to be made in China?” Senator Bernie Sanders, a Vermont independent, said at a hearing Feb. 15.

Notre Dame said its policy on Chinese products is tied to workers’ conditions in the world’s most populous nation. A standards code adopted by the Catholic university in 1997 requires freedom of association and the “right for workers to organize and form independent labor unions of their own choosing.” It implemented the ban on Chinese products four years later.

‘Economic Justice’

A human rights report released by the U.S. State Department in April reinforced the university’s position, concluding that Chinese law “does not provide for freedom of association, as workers were not free to organize or join unions of their own choosing.”

Wang Baodong, a spokesman for the Chinese embassy in Washington, didn’t return telephone calls and e-mail messages seeking comment.

“Our approach has been informed by Catholic social teaching, particularly the principle related to economic justice,” Michael Low, Notre Dame’s director of licensing, said in an e-mail.

Some sporting-goods companies have “decided against doing business with the university” after reviewing the policy, Low said. NorthPole LLC, a maker of camping and tailgating supplies, has obtained all its branded portable chairs and canopies in China, and thus couldn’t apply for a license from Notre Dame, said Cheryl Cantwell, a brand development manager for the privately held Washington, Missouri-based company.

“Most of these products are made in China,” she said in an interview. The company is now tapping its tent-making factory in Bangladesh to come up with canopy samples it can submit to Notre Dame for approval, she said.

Slower, Costlier

Notre Dame’s requirements slow the introduction of products by about a year or result in higher prices because of steeper shipping costs or more convoluted transport channels, said Brian Finegan, manager for licensing and business development at a subsidiary of Jarden Corp. (JAH), a Rye, New York-based company that sells canopies, footballs and other sporting goods under brands such as Coleman and Rawlings.

“We can source products elsewhere, but our sourcing leverage is sometimes limited,” Finegan said in an interview. “Sourcing somewhere else solely for Notre Dame” creates longer lead times, he said.

Adidas signed a 10-year contract with Notre Dame in 2005, which the university said at the time would be valued at more than $60 million. Adidas, which provides the varsity teams with jerseys and footwear, complies with the prohibition on Chinese- made goods, said Lauren Lamkin, a company spokeswoman.

Collective Pressure

Also among license holders are Columbia Sportswear Co. (COLM), the JanSport unit of VF Corp. (VFC) and Electronic Arts, according to Notre Dame’s website.

“Fighting Irish” T-shirts sold by Herzogenaurach, Germany-based Adidas on the campus in recent years were made in Honduras, Nicaragua and the U.S., and baseball caps from other companies were made in Haiti and Vietnam.

In addition to China, Notre Dame bars products from countries including Saudi Arabia, Iran, Laos, Qatar and Turkmenistan. None is a major supplier of sporting goods. Notre Dame is also a member of the Fair Labor Association and the Worker Rights Consortium, groups that monitor specific factories for universities.

While laudable, Notre Dame’s policy may not do much to change a country’s practices, according to Susan Aaronson, a professor of international trade at George Washington University in Washington. By staking out its own approach, Notre Dame loses the impact of many universities putting collective pressure on suppliers, she said.

“You have to have enough demanders of good labor protections,” Aaronson, who writes about China and labor rights, said in an interview. Notre Dame’s ban “is not a mistake, but it is likely to have little impact on behavior in China.”

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Trade Deals Unite Left and Right in Opposition

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The following article by Ambreen Ali appeared at Roll Call online here.

Some tea party organizations have been quietly trading notes with left-leaning advocacy groups as both sides work to derail a series of upcoming free-trade agreements.

Together, they hope to deliver what one opponent of the deals described as a “one-two punch” to proposed trade agreements with Colombia, Panama and South Korea. As liberal groups and labor unions lobby Democrats, tea party members have been calling the Republican freshmen they helped elect.

Some tea party groups have a protectionist slant, opposing pacts that might increase competition faced by U.S. producers, but other groups oppose trade deals because they oppose “big government.” For this faction, free trade should simply be freedom to trade with anyone, instead of a detailed treaty written by governments.

Those concerns differ from labor rights issues and offshoring concerns raised by labor unions and liberals, but Public Citizen’s Lori Wallach said many of the arguments are “different sides of the same issue.”

“I’ve certainly talked to them. We’re not working with them, but I have called them at different times to ask how it’s going,” said Wallach, who is director of the left-leaning group’s Global Trade Watch.

The alliance is less surprising when viewed in light of a Wall Street Journal/NBC News poll from last fall that found a majority of Americans believe free-trade agreements have hurt the U.S. In that poll, 90 percent of Republicans and 84 percent of Democrats agreed that outsourcing is a reason the domestic economy is struggling and people are not being hired.

Coordination between liberal and conservative advocates could be the opposition’s best hope to overcome a strong bloc of support for the trade agreements. Top Republican leaders including Speaker John Boehner (Ohio) and Senate Minority Leader Mitch McConnell (Ky.) have urged the president to deliver these deals, and the White House strongly favors the deals.

The U.S. Chamber of Commerce, National Association of Manufacturers and Heritage Action — the advocacy wing of the conservative Heritage Foundation — are all pushing for passage.

Even FreedomWorks, which works closely with the tea party movement, has argued, “Protectionism only robs Americans of their income and their freedom of choice. The cost of trade tariffs are passed on to consumers in the form of higher prices.”

Some tea party members agree. Ryan Hecker — who helped devise the tea party’s policy platform, dubbed the Contract From America — said he is “100 percent for free trade and for anything that opens up trade barriers.”

Kathryn Serkes, a tea party activist whose Americans for Free & Fair Trade has been reaching out to sympathetic lawmakers and local tea party groups, said she is also for free trade, but that these agreements are anything but.

“It’s like reading the health care bill. You start finding things in there you had no idea were there,” she said, citing strict regulations for men’s pants in the Korean trade deal as an example of regulatory overreach. “A real free-trade agreement would be a very simple agreement between two countries to have free and open trade. I would support that.”

She said several freshman Representatives who signed a March letter endorsing the deals have since changed their minds. She did not name the Members.

“They sort of signed the letter as a general statement supporting free trade,” Serkes said. “President Obama is counting on using the words ‘free trade’ to rope in Republicans on Capitol Hill to support it.”

Tea party groups particularly oppose a provision that lets foreign corporations sue the U.S. government in United Nations and World Trade Organization tribunals. Jim McGovern, a member of Florida’s Martin 9/12 Tea Party Committee, said that is “a threat to the sovereignty of the United States.”

He also questioned why the White House is regulating trade when the Constitution gives that right to Congress, an argument Rep. Ron Paul (R-Texas) has also made against the free-trade deals. The approval process would give lawmakers limited opportunity to debate the agreements and no ability to add amendments.

James Stack, a member of the same tea party group, said, “The middle class is union and nonunion. When a factory closes in a town, whether it’s a union state or a right-to-work state, the jobs are gone. It adds to the deficit and the debt and everything else.”

The AFL-CIO and Service Employees International Union have cited the same reason for opposing the trade deals, but those in favor of them argue that they would actually create jobs.

Alan Tonelson, a senior fellow with the U.S. Business and Industry Council Educational Foundation, said that shared interest between labor unions and tea party groups could help his side win.

“We would hope that the tea parties would make it quite clear to the Republicans they helped elect into office that these trade agreements are a non-starter [as] labor will continue to put as much pressure as it can on the White House and House Democrats,” Tonelson said. At the same time, “That’s the one-two punch that has to work.”

But it is unclear how receptive Republicans will be. Despite tea party ties, Sens. Mike Lee (Utah) and Marco Rubio (Fla.), as well as Rep. Tom Price (Ga.) have endorsed the trade deals.

“These agreements will be a boon to our economy,” Rubio said last month. “Our competitors in China and elsewhere have seized on our missed trade opportunities.”

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Boeing to build factory in China

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The following article by Tu Lei appeared in Global Times here.

S aircraft manufacturer Boeing and Aviation Industries Corporation of China (AVIC) on Monday unveiled a new factory as part of their composites joint venture (JV) in Tianjin, as Chinese companies are set to become more involved in global aviation manufacturing.

With an investment of $21 million from Boeing, the new plant will boost the production capacity of the JV, Boeing Tianjin Composites Co, by 60 percent, and full production will begin there by 2013.

Boeing Tianjin Composites produces components for all of Boeing’s in-production programs, including the 737, 747-8, 767, 777 and 787, and its customers also include Hexcel, Goodrich, and Korean Aerospace Industries.

Last month, rival Airbus also unveiled a new plant for its Hafei Airbus Composite Manufacturing Center in Harbin, Heilongjiang Province. The factory will produce major components for the Airbus A350 XWB, a medium capacity, long-range widebody aircraft.

“Outsourcing has been a trend in global aviation, and the expansion of manufacturing giants in China shows the increasing importance of the Chinese market in global industry chains,” said Lin Zhijie, an industry researcher from Singapore-based Kent Ridge Consulting, an aviation sector consultancy.

Ray Conner, vice president and general manager of supply chain management and operations for Boeing Commercial Airplanes, on Monday said that the company’s annual spending on aviation hardware and services in China is expected to more than double to at least $400 million by 2015.

Currently, Boeing and its supplier partners have contracts with China’s aviation industry valued at more than $2.5 billion. There are nearly 9,600 aircraft globally that use parts made in China.

Lin also said the aircraft giants’ expansion in China indicates that they intend to cooperate with Commercial Aircraft Corporation of China in production of its new C919 passenger jet. Deliveries of the new airplane are expected to begin in either 2013 or 2014.

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Morici: 2.11.11: Trade Deficit Report (updated)

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The following piece is by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

Trade Deficit Drags on Growth and Jobs Creation

Friday, the Commerce Department to reported the deficit on international trade in goods and services was $40.6 billion in December, up from $38.3 billion in November and $27.1 billion in mid 2009, when the economic recovery began.

This rising deficit subtracts from demand for U.S. goods and services, just as stimulus spending and additional temporary tax cuts add to it. The deficit is slowing the recovery and jobs creation, and the Obama Administration and Republicans in Congress have not offered a credible policy to significantly change it.

Jobs Creation

The economy added 36,000 jobs in January, and that was particularly disappointing after surges in holiday retail sales, business spending and auto sales.

Americans have returned to the malls and new car showrooms but too many dollars consumers spend go abroad to purchase imports but don’t return to buy U.S. exports. This leaves too many Americans jobless and wages stagnant, and the resulting slow growth leaves state and municipal governments with chronic budget woes.

By January 2014, the private sector must add more than 13 million jobs to bring unemployment down to 6 percent. Current policies are not creating conditions for 5 percent GDP growth that could be achieved and is necessary for businesses to hire 370,000 workers each month.

Since December 2009, the private sector has added 92,000 jobs per month, but most of those have been in government subsidized health care and social services, and temporary business services. Netting those out, core private sector jobs creation has been a meager 42,000 per month—that comes to less than 14 permanent, non-government subsidized jobs per county for more than 5000 job seekers per county.

During the early stages of an economic expansion, temporary jobs appear first, but 19 months into the recovery, permanent, non-government subsidized jobs creation should accelerate. Instead, core private sector jobs were up only 43,000 in January—down from 73,000 in the fourth quarter.

Economic Growth

Commerce Department preliminary estimates indicate GDP growth was only 3.2 percent, significantly disappointing Wall Street economists.

Consumer spending, and business technology and auto sales all added strongly to demand and growth, and exports actually outpaced imports for the first time in a year. Pessimism, caused by rising gasoline prices, health care reform, and import competition, caused businesses to run down inventories rather than add new capacity and employees.

Fourth quarter exports got a boost from a weaker dollar against the euro earlier in 2010—the export effect of a weaker or stronger dollar occurs with a lag of several months; however, this situation is likely to reverse in the 2011, owing in particular to Europe’s continuing sovereign debt woes. November will likely prove to be the low point for the trade deficit, as imports of oil and consumer goods from China overwhelm any further progress in U.S. export growth.

Oil and goods from China account for nearly the entire trade deficit, and without a dramatic change in energy and trade policies, the U.S. economy faces large trade deficits and unacceptably high unemployment indefinitely.

The de facto moratorium on new offshore drilling permits in the gulf, imposed by onerous licensing requirements, and policies that limit development of other conventional energy supplies are premised on false assumptions about the immediate potential of electric cars and alternative energy sources, such as solar panels and windmills. In combination, limits on conventional energy development and excessive optimism about alternative energy technologies are making the United States even more dependent on imported oil and more indebted to China and other overseas creditors to pay for it.

Led by Ford and GM, the automobile industry is demonstrating it can build many more attractive and efficient gasoline-powered vehicles than it is selling now, and a national policy to accelerate fleet replacement would spur growth and create jobs much more rapidly than investments in battery and electric technologies.

The trade gap with China did ease to $20.7 billion but remains the largest U.S. deficit with any country. This gap was affected by depletion in U.S. inventories in the fourth quarter and will likely head up again, especially in Spring, after the Chinese New Year. The latter celebration often effects the pace of Chinese exports, bunching shipments into March.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent. It accomplishes this by printing yuan and selling those for dollars other currencies in foreign exchange markets. Annually, those purchases exceed $450 billion or 10 about percent of China’s GDP and 35 percent of its exports.

President Obama has pleaded with China to stop manipulating its currency, but Beijing shrewdly recognizes President Obama lacks the will to meaningfully counter Chinese mercantilism with strong, effective actions; hence, Beijing offers token gestures and cultivates political support among U.S. businesses like Caterpillar who lead in outsourcing jobs to China and profit from Chinese protectionism at the expense of American workers.

President Obama should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—about 35 percent. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.

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A ‘prescient’ warning to Boeing on 787 trouble

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The following article appeared in The Seattle Times here.

In a late January appearance at Seattle University, Boeing Commercial Airplanes Chief Jim Albaugh talked about the lessons learned from the disastrous three years of delays on the 787 Dreamliner.

One bracing lesson that Albaugh was unusually candid about: the 787’s global outsourcing strategy — specifically intended to slash Boeing’s costs — backfired completely.

“We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home,” Albaugh told his large audience of students and faculty.

Boeing was forced to compensate, support or buy out the partners it brought in to share the cost of the new jet’s development, and now bears the brunt of additional costs due to the delays.

Some Wall Street analysts estimate those added costs at between $12 billion and $18 billion, on top of the $5 billion Boeing originally planned to invest.

Interviewed after the Seattle U. talk, Albaugh avoided directly criticizing the decisions of his predecessors.

The 787 outsourcing strategy was put place in 2003 by then-Boeing Chairman Harry Stonecipher, who was ousted in 2005, and Commercial Airplanes Chief Alan Mulally, now chief executive at Ford.

“It’s easy to look in the rear-view mirror and see things that could have been done differently,” Albaugh said. “I wasn’t sitting in the room and I don’t know what they were facing.”

And yet, at least one senior technical engineer within Boeing predicted the outcome of the extensive outsourcing strategy with remarkable foresight a decade ago.

Albaugh and other senior leaders within Boeing may be belatedly paying attention to a paper presented at an internal company symposium in 2001 by John Hart-Smith, a world-renowned airplane structures engineer.

Hart-Smith, who had worked for Douglas Aircraft and joined Boeing when it merged in 1997 with McDonnell Douglas, was one of the elite engineers designated within the company as Senior Technical Fellows.

His paper was a biting critique of excessive outsourcing, a warning to Boeing not to go down the path that had led Douglas Aircraft to virtual obsolescence by the mid-1990s.

The paper laid out the extreme risks of outsourcing core technology and predicted it would bring massive additional costs and require Boeing to buy out partners who could not perform.

Albaugh said in the interview that he read the paper six or seven years ago, and conceded that it had “a lot of good points” and was “pretty prescient.”

In his talk at Seattle U., the first specific lesson Albaugh cited as learned from the 787 debacle seemed to echo Hart-Smith’s paper.

Albaugh said that part of what had led Boeing astray was the chasing of a financial measure called RONA, for Return on Net Assets.

This is essentially a ratio of income to assets and one way to make that ratio bigger is to reduce your assets. The drive to increase RONA thus spurred a push within Boeing to do less work in-house — hence reducing assets in the form of facilities and employees — and have others do the work.

Hart-Smith argued that it was wrong to use that financial measure as a gauge of performance and that outsourcing would only slash profits and hollow out the company.

Reached by phone in his native Australia, where at 70 he is now retired, Hart-Smith said he’d heard in recent months on the grapevine from former colleagues that senior executives at Boeing Commercial Airplanes have been reading his paper.

“I’m glad they got the message,” Hart-Smith said. “It took far too long.”

After he presented his paper at a company symposium in 2001, he received hundreds of supportive e-mails from engineers and lower-level managers, he said.

But a senior executive present at the symposium spent a half-hour after his presentation attacking the paper, and afterward Boeing leadership ignored Hart-Smith.

He had hoped to join the 787 program but wasn’t permitted to do so. He felt sidelined, he said.

In Hart-Smith’s analysis, the seeds of Boeing’s outsourcing ideas grew out of the McDonnell aircraft business, which focused on military-airplane programs. On the military side of the business, the U.S. government was the major, often the only, customer and it funded development costs in full.

“The military approach didn’t require you to risk your own money,” Hart-Smith said. “That was the McDonnell Douglas mentality.”

He blamed that attitude for the major outsourcing on the MD-95 and proposed MD-12 programs, the failure of which led to the decline of Douglas’ commercial-airplane business in California.

The same ideas were transferred to Boeing with the McDonnell Douglas merger and led directly to the 787 outsourcing strategy, he said.

Taken to its extreme conclusion, Hart-Smith said mockingly, the strategy of maximizing return on net assets could lead Boeing to outsource everything except a little Boeing decal to slap on the nose of the finished airplane.

Though most of the profits would be outsourced to suppliers along with all the work, and all the company’s expertise would wither away, the return on investment in a 25-cent decal could be 5,000 percent.

Has Boeing belatedly seen the light and embraced Hart-Smith’s analysis?

Clearly the 787 has brought a serious rethink at the top.

“We went too much with outsourcing,” Albaugh said in the interview. “Now we need to bring it back to a more prudent level.”

That likely includes building the horizontal tails of the next version of the Dreamliner, the 787-9, in the Seattle area. And for the next all-new airplane that Boeing will build, Albaugh vows that “we can do things differently and better.”

“Doing the new airplane the way we did this one is not what we want to do.”

But the rethink may not be as radical as Hart-Smith would like.

In his paper he wrote that while some selective outsourcing is necessary, Boeing should keep most of the work it has traditionally done in-house.

Albaugh balked at going that far.

“I haven’t said keep most of the work in-house,” Albaugh said. “I still believe we need to make sure we try to access the best technologies and capabilities that are available around the world.”

And despite what Hart-Smith has heard on the grapevine, no one from Boeing’s leadership has actually called him up to talk about his analysis.

Hart-Smith retired from Boeing in 2008. He still presents engineering papers at academic conferences around the world.

Yet that startlingly prescient 2001 paper focused on business economics. Where did a structures engineer get that kind of expertise?

“It’s common sense,” Hart-Smith said.

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Manufacturing Is Vital Component To U.S. Economy

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The following is the transcript of an interview by Steve Inskeep of NPR with Andrew Liveris, CEO of Dow Chemical and author of the book “Make It in America.” He’s among the CEOs who met last week with the visiting president of China. You can find it online here.

Manufacturing Is Vital Component To U.S. Economy
Published: January 25, 2011


The website Real Clear Politics shows movement in opinion polls. For the first time in months, President Obama’s approval rating is above 50 percent. That comes just in time for tonight’s State of the Union speech. The lawmakers he plans to address have higher ratings, too – though still very low, at 24 percent. And many people in the room tonight will know they need to create jobs in order to keep their own. Over the weekend, the president previewed his speech.

President BARACK OBAMA: My number one focus is going to be making sure that we are competitive, that we are growing and we are creating jobs, not just now but well into the future. And that’s what is going to be the main topic of the State of the Union.

INSKEEP: That subject is also on the mind of a leading executive, Andrew Liveris, CEO of Dow Chemical and author of the book “Make It in America.” He’s among the CEOs who met last week with the visiting president of China.

When it comes to manufacturing, what is China getting right that the United States is not?

Mr. ANDREW LIVERIS (CEO, Dow Chemical): Well, you know, what the Chinese do -and not just the Chinese; other countries that I reference in the book, such as Germany – is they have a holistic approach to manufacturing. It’s a strategy. Basically, they say manufacturing is a very vital part of my economy. It employs my people; it pays them great wages. So they have a country strategy. They approach it as a country.

Now, those of us who are free marketeers would say, well, gee, you know, that’s government interference. Well, I don’t see that as government interference. I see that as the public sector establishing the rules of the road such that the private sector knows what those rules are and therefore, we can compete.

INSKEEP: Well, what do you think about the idea that the United States can still be the place where ideas are produced, where corporate headquarters are located, and even if an American company outsources some of their manufacturing or a lot of their manufacturing, there are still a lot of jobs being created in the United States by that economic activity?

Mr. LIVERIS: Well, you know, at the end of the day, I think we have proof points that say that if you put all your eggs in one basket, and if you’re just the idea owner, that you will eventually not generate the ideas that matter in terms of valuating your community, in terms of having the higher-paid jobs.

INSKEEP: What’s an example of that?

Mr. LIVERIS: Well, if you outsource electronics to countries that have initially cheap labor then obviously, they’ll start making those devices. But then on top of that, they’ll learn how to make the next one – better. And then they’ll build the universities around that industry that actually generate the human capital. Then ultimately, what happens is the companies who’ve maybe initially outsourced start to build facilities there, and they start to build R&D centers alongside and ultimately, you’ll outsource the creativity.

INSKEEP: When a lot of Americans think about manufacturing and manufacturing jobs overseas, it seems like a very simple question of cheaper labor. There are people overseas who will work for $3 a day – maybe even a dollar a day, in some cases -and work for wages that Americans would never dream of matching. It’d be a disaster if Americans matched those wages. And is it more complicated than that?

Mr. LIVERIS: Way more complicated. I mean, outsourcing based on wages has really become the storyline of manufacturing, and I think that’s wrong. It is more complicated than that. Take Dow as an example. We built this R&D center in China. We now have 500 Chinese scientists working there, and they earn incredibly good money.

Industries that are high-technology – clean energy, solar, photovoltaics – that conversation, and why that is all moving overseas, is not about labor costs.

INSKEEP: Well, now, that’s interesting because here you are, you’re the CEO of a multinational corporation, you’re a big supporter of American manufacturing -you’ve just written a book about boosting American manufacturing – but you mentioned that Dow Chemical has opened an R&D center in China. How do you, as a CEO, decide which of your operations to keep in the United States, and which to move abroad?

Mr. LIVERIS: Basically, the rules of the road per country. In essence, do I have in country X, do I understand their tax policies? Do I understand their energy policies? What are they doing to me in terms of regulatory policy? We look at all items on the cost line, all items on the incentive line, and make decisions on that basis.

INSKEEP: OK. What are some lines there where the United States apparently doesn’t do very well, since you have moved some operations overseas?

Mr. LIVERIS: Well, I not only have high taxes, I have uncertain taxes. Right now, I have more regulations coming at me that are not fact-based, not science-based, not data-based. I actually don’t even know what my costs are going to be in the next five years. And so I’m sitting back waiting for regulatory reform, and the government, of course, is now engaged on that – health care and the uncertainty around the health-care bill, and what’s going to end up happening there. Energy policy – we’ve got lots of uncertainty in the energy policy regimen. I mean, I can keep going, but that’s half a dozen.

INSKEEP: Well, you keep using the word uncertainty. It sounds like you almost don’t care what the rules are as long as you know what they are and what they’re going to be five years from now.

Mr. LIVERIS: The choice – bad policy versus uncertain policy – is a tough choice. I don’t think we have to go there.

INSKEEP: Is there some way in which, actually, you want an activist government, then?

Mr. LIVERIS: Yeah, activist in the sense that they are proactive, yes. I think we have a crisis in this country around manufacturing. I believe we need to have an activist – to use your word – government that engages proactively with business to create that framework, a public-private partnership. If there’s anything in the book that, you know, hasn’t been stated before, it’s that.

You need the private sector to have an input; you need the public sector to have an input; and it needs to be brought together at a national level.

INSKEEP: Is there a little bit of a contradiction here? Because you’re saying that your taxes are too high; you’d like corporate taxes to be lower. But at the same time, you want a government that is being more proactive, as you say, to provide better education, to provide better services, to upgrade society, to provide tax credits where necessary.

Mr. LIVERIS: Well, you know, this is where the collision occurs, which is: Do you have to spend more to invest more? I don’t think so. I think it’s not a zero sum game. I think, you know, you bring in certainty around tax regimens, like make the R&D tax credit permanent. I could start spending more on R&D dollars here, which therefore creates more tax revenues for the government, that allows them to go spend it on the items that we just talked about, such as education.

It’s a virtuous circle, and I think that virtuous circle needs to be completed.

INSKEEP: Interesting dilemma here, though – was raised in the Financial Times in a quote from one of your fellow CEOs, the CEO of the company that makes Massey Ferguson products. He basically says one thing that everyone seems to be missing here is that if an American company wants to expand its sales abroad -in Brazil, say – they’re likely to build a factory in Brazil. They’re going to put it close to the market for any number of economic and political reasons. It’s not going to increase U.S. exports, necessarily.

Mr. LIVERIS: Well, our experience at Dow – you know, we’re – we manufacture in 37 countries; we sell in 150 – is that you can actually have the synergy of building a market by exporting from the United States. But here’s the thing: The United States is still the largest economy in the world. The United States still has scale. The United States still has a powerful university system. So really, what I’ve got is, I’m putting satellite spokes around the world from my central hub. Over time, we stand the risk that the hub will move. The larger hub, potentially, will become China.

We can’t lose this country having a manufacturing-based hub. Sure, we’ll build factories around the world, but the hub needs to stay here.

INSKEEP: You’re saying we at least still need to be making a lot of things here, and making things – at least for the domestic market – at a greater rate than we do.

Mr. LIVERIS: And increasing the exports from it as a result. And then you get to the next idea and the next idea, and you keep making it here – and the next idea. And it continues a cascade where the United States continues to show the world why the last 50, 70 years was not a fluke.

INSKEEP: Andrew Liveris is the author of “Make It in America,” and he’s the CEO of Dow. Thanks very much.

Mr. LIVERIS: Steve, thank you. Pleasure talking to you.

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Has Obama Assumed the Position of Salesman-in-Chief to China?

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The following is a rush transcript of the Amy Goodman show on Democracy Now. Robert Scott, senior international economist with the Economic Policy Institute, was among her guests. You can watch the broadcast here.

What do the heads of Goldman Sachs, JPMorgan Chase, Microsoft, Motorola, General Electric, Boeing and the Carlyle Group have in common? They all attended last night’s State Dinner with President Hu Jintao. Earlier the White House announced $45 billion in new trade deals with China, including a $19 billion deal with Boeing and a package with GE expected to generate more $2 billion in U.S. exports. Some economists say the deals will hurt U.S. efforts to end the jobless Great Recession. “President Obama has assumed the position of salesman-in-chief for companies like Boeing and General Electric who are actually engaged, along with many other multinational businesses, in primarily outsourcing American jobs to China,” says guest Robert Scott, senior international economist with the Economic Policy Institute.

JUAN GONZALEZ: We turn now from human rights in China to the country’s economic relationship with the United States. Top U.S. business leaders met with Presidents Obama and Hu Jintao on Wednesday to call for increasing exports to China. Just before the meeting, the White House announced a list of trade deals with China totaling $45 billion. The list includes a $19 billion deal with Boeing for aircraft technology and a package with General Electric that’s expected to generate more than $2 billion in U.S. exports.

After meeting with executives from several U.S. corporations, Obama said he hoped to ease some of the friction over trade between the U.S. and China.

PRESIDENT BARACK OBAMA: Even with China’s enormous population, the United States still does more trade with Europe than it does with China. That, I think, gives an indication of the amount of progress that can be made, if we are consulting with each other, if we are hearing specifically from businesses in terms of how we can ease some of the frictions that exist in our trading relationship. And so, my hope is that today, in the brief time that we have, we’ll be able to hear some concrete ideas about how we make sure that fair—that trade is fair, that there is a level playing field, how can we protect intellectual property, how can we promote innovation, how can both of our governments remove barriers to trade and barriers to job creation. And with China’s growing middle class, I believe that over the coming years we can more than double our exports to China and create more jobs here in the United States.

AMY GOODMAN: Later today, President Hu plans to address trade and economic concerns at the U.S.-China Business Council in Washington.

Joining us now to discuss the U.S.-China relationship in more depth is Robert Scott, senior international economist with the Economic Policy Institute, a D.C.-based think tank that focuses on the economic condition of low- and middle-income Americans. Staying with us is Marc Blecher, who is the professor of politics and East Asian studies at Oberlin College and author of several books, including China Against the Tides.

Robert Scott, let’s begin with you on China’s economy and its significance here.

ROBERT SCOTT: Well, China is perhaps one of the United States’ most significant trading partners, and we have the most unequal trading relationship with China of any country in the world. We import almost five times as much from China as we export to them. Over the last nine years, the United States has lost about two-and-a-half million jobs due to growing trade deficits with China, more than a half-million jobs in the last year alone. We’ve lost jobs in every state. We’ve lost jobs in every congressional district in the country. And I’ve produced studies that have documented all of this.

JUAN GONZALEZ: Yet, Mr. Scott, none of that was part of the discussion between President Obama and President Hu in the past day.

ROBERT SCOTT: Well, that’s correct. I think in these discussions, unfortunately, President Obama has assumed the position of salesman-in-chief for companies like Boeing and General Electric who are actually engaged, along with many other multinational businesses, in primarily outsourcing American jobs to China. So, much of the discussion concerned the terms under which U.S. firms could do business in China and that sort of thing.

President Obama seems to have a gap in his vocabulary. He almost never mentions the word “imports.” He talks constantly about exports, and that’s all they’ve talked about yesterday in the negotiations. They never talk about the vast excess of imports over exports. And that’s what’s driving trade and trade-related job loss here in the United States.

JUAN GONZALEZ: Marc Blecher, I’d like you to respond to that, but also to talk about the—much of these imports are based on cheap Chinese labor. One of the things that’s happened in the last couple of years is this amazing upsurge among Chinese workers, seizing factories, demanding huge increases in wages. How do you see that developing in terms of the vast dissent that you’ve talked about that exists within Chinese society and how that will impact on future trade and imports to the U.S.?

MARC BLECHER: Two comments. On the employment question, while there’s no question that China has attracted a certain amount of employment from the U.S. and that the U.S. has suffered a certain amount job loss to China, I worry that we’re using China as a whipping boy for our employment problems. If you look back over the past 30 years, the whole neoliberal period that we’ve had, the vast majority of employment losses in this country have not been due to outsourcing. They have been due to technological upgrading. And that’s an inevitable problem. And the U.S. government, over all those years, over many presidents, has not had an active labor market policy to try to help us cope with that by upgrading our labor force. Instead, we’ve cut support for education and technology and so on. So, I haven’t seen the Obama administration do much about the enormous job losses in this country over the past two years. I think they’ve tried, and most of the responsibility for this goes to opposition in Congress to spending more money for job stimulation. But to use China as a whipping boy for our employment problems, I think, is something we ought to be wary about.

As far as your second question, the tremendous upsurge in labor protest in China is something that is amazing. It’s something that we should actually applaud. On the one hand, it shows that—–what I was saying earlier, that there’s huge scope for political expression in China. In every Chinese city, every single day, there are protests about labor issues, about people being evicted from their homes, and so on. And these people don’t get arrested and all thrown into jail. If they did, they wouldn’t keep protesting. Instead, the government has figured out a strategy of coming in, paying them off, and trying to cope with their problems.

Rising wages in China, improved working conditions in China, are one of the best ways to help American workers, because sweatshop labor is what’s attracting so much of the employment loss that we do have with China. And, you know, then we have a race to the bottom, where wages and working conditions are depressed here to meet Chinese levels. The best thing we can do is to help encourage the growth of a lively labor movement in China. The American labor movement is beginning to do this. I would like to hear critics of human rights in China talk more, as Sharon did, about rights of workers and farmers, rather than just imprisoned political dissidents. I think that’s a good thing for American working people, but it’s also a good thing for the American economy as a whole, because if we stop relying on so much Chinese imports, because they become a little more expensive with improved conditions in China, then that can only help revive our economy here.

AMY GOODMAN: Some of the major deals that were made, the announcement yesterday, for example, of—what was it?—$19 billion deal for 200 Boeing airplanes. Also, General Electric announced five agreements with Chinese partners, including a joint venture to—for aircraft avionics. Talk about the significance of this, Robert Scott, and also—I mean, among those who were at the dinner, and including the heads of GE and Boeing and Microsoft and Carlyle Group, was Bob King, the head of UAW, United Auto Workers.

ROBERT SCOTT: Yes. Well, let me respond first to, I think, a misperception that Professor Blecher, I think, promoted a moment ago about productivity growth. United States has had productivity growth for generations. That’s not the cause of job loss. For example, during President Clinton’s term, we had created 23 million jobs. We had stable manufacturing employment. The problem really started in 2000. Since then, we’ve lost six million manufacturing jobs. We had essentially the same rates of productivity growth in the ’90s as we did in the last decade, and yet in the last decade we lost six million manufacturing jobs. And that—the entire reason for that is largely due to the growth of imports, and China is the largest source of the growth in those imports.

Now, in terms of these deals that were cut and announced yesterday, they were actually cut a year or two ago. These deals had been announced several years ago. This is just a formal government approval of the sale of these 200 jets by Boeing to the Chinese airlines. And these sales are going to be accumulated over the next decade or so. They’re going to be a drop in the bucket compared to the growth in imports from China, which have surged enormously just in the past year, as I mentioned earlier.

I’m also very concerned about the GE deal. GE is essentially giving away its technological keys to the kingdom in exchange for a few short-term sales. They’ve set up a joint venture with a Chinese company. They throw in $200 million and their most advanced avionics technology to their Chinese partner, who pays them handsomely for it, who puts in $700 billion, and in return they’re going to get some sales to Chinese aircraft manufacturers, which many other companies have been competing for. But there’s a pattern here. What happens is that the Chinese joint venture partners tend to suck the technology out of their foreign partners, and then they kick them aside in a few years. So, GE says this deal is good for 50 years; I can almost guarantee you that the deal will end in just a few years. And as a result, GE will find that it’s no longer in the business of making avionics equipment. That business will have shifted to this Chinese company. And that’s the problem we run into.

AMY GOODMAN: And Robert Scott, the story of—the story of Evergreen Solar, an amazing story of a U.S. company that received $43 million in state subsidies from Massachusetts for its solar panel factory in 2008, now announced it’s shutting the factory and moving to China.

ROBERT SCOTT: That’s right. And the reason for that is because China has offered huge subsidies to Evergreen and other solar manufacturers to build their plants in China. And that’s not about cheap labor. Cheap labor has nothing to do with it. The biggest cost of building a solar plant is the cost of the plant itself, the capital investment, which is rising exponentially. China offered this company interest rates of 4.8 percent, and they financed 60 percent of the new plant in China. And they don’t—Evergreen doesn’t even have to make a payment of interest or principal on those loans until 2015. So this is a tremendous subsidy to Evergreen. And this is really symptomatic of a much bigger problem of subsidies and currency manipulation, in particular, which makes it almost impossible for U.S. firms to compete with China on a level playing field.

JUAN GONZALEZ: But can you blame China for wanting to continue to develop its own national economy, given the fact that it is the largest country in the world and its people have been in poverty for so long, that even in terms of the issue of developing of bullet trains, of green technology, of infrastructure development, China is forging ahead to try to build a more prosperous society? So, you can’t really blame them. The question is, what is the United States doing in terms of assuring the future of its own economic development?

ROBERT SCOTT: Well, I certainly encourage China to maximize its own development, encourage them to develop their own green technology. The problem is that they are violating many, many standards of the World Trade Organization, the IMF, that they agreed to when they joined the WTO in 2001. For example, currency manipulation. China has spent almost $800 billion in the last year alone manipulating its currency. That makes its products about 40 percent cheaper than they would be on the open product and acts like a tax on U.S. exports to China and everywhere else in the world. So, China is competing unfairly. If China wants to play the game like everybody else, I welcome that competition. But I think China’s problem is they focus too much on exports and not enough on developing their domestic economy, where they have tremendous potential for growth.

AMY GOODMAN: Marc Blecher, we just have 30 seconds. Your final response?

MARC BLECHER: The issue of protectionism is a bit of a red herring or a bit hypocritical for us. All the major Western capitalist economies, in their formative periods, protected their economies. China is expected to develop its economy at a time of WTO and free trade. They are not going to be able to do that and support a population that they need to. So, I think we need to understand their need to protect things, and I would like to see us have an active industrial policy, like China does, so that we would be developing high-speed rail at the pace that they are and getting out of our airplanes and out of our cars and into high-speed rail. China is a model for this, and the U.S. state should follow them.

AMY GOODMAN: Thanks so much, both of you, for joining us—Marc Blecher, professor at Oberlin College, for making your way into Cleveland. And Robert Scott, senior international economist at Economic Policy Institute, author of ” Counting the Jobs Lost to China,” thanks so much for being there in Washington, D.C.

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Made in Midtown: The future of American manufacturing

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The following piece, written by Representative Tim Ryan and Nanette Lepore, appeared in The Hill’s Congress Blog here. U.S. Congressman Tim Ryan was born in Niles, Ohio and represents the 17th Congressional District in Northeastern Ohio. Nanette Lepore was born in Youngstown, Ohio and is a well-known fashion designer based in New York City.

The warning signs are clear: without intervention and investment, the American manufacturing industry is in danger of extinction.

The United States used to be a country that made things: for over a hundred years, our economy was driven by the production of high-quality goods by American workers in American factories. And as Arianna Huffington has often commented, we are now a country that makes things up: speculation in collateralized debt obligations and mortgage-backed securities nearly led to the collapse of our economy in 2008.

In Northeastern Ohio’s Mahoning Valley, where we were raised, the loss of thousands of manufacturing jobs in the ’70s and ’80s dealt a devastating blow to the region — a setback from which we have begun to recover only recently and through painstaking effort. The plight of New York City’s Garment District follows an all-too familiar and unfortunate trajectory that we are determined to reverse.

This week, we joined over 1,000 individuals at a rally in the heart of the Garment District to address growing concerns regarding the outsourcing of American jobs. The New York fashion industry employs 175,000 people — over 24,000 in apparel manufacturing alone — but these numbers have been slipping for decades. A microcosm of other domestic manufacturing industries, New York’s fashion industry has seen many apparel manufacturers shut their doors as subsidized foreign goods and rising costs drove them out of business as production shifted offshore.

No longer a center of mass production, the Garment District is an economic cluster that links designers, suppliers, distributors and associated service providers – serving as an incubator for innovation that originates the ideas, styles and trends that will launch the next Ralph Lauren or Nanette Lepore. Nearly 850 fashion companies are headquartered in New York City (more than Paris, Milan, and London combined), and hundreds of small businesses — from pattern makers and fabric cutters to button and trim suppliers — support the designers that keep the American fashion industry dominant on a world stage.

Manufacturing’s influence on the health of the American economy cannot be understated. If we are to retain our status as a world power, we must focus on the creation of sustainable manufacturing jobs that will support a strong middle-class. Whether we’re talking about the production of steel or clothing, for every manufacturing job that is created in this country, up to six spin-off jobs are generated through supply and distribution chains. Manufacturing jobs pay a higher wage than service jobs, and create a significant amount of the patents that keep America’s economy on the cutting edge of innovation.

If we allow these jobs to be outsourced, we take the engine out of the American economy. Economic prosperity is directly tied to our capacity to innovate, and innovation is directly tied to our ability to manufacture superior goods.

An important part of the solution is to ensure that our nation stands up for its own workers by enforcing trade laws that are meant to create a level playing field for American manufacturers. The first place that Congress and this Administration can start is by standing up to China’s unfair and illegal intervention in currency markets. China’s continued manipulation of its currency amounts to a de facto subsidy of up to 40 percent on all imports that arrive in the American market. This flagrant violation of international trade law undermines our middle class – stripping jobs from both the steel industry in Youngstown and the fashion industry in New York City. Thankfully, the House of Representatives overwhelmingly passed H.R. 2378, the Currency Reform for Fair Trade Act, in September. If the Senate will take up H.R. 2378 when Congress returns to session in November, we can send this bill to the President for his signature and help to retain hundreds of thousands of sustainable American manufacturing jobs.

With the right federal, state and local policies, we believe that the American manufacturing industry can be renewed and improved. By promoting a comprehensive economic strategy, we can even bring back some of the jobs that have been lost. As the federal government continues to level the playing field and ease costs of production, corporate interests should commit to returning a portion of outsourced jobs back to the United States. And together we can educate consumers to make a conscious choice to purchase American-made goods — providing opportunity for our young, creative entrepreneurs and good paying jobs for our citizens, whether they live in the Big Apple or the Buckeye State.

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Globalization and the Destruction of Wealth

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The following piece was posted to The Viable Energy Now Blog here.

Over the last two decades “outsourcing” has been the operative word for U.S. multi-nationals. The word stands for moving industrial production, be it manufacturing or associated services, from the U.S. to “lower cost” locations. These facilities are increasingly concentrated in China.

This practice has resulted in large U.S. trade deficits, as imports from the outsourced plants replace domestic production. These deficits have an adverse impact on our Gross Domestic Product and on the value of the dollar. They have also contributed to the rise in U.S. unemployment.

The export of American jobs abroad has been well documented and is currently becoming a focus of political activity. Much less understood is another negative impact, which can be described as the shrinkage of our national asset base, or more directly as “the destruction of wealth”.

To explain this, let us take as example a U.S. manufacturing plant, employing six hundred persons, and located in a midsize American town. The plant’s output could be domestic appliances, electronic components or car parts.

If the plant is of relatively recent vintage, it will be equipped with highly automated, energy efficient production machinery, including robots and production control computers. It will have work safety equipment per U.S. government regulations. All effluent and emissions will be treated according to environmental rules. Amenities such as air conditioning, cafeterias, showers and toilets will be up to U.S standards, which are among the highest in the world.

All the above, including the land the plant is built on represents considerable invested capital. But this is only part of the economic equation.

The plant is surrounded by “satellite” assets and activities, supported by the wages and salaries it generates. This includes housing for the employees; businesses servicing the plant; restaurants and motels; doctors’ offices, law firms, real estate agencies and shops of all kinds; schools, clinics, city administration, and firemen and police with their own buildings and equipment.
Now one day production is moved to China. The plant closes.

Both the plant and the “satellite” assets lose their value. Stores close, house prices crash, professionals, skilled workers and shop owners move out.

The Chinese plant that replaces it, built with cheap labor on land acquired at low cost, is far less valuable, and its sale value is questionable in China’s state controlled economy. Because environmental and safety rules are much looser, the associated equipment is rudimentary. So are amenities and facilities for the employees.

The same holds true for all “satellite” assets: housing, stores, administration, and services. In the process of moving the plant from America to China maybe half of the total value of the assets concerned has disappeared.

Now multiply this by the thousands of facilities that have been moved from the U.S. to “low-cost” locations. These American domestic assets have vanished, but equivalent ones have not been created elsewhere. The transfer may have lowered costs for the corporation involved, but the overall result is negative.

After the transaction the employees involved receive lower wages, live in smaller quarters, and are more at risk of work accidents. More energy is consumed per unit of output and more pollutants discharged into the atmosphere.

Wealth has been destroyed, whether that wealth is counted as individual possessions or as natural resources. China has gained some, but the U.S. has lost more. Global living standards have been brought down a notch, and the total wealth of humanity is now a bit less.

Outsourcing our national economy, while it may temporarily enrich some, in the end makes us all poorer in the aggregate. It generates less wealth for fewer people. It is not progress, but a slow, painful trip to the bottom.

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The Economic Think Tanks Were Wrong: Imports And Offshore Outsourcing Have Destroyed Millions Of American Jobs

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The following article by Richard McCormack appeared in Manufacturing & Technology News here.

Outsourcing and imports are not only leading to the wide-scale destruction of American jobs, but to substantially lower manufacturing GDP growth over the decade than what has been officially reported. Imports and offshoring have also led to substantial over-reporting of productivity gains.

The problem is one of measuring. In a global economy, the federal government data collection agencies have not kept pace with changes brought about by trade, which now accounts for almost 30 percent of the U.S. economy. Researchers have verified that the U.S. government has not captured the real costs and levels of imports and their impact on the American economy.

This oversight — involving a small import data collection program run by the Bureau of Labor Statistics — turns out to be “a big problem,” says Susan Houseman of the Upjohn Institute for Employment Research and the national leader in addressing the shortcomings of government statistics.

Houseman and a group of researchers have confirmed that the dollar volume of goods coming into the country is not measured correctly. There has been a substantial under-measurement of imports.

The current import price indexes used by the federal government “fail to capture price declines associated with a shift in sourcing to low-cost suppliers,” says a new peer-reviewed research paper on the subject titled “Measurement Issues Arising from the Growth of Globalization.” As a result, the real growth in imports “has been understated and domestic productivity and real output growth have been overstated. The increased import penetration in consumer goods and intermediate inputs and the large price differentials between domestic and foreign suppliers have increased the possibility that some economic statistics are significantly biased.”

The study, which included representatives from the Bureau of Labor Statistics, the Bureau of Economic Analysis and the Bureau of the Census in its planning group, concludes that the federal government must re-assess the way it measures imports. It recommends that the federal statistical agencies create new data collection programs that capture the true effects of imports and offshore outsourcing both of products and services.

Multifactor and labor productivity measures as well as GDP are now confirmed to have been substantially overstated for the past decade, due to much higher levels of imports than have been measured. A decade of economic and trade policy predicated on the idea that productivity growth and new technology were the reasons for the rapid displacement of American workers has now proven to be wrong.

The problem arises when the government considers the import price of products entering the United States. As currently structured, the federal government compares the change in prices of the same goods that are being imported each month. What is not measured is the difference in the price of an imported product versus the one it replaced that was previously made in the United States.

Based on its current system of data collection, the government has reported that import prices have been increasing, when they should have been going down, reflecting the cost savings of up to 60 percent from buying the same products previously made in the United States from low-cost nations like China, Mexico and India.

“Import price indexes have not accurately captured the lower prices that have prompted many retailers and consumers to shift from domestic to imported goods,” says the study. “Similarly, although manufacturers increasingly have been sourcing intermediate inputs from low-cost foreign suppliers, the import materials price deflator has been rising faster than the domestic materials price deflator, indicating that these price indexes often fail to capture the cost savings driving manufacturers’ offshoring.”

When accounting for this oversight, the value of imports becomes much higher and U.S. output is lower than what has been reported. Houseman estimates that between 1997 and 2007, manufacturing GDP growth has been overestimated by as much as .5 percentage point per year, out of an average annual manufacturing growth rate of 3.0 percent due to the under-pricing of imports.

In addition, the manufacturing GDP growth rate has been widely misinterpreted because the strong growth in the computer industry has dominated the manufacturing numbers, according to the study. Technological improvements in computer capability inflate the overall industrial output numbers. Virtually all of the growth in manufacturing GDP is attributable to computers and electronic product manufacturing. Says Houseman: “Computer price indexes are falling on account of improved technology performance. So while the U.S. is losing market share in global computer shipments, it is still registering phenomenal growth rates to a large degree because of the way the price indexes are constructed for this industry. This drop in prices has nothing to do with the competitiveness of domestic manufacturing. It has nothing to do with workers being more productive. It has everything to do with improvements in the embedded technology.”

As such, given the government’s measurements, the computer industry has accounted for most of the manufacturing-value added growth during the decade ending 2007. Yet the computer sector accounts for only 10 percent of the total value in manufacturing.

When computers are excluded from the overall production numbers, the annual manufacturing growth rate from 1997 to 2007 declines by 2 percentage points. Added with the adjustment for the import price index, annual manufacturing GDP growth for the remaining 90 percent of manufacturing could be as low as 0.5 percent for the decade ending in 2007.

The computer numbers are also plagued by the same import price index issues. Most computers produced in the United States contain a majority of imported parts, the prices of which are not accounted for in government statistics. “The computers that are exported are more or less trans-shipments,” says Houseman. The federal government “needs to net out the import value of exports, which is what should be done with all domestic production, and that makes a big difference.”

The offshoring of services is also not being measured correctly. Companies are shifting their service functions overseas because it is a lot cheaper. But the federal government does not measure the prices of imported services versus those they are replacing in the United States. The difference “is even bigger than when you are importing manufactured goods because it’s all labor,” says Houseman. Currently, data on import and export prices in business services — which include IT services, engineering services and call centers and represents the most rapidly growing category of services trade — are not collected at all. “This data gap could result in significant inaccuracies in economic statistics as trade in business services expands,” says Houseman. “While the BLS recognizes this is an important gap in the statistics, there is no funding to fill it.”

There are other issues associated with offshoring and imports that need to be addressed. The federal government stimulus spending programs and tax breaks are not understood in the new global context. Borrowed money is provided to Americans who use it to buy imports, with little impact on growth and employment.

Obama’s goal to double exports is also questionable, since the United States does not know the import content of exported goods. Products that are exported with a high level of imported parts and components do not create many jobs.

Because of the lack of data on imports, do the GDP numbers need to be re-calculated for the past 10 or 15 years, Manufacturing & Technology News asks Houseman. “Ideally, the agencies would do that,” she says. “But what they are looking to do now is to fix it moving forward. What they’re trying not to do is to guess. There was no data collected on that so there is no good way of going backwards and fixing the problems.”

The Bureau of Labor Statistics has proposed a pilot program to collect import price data “and figure out a correction for all of GDP,” Houseman says. “The statistical agencies recognize this is a problem and a big enough problem that it is worthy trying to fix.” The next step is getting Congress interested enough to provide funding in a tight budgetary environment.

Houseman concludes with this thought: “The majority of Americans in public opinion polls believe that offshoring has been a major factor in the decline in employment and quite specifically in manufacturing, and yet many academic papers and think tanks are saying just the opposite. In this case, the public perception is correct and the data — and people’s interpretation of those data — are wrong.”

The Houseman paper “Offshoring and the State of American Manufacturing,” authored with Christopher Kurz, Benjamin Mandel and Paul Lengermann of the Federal Reserve Board, along with the “Conference Summary” from the meeting on “Measurement Issues Arising from the Growth of Globalization,” and conference papers on the subjects (all worth reading), are on the Upjohn Institute’s Web site, http://www.upjohninst.org/.

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Friends Don’t Let Friends Buy Imports

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