President Barack Obama and Governor Mitt
Romney each claims they would do better standing
up for American workers against unfair trade with
China. However, when it comes to outsourcing both
have sins to repent.
Just about everyone
who has had a choice between buying an
American-made product or an import - a car, a
dress or bottle of wine - must admit international
trade based on national differences in know-how,
labor costs and natural resources can help us live
better.
If Americans expect to sell Boeing
aircraft and Microsoft Windows abroad, then they
must be prepared to outsource some of what
they buy directly, or
through firms assembling goods here.
The
problem is not outsourcing but importing products
that could be made at a similar cost or less
expensively in the United States. That happens
when: US policy throws up unnecessary barriers to
domestic business; foreign governments subsidize
inefficient production or simply keep out
competitive American products; or US firms have an
inappropriate bias toward foreign sourcing.
Those swell the trade deficit, which
imposes great costs, and both President Obama and
Governor Romney each share some guilt.
President Obama's tough restrictions on
oil and gas development in the Gulf, off the
Atlantic and Pacific Coasts and in Alaska do not
reduce US petroleum consumption but merely shift
exploration and production to costlier and riskier
locations abroad. Limits on carbond dioxide
emissions encourage manufacturers to locate in
China, where similar regulations do not apply.
Both kill US jobs without an environmental
benefit.
China keeps its products
artificially cheap, and encourages US
manufacturers to locate production in the Middle
Kingdom, by suppressing the value of its currency,
imposing high tariffs and throwing up
administrative barriers to US goods and services.
In the wake of the financial crisis,
Beijing required that its stimulus money be spent
in China, and yet President Obama permitted
billions of US stimulus money to be spent in China
and similarly protectionist regimes.
For
example, GE, whose CEO heads the president's Job's
Council, used stimulus grants to purchase
components for US wind turbines from Chengxi
Shipyard - a state-controlled company that builds
vessels for the Chinese navy - even though an
American supplier offered to match its price.
President Obama could have excluded those
products - either through the initial legislation
or by executive order - without violating World
Trade Organization rules but chose not to do so.
More broadly, he has not taken aim at China's
undervalued currency, which affords exporters as
much as a 40% price advantage when selling in the
United States.
Bain Capital, the firm
founded by Governor Romney, has invested in
companies that have relocated jobs to China. More
broadly, private equity firms have an inherent
bias toward outsourcing that is often neither
helpful to the businesses they reorganize nor
healthy for the US economy.
Essentially,
private equity purchases distressed businesses and
looks for quick profits by slashing wasteful
employment - unnecessary jobs that would be lost
anyway if the firms failed - and replacing
ossified management. However, seeking big returns
in a brief period, private equity managers are
more likely to sell off valuable brands and
patents to raise quick cash, and to offshore
manufacturing that supports domestic research and
development (R&D) and could contribute greatly
to the future value of the firm and broader US
competitiveness and employment.
US tax
policies offer substantial incentives to private
equity reorganization of businesses by taxing
their partners' income at about half the rate that
many corporations, small businesses and
professionals pay. Simply, those tax breaks give
the economy more private equity reorganizations
than are good for US growth and jobs creation.
Unnecessary outsourcing is responsible for
at least half the US$600 billion trade deficit.
Slashing that deficit in half would boost domestic
demand and gross domestic product by about $500
billion and add 5 million jobs.
Export and
import-competing industries spend at least four
times as much on R&D as the private business
sector as a whole. Reducing outsourcing, by
increasing R&D, could boost US GDP by one or
two percentage points. A US economy growing at 3%
or 4% a year, instead of its current 2%, would
have far fewer budget problems at the federal and
state levels, and far more resources to address
issues like healthcare, the solvency of social
security and finance an adequate national defense
and space exploration.
Peter
Morici is an economist and professor at the
Smith School of Business, University of Maryland,
and widely published columnist.
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