Archive for the ‘Outsourcing’ category

Free Trade, Positive Or Negative?

November 28, 2016

One of President-elect Trump’s campaign tenets was the renegotiation of NAFTA and the abandonment of the Trans Pacific Partnership. Trump promised that such a move would return jobs for Americans, especially those “rust belt States” workers who had lost their working spots when American manufactures either outsourced work to Mexico or set up factories in Mexico and now did the same work there which was previously done in America. While any trade deal should from time to time be reexamined, thinking the US can roll back globalization is (1) dreaming and (2) have far wider implications than just these displaced workers.

A little history. In the 80’s and 90’s, the US automotive industry was in deep trouble. Quality lagged foreign manufacturers and costs to produce a US auto was greater than an imported one. Get it, pay more for a US auto and get lower quality at the same time.

Union-management relations were mostly ineffective. Automotive companies’ management were lacking in vision and resolve. Union management were intrenched and acted as they were living in the 50’s or 60’s and competition did not exist.

The Automotive companies then hit upon the strategy of moving their captive parts manufacture to new, up to date plants in Mexico. These parts could cost less and be of equal or better quality than when they were manufactured in the US. The automotive companies asked other parts makers to match this quality and cost. Gradually automotive parts decreased in cost, improved in quality, and US produced cars became less costly to produce.  Unfortunately, US employment deceased markedly.

So, the anti-NAFTA argument suggests that had duties and tariffs remained in place as before NAFTA, then jobs would have remained in the US. If this were to be true, a less favorable outcome would have resulted.   Automotive assembly would have shrunk, if not disappeared all together.

Consumers were choosing “price” and “quality” over high price and low quality. In an ironic way, NAFTA saved the US automotive industry and a lot of jobs in the process.

So what about TPP? Is that one deal too many? Should it be rejected out of hand?

A little more history.

The norm in most countries around the world is to erect trade barriers as a means of protecting local industry. This protectionism inevitably leads to poorer quality and higher costs for the host country. In the process, however, local manufacturers or farmers are pleased but the country continues to slowly fall behind other nations in economic growth and prosperity.

More sophisticated countries erect clever regulations, such as safety and consumer protection rules instead of duties or tariffs. The imported products would be rejected unless they passed these rules (and conveniently meeting these rules adds cost to the imported goods).

The TPP is intended to enable a different group of nations to access each other’s markets with virtually no restrictions. This would include some other countries competing in the US marketplace, and if their goods or services were preferred, displace business that might be now served by US companies. It would also allow American companies to shift (outsource) jobs to these countries and import products which were previously manufactured in the US.

But, is TPP the problem or is there a lack of disincentives for American businesses, in the name of increased profits and outsource a greater and more relevant problem?

Open and “fiar” (not just “free”) trade has been fairly well established as the optimum position for a strong and growing economy. More restrictive trade is seductive and countries which succumb to domestic politics and revert to tariffs, embargoes, or duties might win in the very short term but inevitably lose in the longer term.

If the GOP or President-elect Donald Trump are seriously interested in workers who are currently or will soon be displaced by trade agreements, should the Trump Administration walk away form open and fair trade arrangements or instead look to worker protections and/or new taxes on outsourcing companies windfall profits.

What will Donald do?

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Pacific Trade Debacle

June 14, 2015

Democrats joined together this week to thwart President Obama’s request for fast track negotiating status on the proposed trade deal among 14 Pacific rim countries. Apparently responding to strong requests from organized labor and environmental groups, Democrats voted overwhelmingly to deny fast track status. Hmmm.

Opponents claim the Trade bill will cost American jobs. I wonder where these people have been over the past twenty years as American company after company has outsourced American jobs to lower wage countries? The consequence has been increased profits for American businesses and huge downward pressure on the average American worker.   To the positive side, it must be recognized outsourced jobs has contributed to a steady low inflation rate (read lower cost of living). So what can be so bad this time?

Outsourcing works (in economic terms) when the country losing the jobs reemploys the workers in other more productive activities. Even though 20 years sounds like a long time, America’s work force has not upgraded itself enough to find gainful work for too many of those outsourced. Accordingly it can be understood why Americans would be worried when Unions tell them how bad this Trade legislation will be.

The only problem is that no trade bill is worse!

Post World War II, the United States possessed over 60% of the worlds manufacturing capacity. Finding a manufacturing job was like finding a local bar, they were everywhere. Business leaders, anxious to make a buck bid against each other in order to attract and retain workers. This became the norm and few people thought that life could or would be different.

During this post war time plenty of countries (like most of Europe, Japan, India, and many Latin and South American countries all engaged in some form of restrictive, protective Trade arrangements. Each of these countries tried to protect their favored industries against “foreign” competitors. Imagine France protecting its industries from German or Spanish ones. That’s like New Jersey building borders against goods from Pennsylvania or New York. The bottom line has been that those trade barriers lead directly to low quality, high prices, and economic stagnation.

The same fate awaits America if we ignore Pacific rim trade.

A far better use of the opponents’ time would be to establish rules on what American businesses can do with overseas profits if outsourcing does occur. Outsourced labor is creating profits for American companies by either lowering the cost of products imported and sold in the US or simply creating new profits in a US subsidiary overseas, or both. Currently that subsidiary’s profit is housed in the lowest tax jurisdiction outside the US and remains there avoiding US taxes. No one wins on that deal.

Taxing US corporate profits attached to our soured jobs and dedicating these revenues to retraining labor might be a useful outside the box move.

Forgetting the greed aspects of business (especially American style), the idea that the US can go it alone ignoring access to 40% of the world’s markets on equal basis is ludicrous. Experience has taught us that we can not expect business leaders to consider the best interests of American labor also.

So, tell me again why the President should not negotiate with fast track authority?