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Profitable Policy

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Dinocrat has a good explanation of how U.S. trade and tax policies have worked to drive manufacturing and employment to foreign lands. Like so many issues, rhetorical framing makes it difficult to have a genuinely curious discussion.

One of the first points to get past is a notion that foreign governments are scheming and evil. Some may be, but in the general case of trade, they’re just making more effective policy choices. It isn’t that the foreigners are malicious, but that the United States is stupid.

US industries have been under calculated attack for decades by foreign governments. This is not necessarily sinister — after all, it’s good business. The first great achievement was Japan’s. After WWII, Japan exported cheap junk to the US and “Made in Japan” was a joke stamped on some toy that broke the day after Christmas. In 1949, Japan started MITI to coordinate its industrial export policy. MITI had a wide range of powers, including some controls on capital flows and exchange rates.

The Japanese were not plotting some sort of revenge for Hiroshima, they were trying to grow their own economy.

Among the first targets of Japan Inc. was the US auto industry, which had become fat and lazy. In 1960, GM accounted for about half of all US auto sales (less than 20% today). The US automakers viewed the first Toyota exports, the 1964 Corona and 1966 Corolla as jokes. But by the early 1970′s the declining quality of US products, the increased quality from Japan, and the relative price/value ratio of Japanese products revealed in the first oil shock, set the stage for the secular decline of the US industry. Instead of responding by increasing US quality and innovation, the American car companies responded as declining oligopolies often do, displaying arrogance and using political power instead of addressing the real problems. Hence, instead of product improvements, Americans got “voluntary import restraints” in 1981.

The U.S. policy choice was to protect inefficiency. That might work for a while, but the market cannot be fooled forever. And all the while, for the sake of the protected industries, the customers of those protected industries are paying higher prices for inferior goods.

Difference in time horizon matter, too. The protected industries complain that foreigners are selling below cost, dumping goods on the U.S. customer to drive domestic producers out of business. But that calculation of cost only applies to a single year. Over a product’s lifetime, those alleged dumpers were making a profit.

It is 1975. RCA and Zenith sell TV’s at $500. You are Sony. Your TV’s also cost $500. But if you sell enough TV’s to capture 50% of the market in three years, your TV’s will only cost $200 to produce. This insight empowers you to ramp up production, sell at a much lower price than your competitor, and make long-term profits. So you, Mr. Sony, sell your TV’s at $300 and capture all that market share. RCA and Zenith yell that the Japanese are “dumping” but Sony’s total profits over the three years on the the entire TV product line are very good. Bottom line: foreign competitors win, US companies exit the business.

And we get cheaper TVs, too. That benefits everyone who watches television. Or buys cars. Or the product of any other industry that was able to lower costs and prices by manufacturing outside the United States.

You can’t build a plant in the US even if you want to. For starters, it costs at least one-third more than building it in China. Almost all of the additional costs come from government compliance. And none of that captures the multi-year delays involved in doing anything in the United States.

Beyond that, the US corporate tax structure is perfect — if your objective is killing jobs. Since the US corporate tax rate is the highest in the industrialized world, the simplest way for a company to make money is to make it offshore and keep it offshore, since repatriating profits is so expensive.

Instead of policy that recognizes global competition, the United States attempts to deny it exists. Given our workforce and culture, we have advantages that could be leveraged. We get more productivity from our workers than anyone else, for example. But policy siphons off that benefit so companies and investors do not get the same reward here for putting their capital at risk.

Ultimately, investment chases profit. As long as profit is seen as either an evil to be eliminated or a cow to be milked to feed non-industrial programs, the United States will continue losing the competition for global investment in manufacturing.