Magazine | March 6, 2017, Issue

Industrial Policy by Tweet

A novel use of the bully pulpit

Among the most controversial uses that President Donald Trump has found for the bully pulpit, at least in the eyes of free-market advocates and believers in Washington’s pro-trade consensus, has been to hector individual companies into keeping jobs in the United States. Indeed, in what appears to be a wholesale rejection of the economic principle of “comparative advantage,” which holds that countries should specialize in whatever they’re best at and not worry about the rest, President Trump insists that companies must use U.S. labor if they want to sell their products to U.S. customers.

As with much else he has done, the president has telegraphed his policy intentions on Twitter, as when he trumpeted, “I want new plants to be built here for cars sold here!” And woe betide any company that announces plans to build a factory outside the U.S., for retribution on Twitter will be swift, as Toyota found out when Trump tweeted, “Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.” Ford evidently heard that message loud and clear, and in response Trump tweeted, “Thank you to Ford for scrapping a new plant in Mexico and creating 700 new jobs in the U.S. This is just the beginning — much more to follow.”

All of which raises the question: Does Trump’s industrial activism herald a new kind of economic patriotism (albeit forced) that will be good for the economy, or is it instead a kind of banana-republic manipulation that will lead to misallocation of resources, a lower standard of living for Americans, and less globally competitive U.S. companies?

Before we answer that, we need to go back to the year 2001, when China joined the World Trade Organization (WTO). In the 1990s, things were pretty good: Real median wages grew 6 percent, and while manufacturing employment declined, it did so by a relatively small 2.9 percent. Hopes were high that the world was entering a new era of turbo-charged growth powered by China’s admittance into the global trading system. President Clinton called China’s accession to the WTO “a hundred-to-nothing deal for America when it comes to the economic consequences,” while George W. Bush promised it would “narrow our trade deficit with China.”

But it very quickly became clear that, as H. Ross Perot famously said about the North American Free Trade Agreement, China’s WTO entry actually would create “a giant sucking sound” as U.S. manufacturing jobs whooshed away.

Even before the ink on the WTO agreement was dry, consulting firms sounded the call: If a company’s CEO was not moving a significant share of jobs to China, then it was time for him to find a new job himself. Emblematic was the assessment of Boston Consulting Group (BCG) that, “for more than a decade, ‘Made in China’ has been a compelling sourcing option. Today, in almost every industry, it is becoming an imperative.” It advised its client CEOs that “the question is not ‘Why outsource to LCCs [low-cost countries]?’ but ‘Why not?’”

Sure, some workers might lose their jobs (as about 20 percent of U.S. manufacturing workers in the 2000s lost their jobs owing to trade), but the Washington elite told us that the U.S. economy would gain. They were wrong, though. Recent studies have shown quite clearly that, far from opening its doors to the world, China has been surreptitiously hauling in as much foreign production as possible through a deep embrace of mercantilist industrial policies (e.g., currency manipulation, standards manipulation, export subsidies, and other policies designed to restrict imports and boost exports)that have severely wounded the U.S. economy. MIT economist David Autor estimates that 2.4 million U.S. manufacturing jobs have been lost to Chinese-import competition since China joined the WTO, five times more than all the manufacturing jobs lost in the 1990s. Rob Scott (of the Economic Policy Institute) and the Information Technology and Innovation Foundation have found similar impacts.

So this gets us back to President Trump’s jawboning. Given the damage done by the mercantilist-inspired movement of U.S. jobs, is he right to be the demander in chief, threatening recalcitrant CEOs with Twitter retribution or worse?

There are several reasons why the U.S. government should indeed apply some form of countervailing pressure against the offshoring surge. First, the study of economics is not nearly as pure as economists often imagine it to be; economics is really about “political economy,” in which markets and politics are intertwined. To wit: Even if one insists that offshoring has been welfare-enhancing (e.g., expanded per capita GDP), there is simply no denying that it has produced considerable blowback among people who don’t live and work in ivory towers. We all saw that on November 8. Even BCG acknowledged that this was a risk, writing that, “as more companies discover the advantages of manufacturing in China, the impact on Western jobs will grow, making it an increasingly potent political issue.” No kidding. So now the pendulum may very well swing too far toward the protectionist side. A little jawboning rather than cheerleading in the 2000s might have kept us from the political conundrum we face now, in which it’s harder to adopt trade-expanding policies such as the Trans-Pacific Partnership agreement.

Second, it was one thing to support global markets and free trade, but it was unforgivable to put the pedal to the metal without calling for complementary policies to ensure that the process unfolded in an above-board fashion. Where was the call to get tough with foreign innovation mercantilism (i.e., policies, such as forced technology transfer and intellectual-property theft, designed to grow a nation’s innovation industries) that artificially spurred offshoring and obstructed U.S. exports? Where was the call for a national competitiveness agenda, starting with fixing the broken corporate tax code, which imposes the highest statutory rate in the Organization for Economic Co-operation and Development (OECD)? While many Republican and some Democratic elected officials did call for corporate-tax reform, the trade community was largely silent, in part because not only did they deny that jobs were being lost because of China’s underhanded industrial practices, but they also hid from the fact that America was even in economic competition with other nations in the first place.

Third, much of the acceptance of offshoring came from a deep-seated but simplistic belief that the economy automatically maintains equilibrium between supply and demand and that any attempt to modify this balance leads to disequilibrium.But as economist Elvio Accinelli finds, economies can be in equilibrium with either a high level of innovation and high skills, or a low level of both. The latter alternative creates a “poverty trap.” In other words, if there are not enough skilled workers, then firms will not adopt advanced technology; and similarly, if firms don’t adopt advanced technologies, then workers won’t seek out the skills needed to use these technologies. Thus, when China emerged as a global player, there could have been two market responses: the one that happened (i.e., companies decided they had no choice but to move production to China), or an alternative of increasing investment in machinery and worker skills to compete with China by raising productivity. Most U.S. companies’ first response was to move, partly because of relentless pressure from investors to meet unforgiving quarterly earnings targets. But that is not the prevailing culture everywhere. I once asked a group of Austrian CEOs why they didn’t move as much production to China as U.S. companies did. They responded that the first thing they did was call in their engineers to see whether they could restructure the product or manufacturing process to do the work economically in Austria. Only if that wouldn’t have worked did they move jobs overseas. When I asked what would happen if they moved them without taking that step, their response was revealing: “We would be shunned socially.”

We will have to watch carefully to determine whether Trump’s hectoring is a constructive form of social pressure to get companies to take a deep breath before offshoring — to look first to their engineers rather than to their accountants — or instead is just a blunt instrument of undifferentiated protectionism. If all Trump does is fire tweets at CEOs to shame them, that won’t be enough to restore American competitiveness. The president should instead look to the Conservative-party governments of David Cameron and Theresa May in the U.K. for a model: They have lowered corporate taxes, expanded government funding for industry-led R&D partnerships, invested to boost worker skills, expanded export financing, and embraced other steps appropriate to a well-devised industrial strategy. Ultimately, a bit of jawboning could be just what the doctor ordered, as long as it’s coupled with policies to help American companies improve their productivity and competitiveness.

– Mr. Atkinson is the president of the Information Technology and Innovation Foundation.

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