Toyota Fires American Workers, None in Japan

January 24, 2009

Earlier this month, Toyota announced their first-ever annual loss in their 70-year history.  (See “Toyota Dumping Cars on U.S. Market.”)  The strenghtening of the yen is one of the major factors.  In response to this, Toyota announced a couple of days ago that they would be laying off 1,000 workers in North America and Europe.  Then today comes this announcement – that they will be cutting production in their Japan plants by 60%. 

Toyota Motor Corp (7203.T) plans to reduce vehicle production in Japan by nearly 60 percent in April, a level that could force it to cut its domestic workforce amid slumping car sales, Tokyo Shimbun newspaper reported on Saturday.

Yet, in spite of this huge cut in production in Japan, not a single Toyota employee will lose their job.

Toyota, the world’s biggest automaker, is whittling down its non-permanent workforce by letting contracts expire, but executives have said they intend to leave full-time staff untouched despite unprecedented factory suspensions in Japan.

Toyota has announced plans to close all its domestic factories for a combined 14 days between January and March, reducing work to a single shift at 17 assembly lines, out of 75 globally, at different times from January and February.

What I find interesting is that, if the currency exchange rate is now a major factor in Toyota losing money, it would make sense to shift operations and production to North America and Europe, where the currency is weak, and cut operations in Japan.  Yet, they are doing just the opposite. 

This is a good example of what I’ve been saying about currency exchange rates – that a falling dollar will do nothing to reduce the trade deficit.  Japan and other nations who are utterly dependent on sustaining a huge trade surplus with the U.S. in order to avoid high unemployment will do anything to keep production in their home country, even if it seems to make no business sense.  They’ll do anything to hold onto their domestic production, including dumping, subsidizing their automakers, etc.  They do this because they know that it’s a relatively cheap way to keep jobs, much cheaper than government programs and unemployment insurance.  They voice support for the concepts of “free” trade and market forces but, when a global recession takes hold and it becomes every man for himself, see how quickly they retreat into taking care of their own. 

You may point to the big drop in the trade deficit in November as evidence that the weakening dollar is having  an effect on the trade deficit, but that’s not true.  The trade deficit fell in November due to an over-all slowdown in consumer spending, and not due to any shift in consumer spending away from imported products to domestically made products. 

I bring all of this up to emphasize the point that it is absolutely futile to count on outside forces – things like currency valuation and trade negotiations – to rein in our trade deficit.  Decades of experience with this approach have only yielded a trade deficit that has exploded completely out of control.  The only way to get the deficit under control is to take positive action in the form of tariffs to assure a balance of trade.  It worked for the first 171 years of our history – from 1776 to 1947, when we signed the Global Agreement on Tariffs and Trade – and it would work again.  Our trade policy for the last six decades has been an abysmal failure.  It’s time to go back to what has been proven to work.

China Reacts to Geithner Testimony

January 24, 2009

When I posted about Treasury Secretary nominee Tim Geithner’s testimony during a confirmation hearing the other day, I failed to point out the real significance of his agreeing with the committee that China is manipulating its currency.  This is a clear signal that the Obama administration plans to officially label China a “currency manipulator.”  By so doing, the Treasury Department would then be required under U.S. law to enter expedited negotiations with China to reduce our trade deficit with them and to eliminate any currency advantage. 

As you can imagine, as reported in the above linked article, the Chinese are reacting with horror.  The loss of their trade surplus with the U.S. is China’s worst nightmare.  They are utterly dependent on their exports to gainfully employ their vast over-supply of labor.  Without these jobs that have been taken from the U.S., unemployment would soar to depression-like levels and likely cause widespread civil unrest and violence in China. 

This is a clear indication that Obama plans to get serious about the trade deficit.  That’s the good news.  Very good news.  However, the tactic of branding China a currency manipulator is a rather crude way to go about it because currency exchange rates have very little to do with the trade deficit.  The huge disparity in population density between the U.S. and China (and many other trading “partners”) is a much more powerful factor.  When expressed in per capita terms (divided by the population of the nation in question), our trade deficit in manufactured goods with China is quite run-of-the-mill.  In 2006, there were eighteen other nations with whom our trade deficit was worse.  For example, our per capita deficit with Ireland, a nation twice as densely populated as the U.S. and number one on the list, was 25 times worse than that of China.  The per capita deficits with Japan, Germany, Korea, Taiwan, Switzerland, Israel, Austria, Denmark and Mexico, among others, all much more densely populated that the U.S., were all worse than China’s – most of them much worse. 

So why single out China?  Our trade results with China are exactly what we should have expected when we applied to them the same trade policy that was already a proven failure in all these other nations.  The sheer size of the deficit with China, which dwarfs the deficits of these other nations, which is what gets everyone’s attention, is just a function of them having one fifth of the world’s population. 

If we’re going to effectively address the trade deficit, it has to be done in a way that addresses the root cause.  Of our top twenty per capita trade deficits in manufactured goods, only seven are with relatively poor countries.  Many are with countries that no one ever accuses of currency manipulation.  But eighteen of these top twenty deficits are with nations much more densely populated than our own.  So I’m not saying that there aren’t other factors at work, but population density is the 800-lb gorilla in the room. 

What’s needed is a tariff structure for manufactured goods that is indexed to population density, leveling the playing field by extracting compensation from those nations whose over-crowding renders them incapable of offering us access to markets comparable to ours.  Any other approach that’s based on faulty logic is going to appear arbitrary and may put us in an indefensible position when challenged by others sympathetic to China.

Nearly 600,000 Jobs Lost in a Week

January 22, 2009

The Labor Department reported today that nearly 600,000 people filed for unemployment last week.  That’s an annual rate of over 30 million workers losing their jobs – over 20% of the work force. 

I thought you might be interested in some anecdotes from the state of Michigan.  It was reported yesterday that in one month, from November to December, unemployment in Michigan rose by a full percentage point to 10.6%.  And it seems that the unemployment offices have been completely overwhelmed.  Phone lines are jammed.  The web site has crashed from overuse.  People are forced to take their questions directly to the unemployment office.  The local news showed a line at one such office that appeared to stretch for a full city block.  I’m reminded of pictures of the unemployed waiting in lines during the Great Depression.  And many of these are highly skilled people.  One guy interviewed had two master’s degrees and worked in an IT department.  Yet, some politicians still offer up “job retraining” as the solution.  Retraining to do what?  Where is the huge demand for labor that’s going unmet because Americans are too uneducated to fill the positions?  The only retraining needed around here is how to fill out unemployment application forms. 

I’m also reminded of a visit to Michigan by Mitt Romney during the Republican primary campaign.  He told Michiganders condescendingly that we’re in a “one-state recession.”  Well, it isn’t a one-state recession any more, is it?  It makes you wonder whether the state of Michigan is the canary in the coal mine for the U.S. economy.  If we are, the rest of you had better hunker down because it’s going to get much, much worse!

Geithner: China Currency Manipulation a “Significant Issue”

January 21, 2009

As reported in this linked article, Timothy Geithner, Obama’s Treasury Secretary nominee, when questioned about currency manipulation by China, described it as a “significant issue” and as “… an important issue for the country …” 

I’ve really got my antennae up, alert for any clues as to whether or not Obama will really take meaningful action to restore a balance of trade.  This is just one, small, early indication that he’s willing to take it on.  Yes, I’m making a bit of a leap from Chinese currency manipulation to our overall trade deficit, but why else would Obama be concerned about this issue?  Does he merely want American consumers to pay more for imports from China?  It doesn’t seem logical that that’s all he’s after.  A strengthening yuan would indeed drive up the cost of Chinese imports, but what he’s really after is a restoration of the profit potential to motivate a return to manufacturing products domestically, driving up the demand for labor which, in turn, would drive up incomes, more than off-setting any rise in prices. 

Of course, if we wait for currency valuation to improve the trade deficit, we’ll be waiting forever, just as we have for the last three decades.  The dollar may fall against the yuan, but the Chinese will simply compensate in some other way – perhaps by increasing the government’s subsidies of Chinese manufacturers – in order to hold prices down.  So the real question is how quickly Obama will run out of patience.  When he does, it’s going to be fun to watch what happens!

Reuters’ Asia Writer Fears Protectionist Sentiment in U.S.

January 21, 2009

Many mornings I wake up and wonder, “what can I write about today?” “How many ways can I keep saying the same things about overpopulation, trade and immigration?” I’m slowly learning to stop fretting about what to write, because it never fails that something like this linked article comes along. 
First of all, it incensed me that Reuters posted this in the “news” section of their site as opposed to the editorial section, because the piece is pure opinion from the perspective of an Asian correspondent, Andrew Marshall, Reuters’ “political risk correspondent,” a self-serving diatribe against protectionism and in support of free trade. No doubt, anything that threatens “free” trade between the U.S. and Asian nations like China, Japan, Korea and Taiwan, among others, does present them with some significant risk. So let’s have some fun dissecting this guy’s arguments. It begins with the very first sentence:

As the world plunged into the Great Depression eight decades ago, governments tried to stem the damage by erecting trade barriers, and only made the crisis worse. The risk is growing that history will repeat itself.

To begin with, prior to the October, 1929 stock market crash, which marked the start of the Great Depression, the U.S. had successfully relied upon tariffs for 153 years to maintain a balance of trade. So too did other nations and trade didn’t suffer for it. At the time, U.S. trade policy was governed by the Fordney-McCumber Tariff Act of 1922, which was widely credited for the boom times of the “roaring ‘20s.” The Smoot-Hawley Tariff Act, which many free trade cheerleaders bash as the cause of the Great Depression, wasn’t even signed into law until June of 1930, a full eight months after the depression was already well underway. And its intent was not to head off the depression. Rather, the intent of Smoot-Hawley was to streamline the tariff-setting process by setting the tariffs in fixed dollar terms instead of in percentages, thus eliminating all the hassle of determining the value of imports to be used as the basis of the percentage.

The Great Depression had nothing to do with tariffs. Rather, the small decline in trade was caused by the depression. We’ve already seen a repeat of that phenomenon with today’s recession, when November’s trade data showed a big drop in imports and exports, due entirely to the worsening global recession.

The specter of beggar-thy-neighbor protectionism has emerged as a key global political risk in 2009. In the major industrial economies and in the developing world, faith in the benefits of globalization is being replaced by growing pressure from labor unions and corporate leaders to curtail free trade.

“Beggar thy neighbor protectionism” is a term used to describe protectionist policies that work against the interests of the speaker using the term, in this case a writer representing Asian interests. By contrast, the protectionist policies employed by China and other developing nations, with the full support of the World Trade Organization, is referred to with high-minded names like “free trade” and “globalization.” Give me a break. “Free trade” hardly describes the trade situation of today’s world when the WTO enforces protectionism in favor of two thirds of its member states – the economies of which it’s trying to boost at the expense of others, most notably the United States.

By the way, isn’t it interesting how the terms “free trade” and “globalization” have become synonymous? Prior to the signing of the Global Agreement on Tariffs and Trade in 1947, the world already enjoyed vibrant trade in spite of tariffs. So wasn’t the world “globalized” already? Free trade has nothing to do with globalization. It is simply a different model of trade, one that doesn‘t work when applied to nations of grossly disparate population density.

There is wide agreement among analysts that protectionism will worsen the crisis this year. The only question is how much.

The Economist Intelligence Unit forecasts global merchandise trade will contract 1.5 percent, assuming moderate protectionist measures. But, it added, “a more aggressive move against free trade could further undermine global economic conditions and prolong the downturn”.

An adoption of protectionist trade policies like tariffs by America may, in fact, result in a worsening of the crisis in places around the globe – especially in those overpopulated nations dependent on their parasitic relationship with the U.S. to sustain their bloated labor forces – places like Japan, Korea, Germany and China. But tariffs would certainly help restore a balance of trade for the U.S. and would be a huge boon to our economy. Those other places would have to find some other way, besides robbing jobs from the U.S., to deal with their unemployment problems.
 Despite the risks, many analysts argue that a wholesale retreat into protectionism can be averted, because globalization has brought benefits governments will not want to reverse.

Cheap imports from emerging markets have brought significant benefits to consumers and companies in the developed world.

“This factor, combined with the entrenched nature of global supply chains, is likely to limit the political tolerance for protectionism, at least in the main developed-country markets and in emerging markets that are highly dependent on exports,” the Economist Intelligence Unit said.

Notice that, aside from mentioning “cheap,” the author makes no attempt to identify any of these purported “benefits” of his version of globalization. That’s because, for nations like the U.S., there are none. There’s nothing but downside – the annihilation of the manufacturing sector of our economy, the collapse of the entire economy in general, falling incomes, soaring debt and a steady decline in our standard of living. When pointing out low prices for imports for consumers, free trade cheerleaders never want you to make the connection that consumers are also workers, and that wages have fallen further than prices, destroying purchasing power, eroding our savings and making us ever-more dependent on debt.

The only thing we have to fear …

January 20, 2009
… is ignorance. Franklin D. Roosevelt may have believed that fear itself was the enemy, but he was wrong. What he really faced was ignorance of the forces that led to the Great Depression – the ignorance that allowed the forces of greed – corporate tycoons, buttressed by their well-meaning economists, armed with their primitive, 18th century theories about free trade and comparative advantage, to convince our nation’s leaders that an abandonment of successful trade policy would send exports soaring along with their self-interests. Only ignorance could have allowed that generation to believe that a $0.67 billion decline in trade volume could cause a $33 billion decline in their GDP, and that a tweaking of tariffs that had been so successful for over 150 years could have collapsed the global economy.

It’s the same ignorance we face today – an ignorance that settles for superficial explanations for the latest economic collapse – a housing bubble and sub-prime mortgage crisis – without ever questioning why we had to resort to the concept of sub-prime mortgages to make housing seem affordable in the first place. It’s the same ignorance that plagues our economists today, still adamant in their refusal to give consideration to how population growth may impact the macro-economy. It’s the same ignorance that fails to recognize the relationship between population density and per capita consumption, and what happens when nations grossly disparate in in these characteristics attempt to trade freely with each other.

It’s only ignorance that allows economists to believe that a global economy which is utterly dependent on the draining of resources of its wealthiest state can be sustained indefinitely. It’s ignorance that leads us to believe that that same state, now collapsing under the weight of its debt, can only be saved by force-feeding it more debt. It’s only ignorance that allows economists to believe that never-ending population growth is the only path to a healthy economy, or that it’s even possible.  It’s ignorance that places total trust in the World Trade Organization, loudly critical of protectionist forces in the United States while very quietly enforcing protectionism in favor of two thirds of its member countries – but not the U.S., of course.

Will Barack Obama carry on this tradition of ignorance by settling upon policy spoon-fed him by his staff and advisers, as his predecessors have done for decades? If policy is crafted by the most capable of ignorant advisers, is it any less ignorant? Or is Mr. Obama wise enough to recognize when policies recommended by his advisers are the same that have been tried before and ultimately led to where we stand now? Will he be courageous enough to trust his own instincts and reach far enough back in history to find policy -especially trade policy – that was a time-tested and proven success? For now, all we can do is hope.


Demos’ “Fair Trade” Approach

January 19, 2009

I received an invitation to the “Thinking Big, Thinking Forward” conference, billed as a conference on America’s economic future,  to be held in Washington, D.C. on February 11th.  The conference is sponsored by a consortium of “think tanks” including The American Prospect, the Demos World Policy Institute, the Economic Policy Institute and the Institute for America’s Future.

I admit that I had never heard of “Demos” before, so I paid a visit to their web site and quickly came across the linked paper titled Trading Up:  Win-Win Solutions to Raise Global Living Standards and Ensure the Success of American Workers

This paper espouses the “fair trade” aproach to international trade that’s favored by Obama and his incoming administration.  To summarize, this approach would include labor standards and environmental protection in trade agreements, improving the standard of living for workers in foreign countries while supposedly leveling the playing field for American manufacturing. 

This is the same tired, worn-out approach that has helped to guarantee an enormous trade deficit and loss of manufacturing jobs for the past three decades.  It’s a never-ending cycle of negotiations, baby steps forward, backtracking, followed by more threats and negotiations – all while our trade deficit expands and kills off more American manufacturing.  It places our trade policy in the hands of our trading partners, making us totally reliant on their promises to negotiate in good faith and to comply with agreements – promises that are never kept.  And it ignores the reality that, even in situations where the “playing field” has been “leveled” in this manner, the results are no different.  Take Japan and Germany as just two examples.  Nowhere are labor standards higher and nowhere is environmental protection taken more seriously.  Yet, when expressed in per capita terms (divided by the population), our trade deficit in manufactured goods with Japan is four times worse than China, while Germany’s is almost three times as bad.  Sure, advancing labor standards and environmental protections benefits the foreign workers but this also translates into making them and their industries much more productive and efficient, which only enhances their competitive position.  That’s not to say that it shouldn’t be done, but that it’s no way to combat a trade deficit and loss of jobs. 

But then Demos goes further by promoting the liberalization of trade with poor nations, eliminating tariffs on their products and helping them to spur export growth.   This is exactly the approach employed by the World Trade Organization, enforcing protectionism in favor of poor and developing countries (and it includes two thirds of its member states in that category) while demanding that the United States drop all trade barriers.  The result is predictable – more job losses and a bigger trade deficit for the United States. 

These approaches have consistently failed to restore a balance of trade for the U.S. because they fail to account for the biggest driving force of all behind the trade deficit – the disparity in population density between the U.S. and so many of these trading partners. 

Mr. Obama seems to be an intelligent, open-minded, results-oriented individual who has consistently championed the cause of the middle class and has acknowledged the damage done to the manufacturing sector of our economy by the trade deficit.  So how long will he be patient with this approach?  Is he willing to wait four years, eight years, ten or even twenty to see results?  He’d better be willing to wait even longer, since this approach has yielded a string of annual trade deficits now thirty-three years long.  Doing the same thing harder won’t change the results.  To expect different results with the same approach is Einstein’s definition of insanity. 

Raise labor standards and environmental protections around the world?  Great!  Let’s do it!  But don’t expect it to make one iota of difference in the trade deficit.  We need to scrap the failed experiment in unfettered free trade – an experiment that, in only six decades since the signing of GATT in 1947, has completely destroyed the wealth and industrial might that America built up over the first 171 years of our history through the use of tariffs to assure a balance of trade.  We’ve now tried both approaches and the difference in results couldn’t be more stark.  It’s time to return to the tried and proven trade policies that helped make this nation great.