Walmart Suppliers Complain of Obstacles to American Manufacturing

June 4, 2014

http://www.reuters.com/article/2014/06/04/us-walmart-reshoring-idUSKBN0EF0AF20140604

In the above-linked Reuters article, Walmart’s suppliers are reported to be complaining of problems in re-establishing American manufacturing to help meet Walmart’s very publicly proclaimed goal of sourcing an additional $250 billion of American-made goods over the next decade.

Their complaints include a lack of domestic suppliers for components, an inexperienced work force and so on.  I have no doubt that their complaints are valid.  There’s hardly anyone left here making anything other than cars and trucks.  (As an aside, have you ever noticed that there are virtually no foreign-made trucks on the road?  Even Toyota and Nissan pickup trucks are made in the U.S.  Why?  Because the U.S. has continued to maintain a 25% tariff on all imported trucks.)  However, these complaints ring hollow when you consider the fact that when these American companies moved production to China, China was completely devoid of all such resources.  Yet, they found ways to overcome those obstacles so fast that, in a few short years, China manufacturing went from zero to the being the world’s dominant manufacturer.

Why?  Because those companies were motivated by a completely untapped, virgin market of 1.3 billion new consumers.  That’s one hell of a big motivation.  But what motivation do they have now to rebuild factories in  the U.S., other than Walmart asking them to do so?  (And I’m sure Walmart isn’t offering to pay them more to do it.)  And, what little motivation that provides is completely offset by the fact that their China plants will now be slowed by reduced exports to the U.S.

A big part of the problem is that Walmart sells end-use products, and not components, sub-assemblies or raw materials.  Those companies have even less motivation to come back – they don’t even have Walmart on their backs.  It’s kind of like the U.S. trying to apply a tariff to some end-use product.  It never works because, ultimately, it puts the companies involved at a disadvantage when trying to obtain materials and components.

Provide real motivation  and they’ll all find a way around these obstacles, just as they did when they moved to China.  Only tariffs, applied across the board to nations incapable of providing the U.S. with an equivalent market (overpopulated nations with emaciated per capita consumption), can provide the profit incentive companies need to make the transition.

I’m no fan of Walmart, but give them credit for trying.  But they need help in the form of trade policy that’s rooted in how the world of trade really works – help that our government lacks the wisdom and courage to provide.  Until that happens, the manufacturing renaissance will remain a myth.

 


Do Low Wages Cause Trade Deficits?

May 29, 2014

In recent posts we’ve examined the effect of population density upon the U.S. balance of trade in manufactured goods and found a strong correlation.  But when establishing a new cause for some phenomenon, it’s equally important to disprove the previously hypothesized explanations.  Economists are fond of blaming trade deficits on two primary scapegoats – currency valuations (often claimed to be manipulated to favor the offending trading partner) and low wages.

In my last post, we proved that currency valuations actually have no effect whatsoever.  Stronger currencies were no more likely to help America’s trade balance than they were to make it worse, and vice versa.  That’s not to say that currency valuations won’t impact the profitability of companies.  If the dollar gains strength, American companies make less money on exports.  But their reaction is to cut costs and become more competitive.  Have you ever heard of an American company throwing in the towel, closing up shop and moving overseas because of a fluctuation in the value of the dollar?  Of course not.  They stay and compete.

But what about low wages?  On the surface, that sounds like a more plausible explanation for shifting manufacturing off-shore.  Why make widgets here when I could move the factory to China, pay a fraction of the wages, and then import the products and sell them at the same price?  Almost sounds like a no-brainer.  But it’s not that simple.  There are other factors involved – huge factors – like logistics.

So let’s spend a little time examining some hard data on the subject.  While gathering trade data country-by-country for 2012, I also used the CIA World Fact Book to determine “purchasing power parity” (PPP)for each country (analagous to wages paid in each country), and used the “Index Mundi” web site to track how each nation’s  PPP has changed over the years.  Using that data, we can chart America’s balance of trade in manufactured goods relative to the wealth of each nation.

In this first chart, I simply took the 164 nations included in the study and divided them into quintiles – five groups with the same number of nations in each group.  If indeed wages (wealth) play a role in trade, what we should see are small deficits (or even surpluses) with wealthy nations, and progressively larger deficits with poorer nations.  Now, look at the chart:  with nations by quintile.

There is little evidence of any trend or consistency in this chart.  We actually have a relatively large trade deficit with the very wealthiest of nations which include virtually all of Europe, Japan, Taiwan and South Korea, nations which also happen to be very densely populated.  We actually have a small surplus with the 2nd quintile of nations which includes many South American nations and relatively few densely populated nations.  We have a very large deficit with the 3rd quintile of nations for one reason – China is included in this group.  With the 4th quintile – those nations ranked in the bottom 20-40% of wage earners, we have a small trade deficit.  And finally, among the very poorest of nations, heavily represented by African nations – seemingly fertile ground for taking advantage of low wages – the U.S. actually has a small surplus of trade.  To reiterate, among the bottom 40% of wage earners in the world who represent 3.1 billion people – almost half of the world’s population – the U.S. trade deficit is actually quite small.

This flies in the  face of the claim that low wages cause trade deficits.  Why don’t we manufacture more in Africa, where wages are dwarfed by those in China?  And China, not exactly awash in natural resources, actually turns to Africa for its supply of raw materials!  How inefficient is that?  Wouldn’t it make much more sense to build the factories in Africa, close to the supply of raw materials and an even shorter ship ride from the western coast of Africa to the eastern shore of the U.S.?  Something about this claim of low wages causing trade deficits already smells.

But let’s look at things another way.  Dividing countries into quintiles may be a little misleading.  We should actually divide the population of the world into quintiles by wealth, since that’s what we’re actually measuring here.  Otherwise, some nations in one quintile may have huge populations while another quintile of nations may be small and sparesely populated.  So take a look at this chart:  with people by quintile.

I will tell you that even I was blown away when I plotted these results.  Now the data shows a clear trend, but one that is precisely the opposite of what economists claim.  Our biggest trade deficits are with the wealthier people of the world, steadily declining as people become poorer.  How can this be?  The explanation lies in what really causes trade deficits in the first place.  Trade deficits are caused by disparities in per capita consumption, driven by disparities in population density, and nothing else.  And trade surpluses make people wealthier, not poorer.  By running huge trade deficits with nations like Germany, Japan, Korea, Taiwan, China and a host of others, we’re making them richer day-by-day as the U.S. grows poorer.

In fact, from 2001-2o12, of the 164 nations studied, the U.S. ranked near the bottom in terms of growth in PPP.  134 nations experienced growth in PPP that outstripped the U.S.  Only 30 nations lagged the U.S.

In that respect, globalization works.  It’s doing an excellent job of redistributing American wealth to other nations so heavily burdened by overpopulation that their economies would be destabilized if allowed to continue without our assistance.  That’s the goal of globalization – stabilization through spreading the pain, unemployment and poverty of overpopulation.  They cause the problems.  You pay the price.  And yet, the push for more growth – fueled largely by population growth – goes on.  Without that, income inequality would also begin to stabilize and we certainly can’t have that!

 


America’s Best Trading Partners

April 24, 2014

Earlier this month, we examined the list of America’s twenty worst trading partners – those with whom the U.S. has the largest trade deficits in manufactured goods on a per capita basis.  We saw that the list was dominated by nations with very high population densities.  Eighteen of the twenty were more densely populated than the U.S.  The average population density of the group was five times that of the U.S.  And they were wealthy nations, with an average purchasing power parity of $35,000 per person, debunking the myth that trade deficits are due to low wages.

What about the other end of the scale?  Who are America’s best trading partners – those with whom the U.S. has the largest trade surpluses in manufactured goods on a per capita basis?  Here’s the list:  Top 20 Surpluses, 2012.  This list looks very different.  Thirteen of these twenty nations are less densely populated than the U.S.  Of the remaining seven who are more densely populated, there is a very simple explanation why four of them – United Arab Emirates, Qatar, Kuwait and Brunei – are big buyers of American manufactured exports:  they are tiny nations literally afloat on large seas of oil.  They are flush with American petro-dollars which, ultimately, can only be used for purchase of American goods, services and investments.

Of the remaining three that are more densely populated than the U.S. – Panama, the Netherlands and Belgium – Panama is only a bit more densely populated than the U.S.  But Belgium and the Netherlands are each more than ten times as densely populated, seeming to defy the population density theory for trade deficits.  But both are very small nations, and both are the only nations on the European continent with deep water ports on the Atlantic coast.  Perhaps they are merely distributors of American products to other European countries.  If rolled into the Euro zone, the U.S. still has a large trade deficit with the Euro zone.

In contrast to the list of our twenty worst trade partners, whose average population density was almost 500 people per square mile, the average population density of America’s twenty best trade partners is only 188 per square mile.  But that’s a figure that’s skewed by a few very tiny but very densely populated nations.  If we divide the total population of these twenty nations by their total land area, the population density is only 19 people per square mile.  (This figure is 344 people per square mile for our twenty worst trade partners.)

It’s also interesting to note that the average purchasing power parity (a good measure of the wages paid in those nations) for our twenty best trading partners is almost exactly the same as our twenty worst trading partners – about $35,000 per person.  Clearly, wages have absolutely no role in determining trade imbalances.

The data is clear.  This is absolute, undeniable proof that population density plays a dominant role in determining whether free trade with any given nation will yield a trade deficit or surplus.  It’s irresponsible to apply free trade in a manner that’s blind to this reality.  When trading with badly overpopulated nations, tariffs must be employed to maintain a balance of trade, to offset those nations’ inability to provide us with access to a market that’s equivalent to ours in terms of its citizens’ ability to utilize products.

 

 


Unemployment Rises in February

March 10, 2014

http://www.bls.gov/news.release/empsit.nr0.htm

As announced by the Bureau of Labor Statistics on Friday (link to the report provided above), unemployment rose by 0.1% to 6.7%, reflecting a gain in the employment level (household survey) of only 42,000 while the labor force grew by 264,000.  This leaves per capita employment essentially unchanged in February at 45.7%.  That figure is almost 3% lower than in 2007, meaning that nearly 10 million workers remain unemployed.

Per Capita Employment

Unemployed Americans

Wall Street drew some comfort from the fact that the number of jobs created – 175,000 (according to the establishment survey) – exceeded expectations reduced by the bad weather in February, but the numbers are weak nonetheless.  Other indications of a weak job market included:

  • the number of long-term unemployed increased by 203,000 in February to 3.8 million,
  • the employment-to-population ratio hasn’t improved in the past year,
  • the number of people working part-time because they can’t find full-time employment remains at 7.2 million workers,
  • manufacturing added no new jobs in February,
  • the average work week dropped by 0.1 hours, and
  • factory overtime also declined by 0.1 hours while the average factory work week remained unchanged.

It’s yet another corroboration of the “new normal,” chronically-high unemployment economy that dumb trade policy and a growing population have given us.


Rice for Vehicles

February 21, 2014

http://www.reuters.com/article/2014/02/21/us-usa-asia-tpp-idUSBREA1K0A320140221

This epitomizes what’s wrong with American trade policy and the American economy as a whole.  As reported in the above-linked Reuters article, President Obama is running around the world selling meat and produce and is willing to surrender manufacturing jobs as payment.  In the case of Japan, he wants them to lower their tariffs on American farm products and, in return, is considering giving up our small tariffs on their cars and our big tariffs on imported trucks.  (By the way, in case you wonder whether tariffs work, take a look around at how few imported trucks are on the road compared to cars.)

At the same time that he’s marketing the U.S. as some rural, agrarian society – something we haven’t been for a century, he’s desperate to liberalize immigration policy to turn us into even more of an urban jungle than we’ve already become. 

Is the condition of our economy any wonder, when our president considers rice for vehicles an even exchange?  Does he not understand the difference in the labor involved in producing these products?  Can’t he acknowledge what a disaster the same trade deal with South Korea has been for American jobs? 

God help us.  Obama won’t.


Trade Deficit in Manufactured Goods Hits Record in December

February 6, 2014

http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

As announced by the Bureau of Economic Analysis this morning (link to the report provided above), the U.S. trade deficit rose slighly in December to $38.7 billion – a fairly benign figure that continues a declining trend.  But slight improvements in the balance of trade for services, food and petroleum products mask a big $4.9 billion drop in manufactured exports that resulted in a record deficit in manufactured goods of $46.5billion.

Manufactured exports fell to $106.5 billion, the lowest level in 27 months.  To keep pace with with Obama’s goal to double exports within five years (a goal he set in January, 2010), exports needed to rise by $39.5 billion per month.  Manufactured exports now lag the president’s goal by a record $41.3 billion. 

Imports of manufactured goods in December were $153 billion, only $0.4 billion shy of the record set only 3 months earlier.  Clearly, if the president’s goal is to generate manufacturing jobs by reducing the trade deficit, his focus is misplaced.  He has no ability to influence exports which are determined solely by foreign demand.  But he has total control over imports, control that a change in trade policy toward a greater use of tariffs would give him.  But he lacks the fortitude for that approach. 

Here’s a chart of manufactured exports and imports:  Manf’d exports vs. goal

And here’s a chart of the manufactured goods trade deficit:  Manf’d Goods Balance of Trade

This kind of debunks the whole notion of the mythical “manuacturing renaissance,” doesn’t it?


The Dumbest Idea Yet for Revitalizing Detroit

January 25, 2014

http://www.freep.com/apps/pbcs.dll/article?AID=2014301230069

The above-linked article details what may be the most hare-brained scheme ever devised for resuscitating Detroit’s economy, or the economy of any city, for that matter.  The plan is the brain-child of Michigan Governor Rick Snyder who, before being elected governor, served for a few months as interim CEO of ailing Gateway Computers until a more competent chief executive could be found. 

Detroit’s woes are no mystery.  Its economy was built on the auto industry which, until about the 1960s had a virtual lock on the domestic auto market.  Thanks to a change in U.S. trade policy in the late 40s, which opened the doors to our market without gaining access to equivalent markets, the share of the auto industry held by domestic manufacturers has shrunk to barely 50%.  The demise of the auto industry, together with escalating racial tensions, led to a mass exodus from Detroit.  Since 1960, Detroit has lost nearly two thirds of its population.  Last year, the state of Michigan experienced a net loss of 9,000 new college graduates.

In his state-of-the-city address, newly-elected Mayor Mike Duggan proclaimed that his tenure should be judged by one criteria – that within four years the population of the city of Detroit would be growing again.  Fair enough. 

But there’s a right way and a wrong way to go about it.  The right way is to improve city services, reduce crime, eliminate the blight, clean up the city, and attract businesses back into the city.  That’s the mayor’s job.  If he does it well, then Detroit will once again be judged a desireable place to live, and its population will grow.  And Mike Duggan will be seen as a successful mayor. 

Then there’s the other way – the lazy way – the wrong way – Governor Rick Snyder’s way.  Let’s just bring in 50,000 immigrants, says Rick.  Immigrants with advanced skills who can start businesses, says Rick.  (The insulting implication is that Detroit’s current residents are too dumb to start businesses.) 

But this begs a question for anyone who is familiar with Detroit.  Detroit already has one of the largest immigrant populations in the nation.  If immigrants arrive on our shores with this magic elixir for curing the economy, as politicians, corporations and the Chamber of Commerce would have us believe, then Detroit’s economy should be flourishing instead of floundering.  What happened?  Did we let in the wrong immigrants – the dumb ones?  Will the new batch of 50,000 immigrants be better-screened to identify their possession of the magic economic elixir?

The fact is that immigrants possess no such powers for curing the economy.  They are just people, no different than the rest of us.  They’re no smarter about how to establish businesses and grow the economy.  Nor are they dumber, thus being inclined to become a net drain on social safety net resources, as some anti-immigration groups claim.  In the final analysis, the only effect of immigration is to grow the population. 

And that’s just what those who benefit from a growing population – corporations who want to see growth in total sales volume – want.  Those 50,000 immigrants will set up households and consume the products necessary to do that.  And that will “create” jobs.  There’s a lot of work involved in meeting the needs of a growing population.

But no debate of immigration policy is complete without giving equal consideration to the other economic consequences.  The inverse relationship between population density and per capita consumption dictates that, once a critical population density has been breeched (a population density that liberal immigration policy helped us reach decades ago), the now-larger population will, on an average per capita basis, consume just a little less as they are forced into more crowded conditions.  Out of the 50,000 people added to the population, they’ll add to the labor force just slightly more than are absorbed by the new job opportunities created.  The end result will be declining wages and rising poverty.  Detroit will have a bigger economy, but it will merely be a bigger version of what it has now.


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