I am not an Economist. I'm no trade agreement expert. I'm just a guy with a percentage and a question. The percentage involves the controversial Trans-Pacific Partnership, and it stood out to me when I began looking at this potential trade agreement. If the percentage is right, continues to be right, and there is active causation involved, then the TPP could be a huge boon to the United States.
But is it right? Let's look at the percentage:
"In a 2011 study by the industry-supported Manufacturing Institute, researchers calculated that the 'raw cost' of American manufacturing—including wages, raw materials, and capital costs, but excluding taxes, regulatory compliance, and other “structural costs”—is now 9 percent lower than the average raw cost of production among America’s nine largest trading partners (including China, but also high-cost places like Canada). In 2003, by comparison, American raw production costs were 20 percent higher than the average among our trading partners."
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The percentage is nine.
What that percentage seems to indicate to me is that there is now an economic incentive to manufacture in the United States. The other percentage from the same paragraph--twenty--tells me that there was a huge economic incentive to manufacture in foreign countries and especially China back in 2003. As I wrote above, if the percentage is true and continues to be true, and there is active causation involved, then the TPP could be a huge boon to the United States economy generally and manufacturing in particular.
How could this happen so quickly and so dramatically? The writer lists the following:
"Several factors account for this dramatic about-face. The Manufacturing Institute estimates, for instance, that raw production costs in China skyrocketed 132 percent from 2003 to 2011. This includes Chinese wages, which the Bureau of Labor Statistics (BLS) reports more than doubled from 2003 to 2008 (albeit from 62 cents an hour to $1.36). Meanwhile, American production costs have fallen. The natural gas boom, for example, has meant that industrial prices for natural gas are less than half what they were in 2001.
New advances in technology have also made American production cheaper by increasing productivity and shrinking labor as a share of total costs. Instead of hiring low-cost Chinese workers, companies can now use even lower-cost American machines."
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Additionally, the cost of transporting goods across the wide Pacific has risen sharply with the price of oil. Over the jump, I will discuss some of the reasons the percentage could be false or a false hope, and I will ask you to tell me what you think.
The potential problems I see with the percentage include: (1) The percentage could be wrong (because it is propaganda or because the math is off); (2) The percentage could represent a false hope because our Tax Code is so fucked up in favor of incentivizing off-shoring that corporations will continue to seek to move manufacturing jobs overseas, (3) The percentage can fluctuate with market prices, especially oil and natural gas, (4) The percentage could represent our coming out of the Great Recession, and (5) The percentage could change when Chinese, Korean, Thai and Vietnamese middle classes begin gaining wealth and clamoring for more and better consumer goods.
1. The Number Could Be Wrong (Because It Is Propaganda or Because the Math Is Off).
In the past, industry trade groups have spun dangerous lies. Trade groups told us that smoking didn't cause cancer and that Asbestos was the wonder material of the new century. Both deadly lies. So a reasonable person should treat information from a trade group with skepticism. I like to start by looking at the underlying motivation for the statement. In the cases cited above, the motivation was to sell more tobacco and Asbestos products. In the present case, however, would a manufacturing trade group intentionally go out of its way to make manufacturing CEOs look stupid for off-shoring manufacturing jobs?
Another reason the number could be wrong is if the math is off. I'm not privy to the statistics, so I cannot check the math. The best I can do is rely upon people like Paul Krugman who seem to think that there is a there there.
In a December 2012 piece, he cites "rising wages in Asia; lower energy costs here; higher transportation costs [for companies doing business across an ocean, and] ... robots." It is pretty common knowledge that oil prices continue to go up--at least over the long haul--and that wages for Chinese workers, for example, have shot up much faster than wages in the United States. If Krugman and the authorities that he cites believe the numbers and percentages to be accurate, that's good enough for me.
2. The percentage could represent a false hope because our Tax Code is so fucked up in favor of incentivizing off-shoring that corporations will continue to seek to move manufacturing jobs overseas..
The Tax Code is fucked up. It's so fucked up that it is possible in my mind that it is a reason for any continued off-shoring of American jobs and much of what has happened in the past. Our fucking Tax Code incentivizes shipping American jobs overseas. For some reason, the incentives can be so generous that it is worth billions to a few large companies.
In a 2012 article for American Progress, the author indicated that although all of the other economic factors may favor re-shoring jobs to America, the Tax Code may be holding everything back:
"Labor costs are the main driver of corporations sending jobs overseas, but foreign countries’ costs are increasing compared to the United States. According to a 2012 survey from Duke’s Fuqua School of business, nearly three-quarters of respondents indicated labor cost savings as one of the three most important drivers leading to overseas outsourcing. This was twice the rate of response for any other option. But according to research from the Hackett Group, the cost gap between the United States and China has shrunk by nearly 50 percent over the past eight years, and is expected to stand at just 16 percent by 2013. Labor costs in China and elsewhere are rising, and coupled with rising fuel prices raising shipping costs, the economic argument for sending jobs overseas may be becoming less persuasive.
Despite these increasing costs, the Duke survey found that 'only 4 percent of large companies had future plans for relocating jobs back to the United States.' The Duke survey does not identify the reasons for this reluctance to bring these jobs back to our country, but a key factor could be the U.S. tax code, which, as Seth Hanlon explains, 'rewards companies for making investments abroad—and leads to them shifting offices, factories, and jobs abroad even if similar investments in the United States would be more profitable absent tax considerations.' ”
(emphasis added). When companies move manufacturing to another country, they don't have to pay a penalty; rather, they get
the benefit of deducting moving expenses for tax purposes. And that's not even the most incentiv-y part of the Tax Code when it comes to corporations moving overseas. Please check
this out:
"The United States tax code actually incentivizes moving production, jobs, and profits overseas by favoring overseas investment with a lower effective tax rate. According to a Tax Law Review article by Melissa Costa and Jennifer G. Gravelle, foreign-source income for U.S. multinational corporations saw an average tax rate of 15.7 percent as of 2007, while domestic-based income saw an average rate of 26 percent, a disparity of around 10 percentage points. As noted in a Center for American Progress report on corporate tax reform, this distortion in the tax treatment of foreign and domestic corporate income 'violates economic neutrality and does not serve our national interest.'”
As if all of that wasn't
bad enough:
"The largest American multinational companies parked an additional $206 billion of profits in offshore accounts last year, according to Bloomberg, bringing the total amount of profits stashed where U.S. tax officials can’t touch them up to about two trillion dollars. The 307 companies that Bloomberg examined now hold a combined $1.95 trillion offshore, allowing them to avoid paying U.S. taxes on those earnings. The majority of the total is concentrated in just a few corporate hands. The largest 22 of those companies hold more offshore than the other 285 combined.
General Electric leads the pack, with $110 billion held offshore. Tech companies like Microsoft ($76.4 billion), Apple ($54.4 billion), IBM ($52.3 billion), and Google ($38.9 billion) also dominate, along with drug companies like Pfizer ($69 billion) and Merck ($57.1). The tech giants have drastically accelerated their offshore holdings in recent years, with Microsoft and Google more than doubling and Apple more than quadrupling offshore profit holdings from 2010 to 2013."
Apple squirrels away much of its $54.4 billion in Ireland, a country that has become a tax haven for American countries offshoring their money overseas. Luxembourg is another.
There is a movement to re-shore jobs to America. So, the Tax Code cannot be that great of an incentive--or other foreign disincentives are coming into play, including the delay in getting parts shipped, the lack of speed in making technical upgrades, and other logistic problems. Still, the Tax Code must be amended. Why do you think American manufacturing jobs were shipped to China, Korea, India and Malaysia? NAFTA had nothing to do with those countries; moreover, they don't even have a highway connecting them to the United States.
3. The Percentage Can Fluctuate With Market Prices, Especially Oil and Natural Gas.
This argument is weak, I think, because of the history of oil prices. They always go up. The Iran embargo going away could affect oil prices, but that would only be in the short term. (Markets that large eventually collude to keep prices high, even if there are historic animosities involved in this case.). Natural gas, on the other hand, is readily available and cheap in the United States, and that will be the case for years to come. Additionally, President Obama and, presumably, President Bernie Clinton have and will continue to explore alternative energy options.
4. The Percentage Could Represent Our Coming Out of the Great Recession.
There can be little doubt that many greedy CEOs jumped on Bush's Great Recession as a vehicle to explore off-shoring American jobs. Think Progress reported this:
"[T]he economic recession has had little impact on Corporate America’s patriotism. In fact, in 2009, representatives of many of the nation’s most powerful corporations attended the '2009 Strategic Outsourcing Conference' to talk about how to send American jobs overseas. Conference organizers polled the more than 70 senior executives who attended the conference about the behavior of their companies in response to the recession. The majority said their companies increased outsourcing in response to the downturn, with only 9 percent saying they terminated some outsourcing agreements."
By 2011--although it didn't feel like it--the United States was already climbing out of President Bush's hole. It seems logical for there to be an increase in manufacturing in the country as companies that had laid off workers during the downturn were now re-hiring. New companies emerged because of the now-available capital to start them up. Older companies could expand. I think that the Great Recession and coming out of the Great Recession explains the most recent time displayed in Figure "A" below:
But I don't think that coming out of the Great Recession explains the percentage.
It is unlikely that energy producers lowered their price that much at the time the United States was coming out of the Great Recession. The wages received by Chinese and Vietnamese workers--although it was a worldwide economic slowdown--still rose. Perhaps they would have risen higher? The cost of oil to ship products across the world didn't change that much. Natural gas prices in the United States were low, but they should stay that way for the foreseeable future, right? The only way that the Great Recession would seem to have significantly reduced "the percentage" in the United States' favor would be wages of American workers. During the recession, companies had an employers' market, and they could offer lower wages. Now, with unemployment in the five-percent range, wages are likely to go up in the United States.
How much of this uptick do we owe to re-shoring? There has been a movement by many American companies to re-shore jobs, and it is a phenomenon recognized by all of the economic experts. Will what is shown in the detail from Figure "A" below continue, and how much of any growth will be related to re-shoring or companies deciding not to off-shore?
5. The Percentage Could Change When Chinese, Korean, Thai and Vietnamese Middle Classes Begin Gaining Wealth and Clamoring for More and Better Consumer Goods.
As countries like China and Thailand begin paying their work force more, their workers will want to purchase more and better consumer goods. At that point in time, the cost of transporting goods is much less than it was in sending those goods across the Pacific to the United States. It would seem to make economic sense, at that time, to build at least some of those products in that region of the planet. But for the near-future, the United States will continue to be the most voracious consumer of electronics and other "luxury" products in the world. If anything, Mexico and Brazil are just as likely to get wealthier populations as Vietnam and Thailand, and the former, of course, are on our side of the globe.
I think the percentage is right (or at least close), and it will be a factor in future CEO decisions about manufacturing. Still, the Tax Code must be changed. It has fucked us for way too long. Finally, if the percentage is right (or at least close), and there is active causation, then the TPP could become a boon to the United States, opening up markets for newly American-made products.