Will Manufacturing Return to America?
Tuesday, July 21, 2009
How will the U.S. recover from the current recession? We'll talk with economist Peter Navarro about the role of manufacturing in the future of a sound economy.
MAUREEN CAVANAUGH (Host): I'm Maureen Cavanaugh. You're listening to These Days on KPBS. Way back in 1992, presidential candidate Bill Clinton spoke to an audience of factory workers in Maine who were afraid of losing their jobs. In a departure from what the workers expected, Clinton told them their jobs were probably not going to be saved and they'd have to re-train to find new jobs. The future president outlined what has become the refrain of U.S. policymakers ever since. Trade was going global, America's strength was not in what it could make but in what it could invent, and the structure of our economy was changing from real factories to idea factories. After having struggled with this vision of the U.S. economy for a generation, a lot of people are now saying, it ain't necessarily so. The current deep recession has provoked new demands that America revive its manufacturing sector. The critics say the U.S. must start making things again, especially in a world where other nations are using the notion of a global economy exclusively for their own advantage. My guest to discuss this issue is Peter Navarro, professor of economics and public policy at UC Irvine, and co-author of "Manufacturing a Better Future for America." Welcome to These Days, Peter.
PETER NAVARRO (Professor of Economics, University of California at Irvine): Maureen, how are you this morning?
CAVANAUGH: I'm doing great. Thank you for being here. And I want to invite our audience to join the conversation. If you think America should start making things again, call us and tell us why. Or perhaps we haven't given the information service economy enough of a chance. Give us a call, 1-888-895-5727. Well, as I say, Peter, you know, we've heard for years that manufacturing was a dying sector of the U.S. economy and plant closures were terrible for communities but it was all part of the changing U.S. economy. What do you have to say to that?
NAVARRO: Well, a couple of things. I mean, let's try to first understand why it's important to have manufacturing jobs in America. It's really for two reasons. One is that they have what we call in Economics a bigger multiplier effect, which is to say that one manufacturing job creates more jobs down the line than a service sector job. And then, more importantly, manufacturing jobs on average pay more. So if you basically want a vibrant, healthy economy over the long term in America, you need manufacturing kind of as your core to generate the jobs, generate the income for people to consume and perpetuate economic growth. So that's basically why we need that. It's basically why China, for example, right now is the only country in the world that's experiencing robust economic growth. It's basically taken over the manufacturing factory floor of the world. Now the other thing I think that's important to understand about the argument is that there's a big misconception that the reason why America had to give away its manufacturing base to the rest of the world was because of cheap labor elsewhere. And, in fact, the research I've done over the last ten years indicates that while cheap labor plays a role in this globalization phenomenon, certainly, a lot of what's going on, particularly in China, is driven by simply unfair trade practices designed to beggar the American economy. If you look at what China does in order to take jobs from America, you have the biggest foremost issue is what's called currency manipulation. China fixes their currency to our currency, keeps it undervalued. It's a tax on our exports to China. It's a subsidy to their exports here, creates the biggest trade imbalance. Our trade imbalance with China is 55% of our entire trade deficit when you take out oil. They use large export subsidies, they use flagrant stealing of our intellectual property, which basically cuts the costs of their automakers or their pharmaceuticals. And so it goes. And we in America, going back to the Bush administration when China got into the World Trade Organization, has basically, under the guise of free trade, allowed China to take, essentially, the core of our economy.
CAVANAUGH: I want to break down a little bit the ways in which you feel especially China is not playing fair when it comes to free trade but first of all I want to concentrate on what has happened to the U.S. manufacturing sector. How much has it declined, let's say, over the past decade?
NAVARRO: It's been decimated. I mean, in the midwest, basically, the recession that the rest of the country has been experiencing over the last couple of years started back in about 2004. We’ve lost millions and millions of manufacturing jobs and, as I said earlier, these manufacturing jobs are kind of the seed corn for other jobs. If somebody's working in a factory, they're bringing home a decent paycheck, that's restaurants, it's the kids in college, and everything in between. So we've had a huge problem. In San Diego, I might add here, we're not just talking about heavy manufacturing. I mean, back in the 90s, about the same time that Clinton was making that speech, there was a great hope in San Diego that San Diego would be the biotech capital of the world. And, in fact, the biotech capital of the world right now is China because of a lot of the same reasons I've given in terms of their unfair trade practices.
CAVANAUGH: Now in the book "Manufacturing a Better Future for America," it states about 40,000 plants have closed since 2001. But I'm wondering, since this recession, because as you say, manufacturing's been suffering for years now, but this recession seems to have really knocked a lot of manufacturers out completely. What sectors of manufacturing have been hardest hit by this recession?
NAVARRO: All of them. Hey, it's basically across the board. And if you take – I mean, looking at kind of what happened to GM, I think, is instructive in terms of understanding the whole problem. I mean, their – the whole idea of saving General Motors offended a lot of people but when you looked at why you might even think about bailing out a company like that, what concerned me wasn't the autoworkers per se, it was the supply chain that GM supports. It's the plastic and mold manufacturers, it's the part manufacturers. And that's why the midwest is in such dire straits. And the tale of GM, a kind of a tale of two countries, if you look at what happened to GM in the U.S. versus what happened to it in China, it's very instructive. GM is absolutely booming in China. They're making money hand over fist but it's not really helping America. And what China does, for example, is when GM goes over to try to sell cars in the Chinese market, China engages in one of the most dangerous, unfair trade practices, which is called forced technology transfer. If GM wants to set up a plant in China, they basically have to give China state of the art technology. And so in the short run, that's good for GM because they get entry into that market but in the long run it makes GM obsolete because China basically gets the technology. So, meanwhile, here in America nothing's happening and we've had essentially – I mean, Maureen, in order to understand what's going on with us right now, it's important to understand that we've got this manufacturing base recession that's been going on for six to eight years and on top of that we had the housing bubble recession, which has hit places like San Diego and Las Vegas and Florida the hardest. But we're confused about kind of what's happening to us and when it's all said and done, the president and the congress and Ben Bernanke at the Fed can throw all the money in the world they want at the current problem but at the end of the day if we don't make things here, the problem's not going away.
CAVANAUGH: I am speaking with Peter Navarro. He's a professor of economics and public policy at UC Irvine, and co-author of "Manufacturing a Better Future for America." We are inviting your phone calls at 1-888-895-5727 and right now George is on the line from Del Mar. Good morning, George. Welcome to These Days.
GEORGE (Caller, Del Mar): Thank you very much. I'm pleased to be able to call. I don't understand the professor's reasoning at all. Jobs have been leaving the United States for years. They're going to Mexico. If Africa ever gets it together, they're going to go to Africa. They're going to go to China. Whether there's unfair practices or not, they're going to India. They can go anywhere where the labor prices, the labor costs, are what, a tenth, a twentieth of what they are here, no unions. I don't see how we're going – I don't see this as a viable alternative. I don't know what to do besides manufacturing in the United States but I don't think we're going to be competitive in most areas of manufacturing for a long, long time until labor costs balance. And you can say what you want about China but unless we can do something about them, they are a reality and we're going to have to be competing with them and whether – if they're going to steal our technology and do whatever else they're doing to get…
NAVARRO: Well, you – Hang on, let me – let's…
GEORGE: …get the jobs…
NAVARRO: …let's take – take your arguments one at a time here. You know, the first – the first argument I think is an important one because it's the idea you expressed about how we can't keep – compete with cheap labor. The way any country competes with cheap labor is basically to have better technology and higher productivity. If a worker here in America basically is twenty times more productive than a worker in Guatemala, we can compete with that worker. And the way we've always maintained that edge basically is through solid research and development, technological innovation and strong capital investment here in the United States. The problem is that we haven't been engaging in any of those activities at the level that we used to. And just from a pure economic standpoint, American workers can compete with any workers in the world if the playing field is level. Now in terms of China, I mean, yeah, China is the biggest reality we're facing right now. And the question is, why don't we do something about it? Why doesn't the Obama administration, or the Bush administration before it, call China to task on the currency manipulation question? George, if China's currency is 40% undervalued relative to the dollar because of an unfair trade practice, how is it that somebody in Michigan trying to sell things in the world market, much less into China, is able to compete? That's wrong. Obama needs to crack down on those unfair trade practices. I believe we can go toe-to-toe, head-to-head and face-to-face with China but only if the playing field's level.
CAVANAUGH: Well, why is that the U.S. administrations haven't stood up to these practices in China?
NAVARRO: Great question, Maureen, and there's two reasons. First of all, the Bush administration had two things going for it. One, was its preoccupation with the war on terrorism. It totally just ignored what was an erosion to the manufacturing base and what contributed to that willingness to ignore that was its commitment, its blind faith, in this free trade ideology. I'm a free trader but I'm a fair trader, too. You can't have free trade unless it's fair and have both parties win. Now, the Obama administration faces a totally different issue. As soon as the Obama administration took office, it blinked and it blinked because China is our mortgage banker. China holds two trillion dollars of U.S. government bonds and the Obama administration is afraid to crack down on China because it's afraid that China will refuse to fund it's budget deficits and our trade deficits and that's where we've come in America where we're – basically have to kowtow to China. Unless we stand up, however, the situation only gets worse and we get weaker.
CAVANAUGH: So you say you are for free trade but fair trade. What is wrong with the deals that we have now going on with China and Mexico and other places around the world, in your eyes, that is not – does not make for fair trade?
NAVARRO: Well, let's just say, for starters, that the World Trade Organization, the WTO, which is kind of the framework for trade in America, has a set of rules which basically go back to Adam Smith and David Ricardo which basically say if you do this, everybody's going to be better off. Now, where do we go wrong here? And the best way I like to explain it when I'm giving a talk or a speech or whatever is, I say to you, Maureen, suppose you're in Michigan and you want to do business in the global marketplace and suppose I, as the government, am willing to give you any capital you want, I'll loan you that capital at cheap rates and, by the way, if you don't want to give it back, you don't have to. I'm going to subsidize your energy and your water. I'm going to give you free land. I'm going to give you a subsidy for everything you export out of this country and I'm going to give you other types of tax breaks. I'm going to let you steal any kind of technology you want so you can maybe get a competitive edge on any competitor out there that you can get the technology from. Do you think you can make money under those conditions?
NAVARRO: Yeah, and so that's what’s going on. That's the reality of entrepreneurship in China, okay? It's a partnership between the Chinese government and Chinese entrepreneurs and these – the extent of what China does in terms of unfair trade practices is absolutely breathtaking. And the fact that the Obama administration has basically turned a blind eye to this is basically dooming that administration and this country to a situation where after this stimulus goes into our veins, it's like heroin or meth going into our veins, giving us a fix, after that's over in a year or two, we're going to be left in a worse condition without a manufacturing base and nowhere to go.
CAVANAUGH: I want to ask you, Peter, though, theoretically, do you have any problem in the theory of what this – the idea has been for the longest time: America sort of not being the manufacturing center anymore, having things manufactured in other countries around the world, America generating ideas, inventions, becoming an information service economy. Is there something fundamentally wrong with that notion, to begin with?
NAVARRO: Yeah, I think that was – that was a flat out stupid dream that came out of the kind of nineties infatuation with tech and the whole bubble we were in there. We thought we would kind of like evolve and morph into a different world where technology made everything go so we were willing to concede all this off-shoring. But it – You know, at the end of the day, what we really need to understand is that manufacturing through the ages had been a progression of technological innovation and whereas we used to make, you know, horse and buggies, we just need to make more sophisticated things over time in order for our economy to prosper. The whole idea – To take a guy like Jeff Immelt, who's the CEO of GE, I mean, he had the epiphany which directly answers your question. Back in the nineties, he was on board with that idea, today he understands full well that if countries don't make things, they don't prosper.
CAVANAUGH: I'm speaking with Peter Navarro who is a professor of economics and he's a co-author of "Manufacturing a Better Future for America." We're taking your calls at 1-888-895-5727. Right now we go to Ron in Tierrasanta. Good morning, Ron. Welcome to These Days.
RON (Caller, Tierrasanta): Good morning and thank you. I'm a retired journalist, television journalist, and I want to tell you my first encounter with global economics. Years ago, about 25 years ago, I went to New England to a little town that totally depended on a shoe factory and the shoe factory owners had just packed it up, moved the whole thing to Mexico, and everyone in town was out of work. And I interviewed a couple of economists and their attitude was so what? Americans should not be making shoes. Americans should be making television sets and computers. Take a look on the back of your television set and your computer and see who made it.
CAVANAUGH: Your point is taken, Ron. I understand what you're saying. And, Peter, I think, frankly, that's what happened. This thing got out of – expanded to – in a way that nobody expected it to. I think a lot of people would be fine if shoes were made overseas but, as you say, now biotech is being taken over by countries overseas and I don't think the architects of this free trade, world trade, saw this coming.
NAVARRO: Well, you know, San Diego used to be a great aviation town back in the days of General Dynamics and things like that. And there's a very interesting story about how McDonnell Douglas went over to China basically to try to set up shop there. Things didn't go well and it wound up leaving a half-built factory and the very detailed plans for one of the jets in its line and today, actually within the last year, China announced construction of this new jet that they're doing. It's a regional jet and it's a carbon copy of this thing McDonnell Douglas basically gifted to that country. So your point, I think, is very well taken because it's not just about toys and cheap electronics and shoes anymore. They're going up the value chain, which means they go from toys up to autos to aircraft and they go across the value chain where they're not just assembling anymore but they're manufacturing and R&D. And that – You know, that's the biotech story. A lot of the R&D that should be happening in Torrey Pines right now is happening over in China.
CAVANAUGH: Let's take another call. Allison is in Tierrasanta. Good morning, Allison. Thank you for calling These Days.
ALLISON (Caller, Tierrasanta): I just wanted to say that, you know, for the longest time Americans have lived the very affordable, inexpensive, luxurious American dream on the backs of people in other countries. We are a nation of consumers and we consume an exorbitant amount of stuff that we don't even need. And then when our American dream crumbles, as it has over the past several months, we want to turn around and blame the people that yet made it possible for us to live the lifestyle that we have so enjoyed. I think that makes us extreme hypocrites. It's not just their fault. It's our fault for…
NAVARRO: Well, let me – let me ask you – Can I ask you a question?
ALLISON: …all the consuming and it's also our fault…
NAVARRO: Can I ask you a question, please?
ALLISON: …for wanting to have everything we want cheap. We're not willing to pay the price to have something made in America.
CAVANAUGH: Allison? Peter would like to ask a question.
NAVARRO: Yeah, Allison, let me just ask you this. I mean, if you – if you – you're in China, right? If you're looking at this perspective from what you've just said, I mean, do you think it's appropriate for China, basically, to take young women off the farm, put them in factories which are essentially quasi-prisons and then whatever – give them pennies on the dollar and then whatever they make, the company sells it to America based on a cheapened currency and with export subsidies? I mean, is that the world you want to live in?
ALLISON: You know, I have a sister who lives in China and she's lived in China now for eight years. And there are problems in China and there are problems with manufacturing and there are problems with people getting seriously underpaid. But there's also great expanse and there's a middle class and things have changed dramatically for people in China over the past just eight years that my sister has lived there. She's seen a huge increase in people's ability to have the things in America that we value so much and…
NAVARRO: But can – can…
ALLISON: …and I think it is wrong that they get paid maybe twenty cents.
NAVARRO: But can you connect the dot between…
ALLISON: There's a really good documentary called "China Blue" that really explored the fact that, you know, jeans made in the same factory sell for $500.00 to, you know, $17.00 at another store.
CAVANAUGH: Allison, I've got to stop you. I've got your point, and I want to turn it back to Peter and ask you, Allison – It seems that one of the fundamental points Allison is making here, what role does the American consumer play in the demise of the manufacturing sector? Have we been too fast to take up the cheapest bargain we possibly can and just let American companies go out of business?
NAVARRO: You know, that's an interesting point. I mean, you're basically talking about the Walmartization of the world where, yeah, we go into Walmart and we buy the cheap Chinese stuff and we do that because we're rational consumers and it's cheaper. But, you know, I think the way to kind of resolve this issue here is to simply say, look, there's nothing wrong with China basically prospering and growing and, you know, it's all good if their standard of living is rising. But if it's a zero sum game where it's at the cost of Michigan, basically, going into the toilet, that's a very different scenario than kind of the free trade world that's often taught in the economic textbooks where both companies – countries are supposed to benefit. And what I'm trying to bring here to the table, you know, regardless of whether you want to blame the American consumer or lazy workers or whatever, the reality is that the trade practices right now are not being done on a level playing field. Basically, we're up against tremendous odds when we try to compete in the world because countries like China violate the rules. If we don't defend ourselves, we won't have manufacturing jobs. If we don't have manufacturing jobs, we won't have an economy. If we don't have an economy, we don't have anything.
CAVANAUGH: I just have about thirty seconds for you to answer this question but since the manufacturing sector, as you say, has been decimated, can we return to manufacturing here? Is it too late?
NAVARRO: It's not too late. If we have a level playing field, if we let the currency adjustments take place, the wage adjustments that are taking place right now, when we begin to reinvest in America like we should, all's good. But we have to start acting now. We can't—we cannot—let the factory floor in this country collapse anymore than it has.
CAVANAUGH: Peter Navarro, I want to thank you so much for being with us today.
NAVARRO: Thank you, Maureen. Good luck to you.
CAVANAUGH: Thank you. And Peter Navarro is professor of economics and public policy at UC Irvine, and co-author of "Manufacturing a Better Future for America."