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Outsourcing, China and the presidential campaign

By Peter Morici
web posted October 1, 2012

President Obama and Governor Romney each claims they would do better standing up for American workers against unfair trade with China. However, when it comes to outsourcing both have sins to repent.

Just about everyone who has had a choice between buying an American-made product or an import—a car, a dress or bottle of wine—must admit international trade based on national differences in knowhow, labor costs and natural resources can help us live better.

If Americans expect to sell Boeing aircraft and Microsoft Windows abroad, then they must be prepared to outsource some of what they buy directly, or through firms assembling goods here.

The problem is not outsourcing but importing products that could be made as or less expensively in the United States. That happens when: U.S. policy throws up unnecessary barriers to domestic business; foreign governments subsidize inefficient production or simply keep out competitive American products; or U.S. firms have an inappropriate bias toward foreign sourcing.

Those swell the trade deficit, which imposes great costs, and both President Obama and Governor Romney each share some guilt.

President Obama's tough restrictions on oil and gas development in the Gulf, off the Atlantic and Pacific Coasts and in Alaska do not reduce U.S. petroleum consumption but merely shift exploration and production to costlier and riskier locations abroad. EPA limits on CO2 emissions encourage manufacturers to locate in China, where similar regulations do not apply. Both kill U.S. jobs without an environmental benefit.

China keeps its products artificially cheap, and encourages U.S. manufacturers to locate production in the Middle Kingdom by suppressing the value of its currency, imposing high tariffs and throwing up administrative barriers to U.S. goods and services.
In the wake of the financial crisis, Beijing required that its stimulus money to be spent in China, and yet President Obama permitted billions of U.S. stimulus money to be spent in China and similarly protectionist regimes.

For example, GE, whose CEO heads the President's Job's Council, used stimulus grants to purchase components for U.S. wind turbines from the Chengxi Shipyard—a state controlled company that builds vessels for the Chinese Navy—even though an American supplier offered to match its price.

President Obama could have excluded those products—either through the initial legislation or by executive order—without violating WTO rules but chose not to do so. More broadly, he has not taken aim at China's undervalued currency, which affords exporters as much as a 40 percent price advantage when selling in the United States.

Bain Capital, the firm founded by Governor Romney, has invested in companies that have relocated jobs to China. More broadly private equity firms have an inherent bias toward outsourcing that is often neither helpful to the businesses they reorganize nor healthy for the U.S. economy.

Essentially, private equity purchases distressed businesses, and looks for quick profits by slashing wasteful employment—unnecessary jobs that would be lost anyway if the firms failed—and replacing ossified management. However, seeking big returns in a brief period, private equity managers are more likely to sell off valuable brands and patents to raise quick cash, and to offshore manufacturing that supports domestic R&D and could contribute greatly to the future value of the firm and broader U.S. competitiveness and employment.

U.S. tax policies offer substantial incentives to private equity reorganization of businesses by taxing their partners' income at about half the rate that many corporations, small businesses and professionals pay. Simply, those tax breaks give the economy more private equity reorganizations than are good for U.S. growth and jobs creation.

Unnecessary outsourcing is responsible for at least half the $600 billion U.S. trade deficit. Slashing that deficit in half would boost domestic demand and GDP by about $500 billion and add 5 million jobs.

Export and import-competing industries spend at least four times as much on R&D as the private business sector as a whole. Reducing outsourcing, by increasing R&D, could boost U.S. GDP by one or two percentage points. A U.S. economy growing at 3 or 4 percent a year, instead of its current 2 percent, would have far fewer budget problems at the federal and state levels, and far more resources to address issues like health care, the solvency of social security and finance an adequate national defense and space exploration. ESR

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission. Follow him on Twitter.







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