Tuesday, June 14, 2011

Bringing U.S. Manufacturing Back; Part 2 of 5, Global Neighbors & Competitors

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Financial institutions and banking are interconnected globally. It’s one of the reasons the U.S. taxpayer funded Troubled Asset Relief Program (TARP) bailout orchestrated by the Federal Reserve was seen as a necessity to avoid a “global” economic meltdown and not just an American collapse.

The U.S. neighborhood includes more than cul-de-sac neighbors Canada and Mexico. In a manufacturing sense, China and India are down the block neighbors. Europe and Japan are the old neighborhoods looking a little frayed around the edges.

The Middle East is an old neighborhood with the tension and instability of reconstruction. Mexico and Latin America in general have their own instability, yet they can be good neighbors. Albeit, some Americans believe good fences make good neighbors in reality especially in hard economic times.

China, India, and Mexico are neighbors some Americans love to hate as they are ardent manufacturing competitors too. China doesn’t always play fair. All three are seen as being a large factor in lowering the American manufacturing wages. Yet, along with African neighbors, China and India belong to the largest emerging markets for U.S. manufactured goods. They are a part of the very strong BRIC (Brazil, Russia, India, China) countries.

It usually always comes down to money no matter the rhetoric. Capital is still being invested in the U.S. of course, yet developing countries, like China and India, are providing a private investment upside adding pressure to the U.S. capital investment and economy.

American taxpayer monies being used to invest in manufacturing and production in Mexico, Brazil, China and other countries by the U.S. government adds even more pressure to U.S. manufacturing jobs and the economy.

Here are Dr. Mathew Lieber’s thoughts on just a few specific global neighbors and competitor questions.

BKH: What do you see as your student’s attitudes on America in reference to global neighbors and competitors in general?
ML: Overall, the recurring attitudes expressed are concerns about declining U.S. prosperity and prestige. There is also a positive desire to study and travel abroad, participate in a globalized education, and prepare for a career in an integrated world.

Close to 50% of them spend a semester abroad, which raises interest in foreign relations and a grounded sense of reality about what foreign relations means on a human level.

Military veteran and foreign students play a largely positive role on campus, for they directly link our community to foreign lands, demonstrate enormous motivation and introduce viewpoints that lead students to question their stereotypes.

BKH: How is the U.S. exceptional on the global economic stage?
ML: The U.S. remains the largest single national economy even as it recovers from an ugly recession. It is the single largest consumer market and source of business innovation.

The US dollar is the global economy’s reserve currency, and Treasury Bonds its most liquid asset. The U.S. retains the leading position in international economic institutions. It is also the only military superpower, with 766 bases worldwide and more spending than all other countries combined.

Altogether, this has allowed us the “exorbitant privilege” to consume more than we produce and to run enormous fiscal deficits, because others willingly take our dollar credit. The U.S. has less than 30% of its economy in foreign trade whereas China has about 90%.

BKH: How is the U.S. normal on the global economic stage?
ML: For decades, the U.S. has been getting more normal, in the sense of relative decline, but the recent recession and the rise of Asian economies have accelerated that trajectory. Except for military power, the duration of U.S. leadership is being called into question.

China’s Gross Domestic Product (GDP) is on path to exceed the U.S. by 2020. In 2010, China became the number one automobile market.

After the housing crisis, the U.S. model of bank and financial industry led growth no longer looks so good worldwide. In the International Monetary Fund (IMF) and the World Trade Organization (WTO), the U.S. faces more difficult scenarios for advancing its positions as more powerful players assert themselves.

The G-8 (most industrialized nations) is now the G-20. With China, the U.S. has experienced a defiant competitor exercising its will and the means to resist U.S. pressure. The most basic rules of power and economics do apply to the U.S. We need to tend our power, assess the landscape, and devise a strategy.

BKH: You were in Mexico recently. What is your opinion of Mexico’s violence and its effect on the shaping of U.S. immigration and economic policy?
ML: It is tough to see Mexico’s drug war having much of a positive effect on U.S. immigration policy. It generates fear with 30,000 deaths in 5 years and accelerating.

Beefing up border security may make us feel safer but will not fundamentally resolve anything. We should look at root causes on both sides of the border. I am a realist. We should anticipate its persistence and possibility for deterioration and spillover into the U.S. At the moment, the conflict is regionalized in Mexico but gradually expanding in their territory.

Fueling it are a combination of huge profit margins, a large U.S. market of users and addicts, an ample supply of impoverished youth, an absence of alternative employment pathways, and an aggressive drug war by a corrupt and under-capacitated Mexican government. It can only change with a comprehensive regional strategy encompassing supply, trafficking and consumption.

Effective border and customs policing is essential as well as steps to stop the flow of assault weapons to traffickers. The U.S. should continue to support Mexico’s efforts to develop better legal and police institutions and to promote alternative industries in its territories. We should consider some decriminalization.

BKH: What are the positive and negative effects of the “Dream Act” passage on U.S. relations with Mexico as a neighbor and a manufacturing competitor?
ML: The Dream Act will create positive incentives for responsible behavior for a generation at risk -- to complete high school and not join a gang, to pursue college studies in return for military service. It would stop thousands of youths from turning to welfare and crime. We would have fewer Mexican-born American-raised delinquents to deport and a greater number of more successfully integrated Mexican-American citizens.

An effectively designed Dream Act could provide broad grounds for mutually beneficial cooperation. But there is also a competitive aspect. Mexico will begin aging as a society too. Soon the need for good workers will be even greater, so the young already here could become an honest rule-playing and well educated human resources fueling the U.S. economy.

BKH: What is the significance of immigration and trade between Mexico and the U.S.?
ML: These are two of the main issues on the U.S.-Mexico agenda along with security, rule of law, energy, and economic development. The 1951 mile U.S. - Mexico land border sees more human and economic traffic than all land borders, but today a growing share of the cross-border flows are via air, sea and cyberspace. Mexico is our third largest trading partner after China and Canada.

In the 1990s, a consensus formed, with elite bipartisan support in Washington and in Mexico, in favor of moving toward more North American integration. The 1994 trade agreement was a breakthrough, though the deal neglected labor mobility consequences.

Since 2001, the U.S. has shifted its focus to security, while lapses in Mexico’s democratization have reduced its ability and promise as a strategic partner. The result has been a stalled agenda held back by a hostile political environment.

Economically, we could all gain tremendously and reap potential huge benefits from more cooperation considering we have such extensive trade and business and societal relations. A realist in Washington would point out the U.S. does not have to cooperate. However, it benefits U.S. firms, workers, and tourists to actively and effectively lead a cooperation agenda.

It’s a two-way street of course, and the Mexican government is not a perfect partner. Powerful interests on both sides of the border make out well from the status quo.

BKH: Some European leaders, including United Kingdom Prime Minister David Cameron and German Chancellor Angela Merkel, have declared multi-culturalism has flailed. What are your thoughts to relation to U.S. policies and political economy?
ML: The European states face similar challenges to the U.S. of balancing a dynamic economy open to foreign labor, capital and entrepreneurship with the need to retain national traditions and identities. The pronouncements by Cameron and Merkel are in line with Nicolas Sarkozy’s campaign to ban the use of the traditional Islamic veil in France playing to key conservative segments of their domestic society.

The European countries differ from the U.S., in two aspects driving these negative statements, which I would not expect even the most conservative U.S. President to repeat. First, the European countries lack a traditional ideology and custom of immigrant absorption. Second, they have much more extensive social welfare programs. This provides more generous benefits for Europe’s immigrants and more expansive doctrines of equality, which rankle their conservatives.

This suggests a relative advantage for the U.S. in our shared creed of responsibility, self-help and opportunity—a creed Americans adopt and practice on a widespread basis. It also permeates our policies and institutions. Europe does not have that creed, and its policies have moved further to the left of its cultural conservatives.

BKH: From your travels and research, which countries are the U.S.’ best neighbors and honest competitors?
ML: Surveys reflect Americans’ wisdom of this, and I mostly agree. The United Kingdom, Canada, and Israel are in the first tier. Then there is France, Germany, Japan and the remaining NATO allies in Europe. Mexico is a bit below.

The Caribbean needs us, and the Cuban people are warmly favorable. Brazil is a potential strategic partner we could reach out to and have more interaction. Chile, Colombia, South Korea, and Poland merit mention as do Australia, Singapore and most of the English-speaking world. Throughout Africa, much of the world, there is U.S. goodwill.

A big factor affecting favorability is the rule of law, including enforcement capacity, which varies.

BKH: Is it realistic to have U.S. free trade agreements without exportation of American jobs to developing countries?
ML: Experience shows reducing trade barriers generates more economic efficiency and simultaneously dislocates employment. According to the Economic Policy Institute, the proposed free trade agreements with Colombia and Korea will spur plant closings in U.S. auto manufacturing and other industries.

U.S. trade diplomacy has been generally less effective at ensuring that implementation brings gains in U.S. exports equal to the rise in imports. U.S. consumers benefit from cheaper foreign goods. Well-represented U.S. firms such as Boeing and Cargill and their workers see benefits from exports, but there have been net employment losses.

With the long-run growth opportunities abroad, the US should maintain a free trade strategy involving both bilateral and multilateral avenues. The U.S. must also scrutinize deals more carefully to ensure they generate investment and avoid deindustrialization in the U.S.

One idea is a more proactive effort to bring U.S. and foreign firms into a pre-negotiation phase in order to build a shared expectation among industry and government elites regarding U.S. strategy for opportunity development in the U.S. This would not be a binding or legalistic approach, but one to build a positive long-term vision and determine policy reform areas.

BKH: What U.S. economy impact is there to federal government investing in other countries while hampering U.S. business in those same industries like investing in Brazilian oil exploration while refusing U.S. oil companies new drilling permits?
ML: To my knowledge, Brazil prohibits or strictly regulates foreign investment in its energy sector. Their national champion PetroBras, the dominant player, has a savvy strategy of strategic partnership with foreign state-owned and private multinational enterprises. By contrast, the U.S. has failed to formulate a national energy strategy.

My understanding is the Obama Administration had responded to oil industry demands to open up drilling selectively. It is chastised by the environmental left for such flexibility, while industry complains he has not been flexible enough.

Have we forgotten the BP spill so quickly? We will need to rely on fossil fuels for the foreseeable future, but a smart strategy would be to seek to reduce our dependence on imported oil. There is an associated vulnerability to the political fragility of the Saudi kingdom and the voracious Asian demand for fuel.

A gasoline tax would increase efficiency far more than CAFÉ fuel economy standards and generate revenue for financing a more efficient grid and other transport infrastructure. Would you rather pay Uncle Sam or pay the Saudis and then pay again to police the Persian Gulf?

Imagine having a meter at the pump allowing every American to see how much one’s driving behavior fuels Middle Eastern oil kingdoms, along with other despots like Chavez and Qaddafi.

See also:
Part 1, Who is Professor Lieber?
Part 3, U.S. Foreign Policy
Part 4, Competiting Internal Identity
Part 5, Success Realities

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