Having spent an entire career on the frontlines of U.S. government trade policy, and currently as a member of Secretary of Commerce Wilbur Ross’ Trade Finance Advisory Council, I can let Americans in on an open secret: Washington’s approach to international trade is outdated, broken and disconnected from the real effects it has inflicted on the U.S. Whether or not President Trump can reverse the disastrous effects of decades of wrong-headed group think remains to be seen.
(For a shorter version of the article published on the Daily Caller, please click here. For the full version click on the "Read More" button below.)
At the end of WW II the U.S. accounted for a disproportionate amount of the world’s GDP, the sum total of goods and services produced annually. To be sure our unparalleled lead over other economic competitors derived largely from the devastation of European and Asian infrastructure and manufacturing during the war. However, even as the world rebuilt and got back to normal the U.S. accounted for as much as 40% of the global economy as late as 1960. It was during the post World War II period much of the U.S. government’s approach to international trade was formulated and put into place based on this dominance. Today U.S. GDP accounts for a little over 20% of global output and the consensus of economists is we are likely to lose our small lead to China during this decade.
Unfortunately, Washington policy makers have not adjusted to this new reality and apply essentially the same now questionable tactics and approach that was used for the first few decades after World War II. Free trade has become their unassailable mantra even while they have presided over the collapse of U.S. economic might relative to our competitors. Of course, during this same period Washington, DC was unaffected by their decisions and even thrived, becoming indisputably the most affluent city in America even while much of the country’s industrial base deteriorated to something akin to the war torn landscapes of our enemies. If Americans judged these policy makers by the same standards of any normal competition their results would be viewed as abject failures. Now when Donald Trump threatens to try something different these same omniscient policy makers predict disastrous results.
The U.S. has demonstrably been losing on trade issues both on offense and on defense for years. To most Americans this is obvious, and undoubtedly contributed to Trump’s election. In all but a handful of sectors primarily associated with Internet (whether it be autos, information technology, aviation, semiconductors, electronics, etc., etc.) American business has lost market share to overseas competition and American workers are worse off in relative terms. Everybody loves to point out the obvious foibles of Detroit and the dramatic decline in the auto industry, but are American business executives incompetent in almost every other business sector that competes on the international playing field?
On defense, our policy makers have never come to understand that free trade is primarily the mirage of 19th century British economic thought that has left that once proud manufacturing country with a New York City sized financial services hub and a few memorable castles in a verdant green countryside. Japan, followed by S. Korea, Taiwan and now China have all followed a successful mercantilist approach whereby their governments protect and nurture their industries while aggressively flooding less protected overseas markets with their goods all the while paying lip service to the dogma of American politicians extoling the virtues of free trade. Even Continental Europeans never bought into the fallacy of free trade to the degree their Anglo Saxon cousins did. (Why even today does a Ford Mustang cost as much as a high end Porsche in Germany?)
Since large U.S. companies wanted and needed access to growing economies outside of their borders in the late 20th century they admirably learned to “think globally by acting locally.” Where trade barriers could be dismantled to the levels that made U.S. sourced goods and services competitive they were more than happy to encourage American policy makers in their Don Quixote quest. Almost universally other countries have higher barriers to entry and whatever trade agreements our savvy attorneys struck were always asymmetrical: the other country or countries reduced their barriers a little in exchange for essentially complete access to the U.S. marketplace. Since in America the consumer is king this had the advantage of providing citizens with the best products at the cheapest price. Of course, this also furthered America’s geopolitical goals to tie countries closer to us. Besides the U.S. economy was so vast, what was a little unfair competition?
U.S. multinationals had to adapt and the most successful ones became local players behind the lowered, but still prohibitive trade barriers. Big business was fine with this compromise because they could make their profit margins, maybe even improve them, and then repatriate the profits to their benefit and even that of the U.S. economy. (Unfortunately, as time went on there was less and less need or interest to repatriate, which is part of the reason there are hundreds of billions of dollars of U.S. multinational funds parked overseas.) American policy makers proudly showed off more access to foreign competitors, particularly in the politically powerful agriculture sector, even though much of the benefit went to large corporations instead of American workers or the communities that previously produced their goods and services. Economists authoritatively assured us that in the long run the mercantile practices of Asian countries would be replaced by open markets similar to ours and everything would balance. Of course, the Japanese, followed by their Asian neighbors, never really changed their policies they just tinkered on the margins. (Ask any U.S. small manufacturer how successful they are selling products from America to Asia?) Decades latter the trade imbalances are not only getting worse they are reordering the global balance of power. Today there are few major economic powers where the U.S. does not run large multi-billion dollar merchandise trade deficits (goods and services) and in most there are huge overall trade imbalances.
It is important to point out the obvious that what is good for multinational corporations is not necessarily good for America. I worked with IBM in the 1990’s to help it export equipment overseas and finance a joint venture in Brazil to set up production locally to avoid trade barriers. IBM was proud of its American made content which allowed it to use one the U.S. government’s tools for export promotion, the U.S. Export-Import Bank (ExIm Bank). It was jarring a decade later when I again worked with IBM on a transaction in Russia where it wanted to use ExIm Bank financing. When the managers I worked with found out that in order to access this type of financing IBM needed to produce the hardware and software in the States one indignant executive told me that was ridiculous. “Nobody manufactures IT equipment in the U.S. anymore. Why should we be penalized?” When I pointed out that was the rule the IBM man then looked at ways to outsource the hardware elsewhere. In a decade IBM was indicative of the paradigm shift by most U.S. multinational manufacturers.
While pedigreed attorneys unilaterally lowered our defenses to outside invaders, the U.S. government never responded in a serious manner to the unfair subsidized competition and increasingly aggressive overseas players, much of it fueled by U.S. companies and their technologies now based outside America. Remember the biggest source of the U.S. trade imbalance is U.S. multinationals selling goods and services back to the American market or just plain importing product from other overseas companies. (Think Walmart: in the 1990’s it proudly proclaimed Made in America products, but by the millennium 90% of its merchandise came from overseas.) U.S. companies that were still manufacturing here were almost overlooked and left to compete against government protected and often subsidized foreign competitors, or American companies who had already left for cheaper, less regulated markets. Lip services is loudly paid to small to medium sized enterprises in the U.S., the ones that aren’t large enough or sophisticated enough to set up shop overseas, but the government does very little for them except provide cheerleading.
I began my career working in the Department of Commerce’s International Trade Administration in the Trade Adjustment Assistance program, a much smaller multi-million dollar program focused on helping U.S. manufacturers compete than the much larger multi-billion dollar program with the same name housed at the Department of Labor where essentially the government buys off workers that have been put out of a job by imports. Harley Davidson, Lenox and whole host of long gone U.S. manufacturers were our clients and we provided funds to create and implement strategies to turn them around and help them survive the onslaught of imports. This kind of industrial policy is frowned upon and the business side of Trade Adjustment Assistance was essentially defunded.
So much for defense, not only did the technocrats make it easier for foreign manufacturers to compete in the U.S. market, they then offered only window dressing in support of American based manufacturing. I moved on to ExIm Bank to playing offense in America’s trade policy. What I found was a narrow mindset and an approach that viewed the agency’s role as only to be used as a last resort. I have watched other the last several decades as the other ExIm Bank like agencies from first Europe and now Asia run circles around us. China has essentially weaponized its ExIm Bank and spreads hundreds of billions of dollars around the world while our agency is essentially shuttered due to political gamesmanship. Indeed, our ExIm Bank is so worried about “squandering” taxpayer money to support U.S. exports its limited risk taking has rendered it almost irrelevant. Even its largest user Boeing has adapted by producing more of its product overseas using foreign government support. With ExIm Bank’s diminished role, most American commercial banks which are highly regulated by the U.S. government, particularly in this area, have essentially fled the marketplace, making it even harder for U.S. exporters of manufactured goods to compete. Boeing, GE, Caterpillar sourcing more and more of their manufactured goods from countries that support them will be fine, but small to medium sized manufacturers have far fewer choices unless they can follow suit. And these are the same ones the government loves to point out are doing most of the hiring!
ExIm Bank and other trade promotion agencies such as the Trade Development Agency (TDA), which provides grants to U.S. companies at an early stage to try and help them win U.S. exports, are so small and so insignificant compared to their European and Asia cousins it is almost laughable. Case in point is the much talked about renewable energy sector where America’s future jobs are supposed to come from. The Obama Administration launched Power Africa with much fanfare to provide renewable energy to Africa from American companies. Essentially no meaningful funds were provided to support this initiative and the results have been understandably underwhelming. Meanwhile other countries, led by China, have spent hundreds of billions of dollars in the region capturing most of the business.
I currently co-manage a German and European Fund established to encourage investment in geothermal power in Latin America. The fund was capitalized with €55 million and another €100 million currently being finalized. The U.S. is the largest installed base of this reliable base load renewable power and has been a leader in geothermal technology. Yet U.S. government trade support of this industry is essentially nonexistent. While our German government partners are aggressive, professional and show a can do attitude -- the kind America was traditionally know for -- their U.S. counter-parts essentially have no appetite or aptitude to do anything more than hone to their traditional tattered programs that haven’t been updated in years. We are playing small ball in trade promotion while everyone else from the Asians to the Europeans is eating our lunch.
America has reached an inflection point. It no longer commands the economic clout it once did and yet Washington, DC continues to live in its own little bubble using the same formulas from the previous millennium. Now when industries like aluminum and steel are on their knees because of unfair competition we are more concerned that Harley Davidson (ironically the beneficiary of tariffs decades ago) or Kentucky bourbon will be hurt. While a trade war may not be the answer, continuing our almost religious adherence to free trade looks a lot like the emperor having no cloths. Offensively the U.S. government has to do more to help American manufacturers compete overseas if Donald Trump wants to be successful at rebuilding our industrial base. With massive trade deficits and trillions of dollars of wealth transferred to our competitors during the past half century, often with the “help” from American trade policies, we are running out of time to implement both a better offense and defense if we want to avoid following Britain into becoming a niche player in a world dominated by Asia with China as its leader.
Alan Beard is Managing Director of Interlink Capital Strategies a Washington, DC based financial advisory firm and fund manger focused on exporting and foreign direct investment in emerging markets. A duel British-U.S. citizen, he has written several books and articles on international finance, been an adjunct professor at Georgetown University and advised various government agencies on finance.