Lest Americans doubt that the playing field for international trade is fair they need look no further than our allies – the ones politicians say Trump’s new tariffs shouldn’t apply to. In a moment reminiscent of when Dorothy looked behind the curtain in the Wizard of Oz and found he was a sham, the CEO of the world’s largest automobile company Volkswagen recently uncomfortably questioned the wide disparity between import duties imposed on U.S. cars (10 percent) headed to the Europe versus what the U.S. imposes on German cars (2.5 percent). And U.S. made pickup trucks and work vans face 25 percent tariffs! Even while this unexpectedly candid German executive was stating the obvious, the European Union continued rattling its saber and threatened retaliatory duties on U.S. goods to punish America for imposing “unfair” tariffs on steel and aluminum.
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The United States has been losing on international trade issues to our competitors 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 either Defense or the Internet (whether it be autos, information technology, aviation, semiconductors, electronics, etc., etc., etc.) American business, specifically manufacturing, has systematically lost market share to overseas competition and American workers are worse off in relative terms. Analysts frequently point to the obvious failures of Detroit and the dramatic decline in the domestic auto industry, but are American business executives incompetent in almost every other business sector that competes on the international playing field?
Of course, tariffs and duties are only part of the problem. Non-tariff barriers such as quotas, local content requirements, labeling, inspections, regulatory issues are more difficult to detect and stop than the obvious numerical barriers imposed using taxes and duties but are nonetheless significant barriers to companies wishing to base their operations in America and sell overseas. For example, when countries impose data restrictions (most have) that require information to be stored outside the U.S. that impacts the decisions of where those multibillion dollar data centers are built. Or when companies are forced into joint ventures in order to enter a market where their technologies are transferred and then stolen as has been well documented in China. Because of their insidious nature, non-tariff barriers have become a more important part of recent trade friction, and here the U.S. certainly has its own critics who rightly accuse us of protecting our market through their subtle application.
To their credit, U.S. multinationals have adapted well to ubiquitous trade barriers by moving significant parts of their operations overseas to better service those markets and act locally. Many of these companies now employ far more people outside America than in their “home” country. This is particularly true in high-tech industries. Therefore, big business’ interest in reducing barriers for U.S. made goods and services is very limited since they are no longer using an American industrial base. In fact, why would Apple, which produces most of its product overseas, want to restrict access to the lucrative U.S. marketplace? Apple like the rest of its brothers prefer the government to focus trade policy on intellectual property rights, tax issues and preferential treatment given to indigenous competitors overseas. Only a handful of large American manufacturers service their foreign customers from our shores with highly specialized equipment (e.g., Boeing and General Electric).
It is important to point out 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 the use of a U.S. government tool 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 manager 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 we have unilaterally lowered our defenses to the outside, the U.S. government has never responded in a serious and systematic 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. When countervailing duties are imposed (e.g., steel and aluminum) it is usually after years of vacillation and only then are they applied temporarily because we are so concerned we are breaking with the orthodoxy of free trade. Donald Trump is unique in actually questioning this conventional wisdom. In his statements he has made it quite clear that trade should truly be reciprocal and fair (i.e., equal access). Remember the biggest source of the U.S. trade imbalance is U.S. multinationals buying and/or selling goods and services back to the American market. (Think Walmart: in the 1990’s it proudly proclaimed Made in America products in its advertising, but by the millennium 90% of its merchandise came from overseas.) U.S. companies that are still manufacturing here have been almost overlooked and left to compete against government protected and often subsidized foreign competitors, or American companies who have already left for cheaper, less regulated markets. Until now lip service was loudly paid to these small- to medium-sized enterprises in the United States, the ones that aren’t large enough or sophisticated enough to set up shop overseas, but the government has done very little for them except provide cheerleading.
Perhaps it is too late to stop the inevitable? There a number of well-regarded academics that extol the virtue of the status quo where cheaper goods flood into the U.S. to the benefit of our consumers leaving us to concentrate on producing higher value added goods and services. (Forget the environmental impact of having manufacturing no longer regulated by the U.S. government instead leaving it up to the more enlightened in China, Mexico, Brazil, India and Bangladesh.) Except increasingly value-added goods and services can be outsourced more cheaply from overseas than America. Engineering, accounting, medical, financial and legal services can all be offshored and more and more they are. Universities? The prestigious ones have already or are in the process of setting up campuses overseas. With free flows of capital and the flattening of the world as described by Thomas Friedman it is difficult to see how America competes with its generally higher living standards unless it adopts many of the rules our competitors are clearly playing by — rules most Washington policy makers ignore or dismiss. For whatever reason, Donald Trump doesn’t appear to think America’s industrial demise is a given. It may be too little too late, but for the first time in decades an American leader is pulling back the curtain to expose the sham of decades of Washington trade mismanagement and the fallacious notion that free trade is how the rest of the world operates, or intends to operate in the future.
Alan Beard is managing director of Interlink Capital Strategies a Washington, D.C.-based financial advisory firm and fund manger focused on exporting and foreign direct investment in emerging markets. A dual 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.