Thursday, November 3, 2011

The US and the EU Provide the Trade Paradigm of the Future

When one thinks of trade the image of an unending stream of ships bringing manufactured goods across the Pacific comes to mind. Martin Walker provides an article in The Wilson Quarterly titled The World Trade Revolution, in which he reminds us that what is obvious is not always correct, and what is the present is not always the future.

Part of the "revolution" Walker refers to derives from the evolution of manufacturing technology and the increased costs of importing goods from Asia. While wages in China rise rapidly and transportation costs and timescales become more significant, manufacturing in the US becomes more competitive. Advanced manufacturing techniques are less dependent on labor costs and put a premium on rapid turnaround between research, design and fabrication activities. As an example Walker discusses general electric’s decision to make major investments in plants in the US.

"Its investments, more than $400 million on top of some $600 million made during the past two years, will go toward building new manufacturing plants for household appliances such as refrigerators, freezers, and washing machines. These are traditionally the kinds of mass-market, low-technology products that can be produced more cheaply in China and imported back into the United States....The advantages of lean manufacturing and advanced design are among the reasons GE gave for its decision, along with innovative wage agreements with its unions."

We have a future where home appliances can be manufactured cost effectively in this country—and with union labor! There has been a tendency to downplay manufacturing as a source of jobs, but we should not forget that the jobs that are created are relatively well paying, and purchasing goods made in this country has the benefit of circulating the money locally rather than shipping it overseas.

Walker characterizes our trade with China as container ships loaded with manufactured goods arriving on our shores and returning to China loaded with wastepaper and scrap metal. He describes this arrangement as both unsustainable and embarrassing. Pressure will build to limit this trade imbalance and inevitably China will have to resort to building factories in the US, similar to Japan’s decision to manufacture cars in the US for the US market.

The tendency is to think of trade in terms of physical goods being transported from one country to another. Walker refers to this as the "old" way of thinking. The "trade" with Europe will consist of the new way of considering economic interaction.

"On the face of it, in terms of raw trade volumes and prices, the Pacific trade appears to dwarf that across the Atlantic. Last year, the United States imported $335 billion in goods from Europe but $599 billion from the top five Asian economies (China, Japan, South Korea, India, and Taiwan). In the same period, the United States exported $235 billion in goods to Europe and $230 billion worth to the five Asian countries. Include Asian countries with smaller economies such as Singapore, Malaysia, Vietnam, Indonesia, and Pakistan, and the Pacific trade was worth almost $1 trillion last year...."

This approach is misleading because it does not take into consideration the depth of economic integration that exists between the US and Europe.

"These days, trade in goods is just one part of a much broader and more sophisticated set of commercial relationships. The Atlantic nations ship fewer goods because they conduct their trade in different ways. The Atlantic trade in services, which includes insurance and financial services, data management, advertising and entertainment, and royalties and license fees, was worth more than $300 billion last year, and the United States enjoyed a surplus of nearly $7 billion from it."

"Trade in services is only a fraction of the overall Atlantic economic relationship. Rather than transport goods to one another in ships, the Atlantic economies instead send investment, executives, product designs, and marketing strategies so that they can manufacture goods in one another’s markets. The transatlantic economy generates $5 trillion in total commercial sales a year and employs up to 15 million workers in mutually "onshored" jobs on both sides of the Atlantic.

"The sales of U.S. affiliates in Europe last year were roughly double those in the Asia-Pacific region. And European affiliates accounted for two-thirds of the $670 billion in total 2008 foreign affiliate production in the United States. Indeed, American-owned affiliate companies sell as much in the United Kingdom alone as they do in all of Asia."

There are obvious political advantages to building plants and hiring workers in each other’s country. The Atlantic trade also has the advantage of being reasonably well balanced. Walker’s point is that the Asian economic interaction will have to proceed in this direction if it is to be sustainable. For that to happen in an orderly fashion, changes will be required in both the US and China. The US will have to rebuild its manufacturing infrastructure so that it is a viable platform for building China’s products, and China has to allow its production costs to more closely follow market conditions.

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