Tuesday, July 21, 2009

Manufacturing policy

The New York Times takes a look at the Obama Administration's efforts to revive the flagging fortunes of the manufacturing sector:
So far, however, Mr. Obama’s administration has not come up with a formal plan to address the rapid decline. Instead, it has pursued ad hoc initiatives — bailing out General Motors and Chrysler, for example, and pushing green energy by supporting the manufacture of items like wind turbines and solar panels.

“We want to make sure that we grow a manufacturing base for renewable energy,” said Matthew Rogers, a senior adviser in the Energy Department, explaining that this is being accomplished in part by “accelerating loan guarantees from zero” in the Bush years.
If renewable energy investments make so much sense one has to wonder why they require government loan guarantees. This is a case of government believing that it has more business acumen than the private sector. Our experience with quasi-government agencies such as Freddie Mac and Fannie Mae makes this a rather dubious proposition.
...Beyond energy, the administration’s approach gradually outlines the elements of a manufacturing policy — what Lawrence H. Summers, director of the National Economic Council, described as “a number of things to support manufacturing.”

The auto bailout, for all its improvisations, served notice that the administration would probably rescue any giant manufacturer it deemed too big (or too iconic) to fail, and would help the suppliers of failing giants transition to other industries.

The Buy America clause in the stimulus package pointedly favors the purchase of American-made goods for infrastructure projects. The Commerce Department is adding $100 million, more than double the current outlay, to a program that helps American manufacturers operate more effectively. And trade agreements negotiated by the Bush administration — agreements that would make the United States more open to imported manufactured goods — have been allowed to languish in Congress.

“The administration’s policy is evolving in the right direction,” said Representative Sander M. Levin, Democrat of Michigan, who is particularly concerned about auto imports. “I think they have essentially shed the political chains that prevented government from having a role in manufacturing. They are working their way toward what makes sense.”
In other words the administration's approach -- given a stamp of approval by Rep. Sander Levin -- consists of "Buy American" legislation that has angered our trading partners and forces the government to pay higher prices for goods, some corporate welfare and -- most egregiously -- the deliberate tabling of free trade agreements.

Now, I'm inclined to attribute this more to sloppy journalism than an actual reflection of White House strategy because it makes so little sense. The two most high profile trade agreements currently languishing in Congress are with Colombia and South Korea.

Under current law 92 percent of Colombian goods already enter the U.S. duty free under the provisions of the Andean Trade Preferences Act. The government has calculated that this agreement has not had a significant negative impact on the U.S. economy:
According to a September 2006 report by the United States International Trade Commission, ATPDEA has had a negligible effect on the US economy and consumers as well as a small positive effect on drug-crop reduction and export-related job creation in the Andean region. A 2006 report by the United States Department of Labor stated that ATPDEA does not appear to have had a negative impact on US employment with the possible exception of some sectors of the cut flower industry.
The proposed free trade deal would make this arrangement permanent in exchange for easing Colombian tariffs on American products -- including manufacturers such as Caterpillar. In other words it's an agreement with little if any downside for the U.S. and plenty of upside. Opposition to it only makes sense as a sop to organized labor -- which is reflexively opposed to free trade deals -- rather than as part of a plan to boost the manufacturing sector.

The U.S.-South Korea deal, meanwhile, would abolish taxes in South Korea on large cars produced in the U.S. -- an obvious win for a struggling U.S. auto industry. This too is best understood as a knee jerk reaction against free trade rather than a sensible part of any plan to support manufacturing in the country.

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