One of the biggest challenges facing the American economy is that we lack a domestic manufacturing base. Simply put we do not produce anything anymore. We buy tons of foreign goods and then wonder why we are lacking jobs. We import most of our goods which has resulted in a huge trade deficit and industrial job losses. Our economy has transitioned from an agricultural society to an industrial society to a service economy. The problem with being a service economy is that services are the first thing that consumers eliminate during difficult times. We need to become more of a mixed economy that combines industrial production with service.
In 2006 Warren Buffett said, “The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion more of us than we own of them.” The US trade deficit severely hinders US economic growth. As Buffett puts it, “Our country’s net worth is now being transferred abroad at an alarming rate.”
Most of our electronics are developed by foreign companies. Philips (PHG), Toshiba (TOSBF.PK), Sony (SNE), Hitachi (HIT), Samsung (SSNKF.PK) and Sharp (SHCAY.PK) dominate the US market in terms of television sales. Who owns a Zenith anymore? Are Magnavox and RCA American companies? No, they were sold off to foreign companies that use the American brand names.
Popular electronics items like the iPod (AAPL) are mostly manufactured overseas and then sold in the US. We are also losing more of the US automobile market. Toyota (TM) just surpassed General Motors GM) to become number 1 in global sales. Even clothing and apparel sales in the US are dominated by foreign countries. Over 90 percent of clothing and shoes sold in the United States are made in foreign countries.
We need a multifaceted approach to address these problems:
(1) We need to increase the tariffs on foreign goods so that they are more expensive than domestic goods. Increased tariffs would only apply to countries in which we have a massive trade imbalance such as China. According to the Economic Policy Institute, the US has lost more than 2 million jobs since China joined the World Trade Organization. China illegally subsidizes a large number of their exports to the US so that their products will be cheaper than US products. The US has the largest trade imbalance with China. China exports 5 times as many US goods as it imports.
(2) We need to demand the same level of quality in all foreign goods as American goods or reduce the standards for American companies. China consistently imports unsafe items to America such as toys, pet food, toothpaste and other consumer products. US companies suffer from much heavier product regulations than Chinese manufacturers do. Either make all regulations uniform or allow US companies the same lax regulations that foreign countries enjoy.
(3) We need foreign countries to stop manipulating their currencies. China is the best example of this. China has historically devalued its currency so that its exports are cheaper than other countries. Even during this global economic crisis, China continues to devalue its currency at a time when America needs the yuan to strengthen. Consumers gain from lower prices in the short run but the US economy and US companies suffer the most in the long run. People don’t understand that by buying cheaper foreign goods today, you eliminate US jobs and decrease wages over time.
Other factors persist such as concessions from industrial unions. Employers need to pay a fair and liveable wage to unions but do need to get union workers to agree to some cost cutting measures.
Without a return to its manufacturing base the United States will struggle to attain any viable long term economic growth.
Photo by asecondhandconjecture