Under Free Trade in the world economic system certain jobs flow to the country that is the lowest cost producer. Although many jobs are not transportable enough jobs can be transported to seriously impact the financial health of a nation. This loss of jobs to other countries has caused a rise of populism in the United States as well as other countries around the world.
The following concept paper provides a greater understanding about the creation of trade deficits and related jobs transfers, a description of the problems that arise with the age-old method of using tariffs as a solution, and a new way to eliminate trade deficits and bring jobs back to Untied States.
Non Transportable and Transportable Jobs
In the United States and other countries vast numbers of jobs are simply not transportable, such as construction workers, hairdressers, nurses, policeman, oil rig drillers, and the list goes on and on. The primary reason in these cases is that there must be a physical presence for work to be accomplished.
However, jobs in manufacturing which do not require a physical presence are the most vulnerable for transporting to other countries who have the competitive advantage (i.e. low cost labor, natural resources, etc.). Although there may be other industries subject to transporting of jobs from the United States such as technical support, manufacturing is by far the hardest hit.
Tariffs – Problems with the Age Old Solution
The age-old solution is to place tariffs on imported goods so as to make them more expensive to buyers in the United States and thereby provide a way that an American manufacturer can compete with foreign competition. One problem is that foreign governments rarely stand by and do nothing. They usually quickly retaliate with tariffs on our exported goods to them. A trade war erupts.
American importing companies now pay higher prices for goods and pass on the price increase to its customers. An example might be a pair of jeans that used to cost $40 now costs $60. Companies in the United States can now compete against foreign manufactures and can hire American workers at higher wage rates. What is really happing is that American consumers subsidize American manufactures because they are high-cost producers. That is isn’t the whole story though.
Exporting companies now have to lay off workers because other countries cannot buy their goods because the price is too high due to tariffs levied on American goods by foreign governments (remember trade war).
The net effect is that with tariffs wars, the lowest-cost producers are penalized and high cost producers subsidized by consumers. New jobs are created at the high-cost producers and jobs are lost by low cost producers in America. It begins to become a wash as far as jobs go except that consumers in both the United States and its trading partners pay higher prices because low-cost producers no longer produce goods, only high-cost inefficient producers produce goods.
High-cost producers, along with their new jobs, win, low-cost producers lose jobs, and consumers in both the United States and its trading partners pay higher prices. It is a losing game for many and a winning game for a few. Not a pretty picture. That is why tariff wars almost always fail.
Certain factors significantly affect the competitiveness of companies operating in free trading markets between countries. Free or almost-free market trading conditions are the norm because tariff wars rarely last. Under free market conditions, whenever there isn’t the constraint of a physical presence requirement, production and jobs will flow to the country that has the lowest cost and is the most efficient producer. The following are factors that affect their competitiveness.
Factors that can make Foreign Trading Partners Competitive to the United States
Trade balance deficits occur when other countries with low costs and with their ability to produce efficiently out-weigh any of the United States advantages. Some of them are:
Low-Cost Labor – In many cases they have low cost labor. Whenever a manufacturer requires a large component of labor these countries have a competitive advantage to manufactures in the United States, and production jobs flow to them.
Natural Resources – Another reasons some countries have competitive advantages is that they have natural resources. For example, a country may have a precious mineral that the US does not have or they may be able to produce bananas which need a tropical environment. Job will flow to those countries which have a better natural resource than the US does.
Government Manipulation –Yet another reason a foreign company can be competitive is government intervention. Governments can manipulate their currency so as to make it weak. This makes their goods even cheaper in the United States, not due to efficiency but due to currency manipulation. The United States has a difficult time doing the same since it is a safe haven for investment and is essentially the world’s currency. Another manipulation is by government subsidy. This allows foreign competitors to dump goods into the United States markets at extremely competitive prices.
Factors than can offset some or All of Our Foreign Trading Partners’ Competitiveness
There are some significant factors that offset our trading partner’s competitive advantages. They include:
Transportation – The cost of transportation can be one of those offsets. The further away the greater the cost of transportation as a factor. For example the transportation costs from China considerably greater than from Canada or Mexico.
Natural Resources – The United States, for example has significant oil and gas which can offset another fossil fuel producing nation’s advantage. Abundant natural resources can always be a competitive advantage offset.
Market Intelligence/Close to the Market – Foreign competitors have a more difficult time understanding shifts in the market in the United State. Sometimes they produce the wrong thing in the wrong amounts and at the wrong time due to poor visibility to the United States markets.
Customize/Short Production runs/Quick Changes to the Market – Foreign competitors usually do better with long production runs of the same product. They are rarely nimble. American manufactures who are close to the market can operate with short production runs and quick changes. They can compete well on customized goods due to great market understanding.
Automation/Technology can replace Labor – Automation can be a powerful force to make American manufacturers competitive against foreign manufacturers. The number of jobs created by automation in the United States because it is now the lowest cost producer is less than the jobs lost by a foreign manufacturer. The new jobs created in the United States would be for higher skill sets than the lower skilled jobs lost by foreign manufacturers due to the technology requirements created by automation.
Subsidy – The United States government can subsidize certain industries not only to gain competitive advantage but to also pursue certain national goals.
Weak Dollar – A weak dollar against foreign currencies will make American manufactures more competitive. Unfortunately this is difficult to do since the US dollar is the safe haven and currency of the world.
A New Approach to Eliminating Trade Deficits and New US Job Creation
One might first look at the top 10 types of imports to the United States to prioritize what actions might be taken. The following of the 10 top United States Imports for 2015.
As you can see from the table above, the top 10 imported products represent 67.5% of our imports. If one were to set a priority to deal with United States Trade Deficit, one would focus on these types of products. Each of the above products have been assigned a letter A, B, or C for convenience in the explanation of the new approach to eliminating trade deficits and create new jobs in the United States that follows.
Type A Imported Products
Type A imported products for the most part have low labor cost and a larger labor force as a larger component of the foreign competitor’s cost structure. One way to be competitive with these foreign manufactures is to use automation to replace some of the labor cost. When jobs move back to the US there won’t be as many jobs coming back as were lost by the foreign competitor but there still will be quite a number. The jobs created will have higher skill levels thus providing more high quality jobs.
In addition, US companies could develop marketing plans that provide consumers with far greater choice through varying degrees of customization and speed from production to consumer which requires fast reaction of plant processes. US manufacturers utilizing these processes could bring jobs back to the United States.
For type A products the United States government could ask industry to make proposals as to how they could become competitive with foreign manufacturers. It is believed that automation and market development plans would be the predominate methods proposed. However, industry could propose other creative ideas. The purpose of these proposals is to obtain United States grant money to fund the research and implementation thereof.
Industry is encouraged to collaborate with each other and with universities in making their proposals. Proposals might be classified as 1) Research & Exploration, 2) Planning, and 3) Implementation. The dollar award size would become larger as the level of accepted proposals progress.
The United States government would set up a proposal evaluation system. Proposals would be evaluated and awarded on a cost/benefit basis to winning companies.
In the short run funding could come from a combination of new taxes and/or borrowing. Since the program will over time greatly improve the economy, increased tax due to growth will easily pay for it. This program could carry a name like “Jobs for America”.
Type B Imported Products
Type B imported products are automobiles and oil. Here a different strategy might be employed to make American companies more competitive.
A significant rebate for the purchase of electric/part electric cars made only in the United States could be implemented. The effect would be to make electric/part electric cars far more competitive against foreign auto manufacturers. Those electric type cars would then be made mostly in the United States.
Not only would electric/part electric cars made in the United States be more competitive, but they would also be more competitive to fossil fuel cars no matter where they are made. The effect is many more electric/part electric cars would be made than otherwise would be.
Another advantage of the electric/part electric tax rebate is that it has a positive impact of climate change. As the electric/part electric cars increase, CO2 emissions is reduced due to decreased operation of fossil fuel cars. It’s a big win for the environment.
In addition the United States becomes the world leader in the new technology for electric/part electric vehicles.
As more electric/part electric cars hit the road demand for oil diminishes thereby further reducing importation of oil. This reduces the dependence on countries that are not friendly to the United States.
As an incentive to the oil companies’ one might pay the oil company a subsidy for using only United States oil. The subsidy could be paid for by an increase in the federal fuel tax. However, the increase in tax on fuel paid by consumers could be offset by lower prices by the oil companies due to their subsidy. The effect is the use of foreign oil declines while oil companies now use more US oil to get the subsidy which can be passed on as lower prices offset to the consumer by federal fuel taxes.
In summary the tax rebate program for electric/part electric cars has many advantages. It brings auto manufacturing jobs back to the United States, reduces the trade deficit for both auto’s and oil, ha a positive impact on the environment and climate change due to lower CO2 emissions, and makes the United States the leader in new technology auto production.
Type C Imported Products
The only type C imported product on the list is gems and precious metals. In this category our trading partners have a clear competitive advantage since it depends on natural resources in their country. There is no proposal to do any action to increase competitiveness for Type C imported products.
A Revised Trading Schedule
If one would assume that Type A and Type B programs were fully implemented at a 50% success rate the following schedule for Imports and Exports would look like this.
Notice that the Trade Deficit declined by 96.7%. It’s now about a wash between imports and exports. That is a dramatic shift in the United States trade balance. We do not have to be 100% successful, just make a shift in the balance to provide America a significant competitive position in world trade.
Trade deficits and loss of jobs thereof can be a difficult subject to grasp. However, the following bullet points hope to make it simpler.
- United States non-transferable production and jobs are safe – transferable ones are vulnerable.
- Tariff wars don’t work in the long run – consumers everywhere pay higher prices.
- Competitive advantages of foreign countries are low cost labor, natural resources, & government intervention.
- Off-setting competitive advantages for American companies are lower transportation costs, natural resources, market intelligence, customization, speed, and government Intervention.
- A new approach for the United States government is to support programs that promote automation to offset lower labor cost of trading partners and by market driven programs. These programs provide competitive advantages for American made products thereby Increasing American production and jobs. America also becomes the technology leader in automation and marketing.
- A new approach for the United States government is to instigate an electric/part electric rebate program for autos made only in America. This would create production and jobs in the United States for electric/part electric cars. It would also create a positive impact on climate change and make America the technology leader in electric vehicles.
- A new approach for the United States government is to subsidize the oil industry for the use of United States produced oil paid for by federal fuel tax. The increase in fuel prices due to the tax would be offset by the lower price from oil companies afforded by the subsidy. The Effect is to use US oil and not foreign oil.
- The new approach United States government programs would be paid for over time by new taxes paid by the growth in the economy.
- These new approaches create new American production and jobs, reduced trade deficits, positive impact on climate change, and technology leadership in the world.