In this year’s State of the Union address, President Obama made a bold statement about how to incentivize job creation in the United States: “It is time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America.”
That statement has been bothering me ever since, for one fundamental reason…that those two statements are not necessarily related or conflicting. Let’s parse!
The two statements are “we shouldn’t reward businesses for shipping jobs overseas” and “we should reward companies that create jobs.” Great lines for a speech, but how do they actually reflect the ways in which businesses make decisions and ensure job creation? And, equally important, what are the possible negative unintended consequences?
Let’s start with understanding how well trade statistics describe the global economy (believe me, this will come in handy in a minute). In agriculture and resources, trade statistic are pretty accurate; something grown or dug up in one country is shipped to another. In services, not very well, but mainly because counting methods remain primitive and may miss a lot of trade; no data at all exists, for example, to explain how much services travel via Internet. (As Sam Kaplan of the Trade Development Alliance likes to say, “trade statistics are where baseball statistics were 15 years ago.”)
But it seems to me that the most questionable data of all is the data that we use most in attempting to quantify trade flows: manufacturing data. Complex products – cars, shirts, telephones – contain metals, components, semiconductor chips, fabrics and other parts from all over the world. According to the World Trade Organization:
Companies divide their operations across the world, from the design of the product and manufacturing of components to assembly and marketing, creating international production chains. More and more products are “Made in the World” rather than “Made in the UK” or “Made in France”. The statistical bias created by attributing the full commercial value to the last country of origin can pervert the political debate on the origin of the imbalances and lead to misguided, and hence counter-productive, decisions. (emphasis added)
The example that you hear the most these days is the iPhone, which has been a hot topic on the State of Trade blog for the policy reasons that we’ll get to in a minute. Standard Customs service counts report the iPhone as $1.9 billion in Chinese exports to the United States. A “value-added” account reduces the Chinese input to $73 million worth of factory work, plus $684 million in Japanese gadgets, $251 million in Korean content, $341 million from Germany, and $582 million from other countries.
“So what?,” you might be asking. Well, let’s get back to the question at hand: “It is time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America,” say the President. What bothers me is the basic question of “why do we care where the jobs come from?” That is, job creation can come from three types of companies – 1) companies that don’t have a global supply chain and are successful, 2) companies that “bring jobs back from overseas” and 3) companies that create jobs in the United States BECAUSE of their global supply chain.
All three kinds of job creation have equal value and, in fact, the company leveraging a global supply chain might actually be able to create more sustainable jobs than companies that “bring back jobs” just to be nice. If REI, for example, was producing all of their high performance outdoor apparel in Washington, their prices wouldn’t be competitive and they would not be able to create the kinds of jobs that fit our state’s workforce – the designers, marketers, sales people and logistics folks that make good living wages. They might very well be heralded in the short term for “insourcing”, but we’d probably all go to Amazon.com and buy our products for cheaper. (Not that there’s anything wrong with shopping on Amazon.com!)
My point is that I just don’t like the false dichotomy of “you’re either creating jobs in the United States OR you’re creating jobs overseas.” The former often happen because of the latter. And this ties back to my trade data point from earlier, which Thomas Friedman wrote about a few weeks ago in his column entitled “Made in the World.” He points out that:
…C.E.O.’s rarely talk about “outsourcing” these days. Their world is now so integrated that there is no “out” and no “in” anymore. In their businesses, every product and many services now are imagined, designed, marketed and built through global supply chains that seek to access the best quality talent at the lowest cost, wherever it exists. They see more and more of their products today as “Made in the World” not “Made in America.”
The point that Friedman goes on to make is one that I have been making repeatedly as well. The way to get companies to utilize more of their domestic supply chain is to invest in the basics of economic competitiveness – workforce, infrastructure and freight mobility – rather than tax expenditures on behalf of specific shifts in company hiring. A great example of this is Caterpillar Inc as described in American Shipper (don’t you all read American Shipper?) in an article entitled “Ports help Georgia land new Caterpillar plant.” And I quote:
Caterpillar said it is shifting production from Japan to Georgia to place the two product lines closer to its primary customers in North America and Europe. Caterpillar officials said they were also attracted to the Athens site, from dozens of potential locations, by the strong regional base of suppliers, a pro-business climate and a good pool of potential employees with manufacturing experience, in addition to the availability of major ports. Georgia’s Quick Start program that customizes workforce training to a company’s needs and the 250-acre site’s proximity to two highways were also factors in Caterpillar’s decision, according to state officials. (emphasis added)
That’s Economic Development 101. And it’s a much better bet. Even Christina Romer, the President’s former chief economic advisor, says that “it might be better to enact policies that will make all American businesses and workers more productive and successful.”
Here’s the last point on this topic. Interestingly enough, when Caterpillar “insourced” those jobs to Georgia, it wasn’t a zero-sum game, but rather a more efficient distribution of company assets:
“The small tractors and excavators are currently made at Caterpillar’s facility in Sagami, Japan. Once the transition to the new plant in Athens is complete, the Sagami plant will serve as a high-tech component facility, Caterpillar said.”
Creating new jobs here while continuing to invest in overseas employment; that’s the way of the global economy. Telling companies that it’s bad to create overseas jobs ignores the vital competitive nature of today’s global supply chains…which help create jobs in the United States. So, here’s my revision of the President’s statement: “It is time to start rewarding companies that create jobs right here in America, regardless of how they structure their supply chains to do so.”