Unfair Playing Field with China
China keeps its products artificially cheap, and forces the relocation of U.S. manufacturing to the Middle Kingdom by maintaining an artificially undervalued currency, imposing high tariffs and outright exclusions on competitive U.S. products.
Billions of dollars of U.S. stimulus money were spent in China, instead of the United States, and President Obama could have excluded those products—either through the initial legislation or by executive order—without violating WTO rules but chose not to do so. Moreover, he has failed to take action regarding U.S. procurement generally, or by broadly forcing China’s hand on its mercantilist practices, as he promised to do when campaigning for the presidency in 2008.
Private equity has an inherent bias toward outsourcing that is neither helpful to the firms it reorganizes nor healthy for the U.S. economy.
Essentially, private equity purchases distressed businesses, and looks for quick profits by slashing wasteful employment—unnecessary jobs that would be lost anyway if the firms failed—and replacing ossified management. However, by seeking large returns in a brief period, private equity emphasizes selling brands and intellectual property (patents) in repackaged firms that are generally loaded up with debt. To boost cash flow and service debt, these firms are more likely to sell off valuable brands and patents, and to strip away and offshore manufacturing that supports domestic R&D and could contribute greatly to the future value of the firm and U.S. competitiveness and employment.
Unnecessary outsourcing is responsible for at least half the $600 billion U.S. trade deficit. Eliminating half of that deficit would boost domestic demand and GDP by about $500 billion and add 5 million jobs.
Export and import-competing industries spend at least four times as much on R&D as the private business sector as a whole. Reducing outsourcing, by increasing R&D, could boost U.S. GDP by one or two percentage points. A U.S. economy growing at 3 or 4 percent a year, instead of its current 2 percent, would have far fewer budget problems at the federal and state levels, and far more resources to address issues like health care, the solvency of social security and finance an adequate national defense and space exploration.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland.