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 Richmans' Trade and Taxes Blog

Outsourcing Production Is Committing National Suicide, Says Andy Grove, Former Intel CEO
Raymond Richman, 7/10/2010

There is growing concern in this country about the outsourcing of manufacturing production and its effect on American jobs. In our book, Trading Away Our Future (Ideal Taxes Assn., 2008),  we blamed foolish U.S. government policies recommended by foolish free trade academics for permitting the trade deficits that have led to our industrial decline and permitted our former enemies Germany and Japan, and our current enemy China to grow their industry dramatically at the expense of the American worker. In the July 5, 2010 issue of Business Week, Andy Grove, a founder of Intel and its former CEO makes the spectacular prediction that the outsourcing of production of technologically advanced products by our product innovators is an act of economic suicide.  He writes,

The great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years. …Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers. … Some 250,000 Foxconn employees in southern China produce Apple’s products. Apple, meanwhile, has about 25,000 employees in the U.S. -- that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies.

American economists viewed this development with benign neglect. Groves cites the following quote by Princeton professor and former member of the Council of Economic Advisers under Clinton and member of the Board of Governors of the Federal Reserve System under Greenspan: “The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became ‘just a commodity,’ their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success.” (Italics mine.)

As Groves points out, start-ups are great but if their product gets produced abroad, they make hardly any contribution to the U.S. economy.   

To make matters worse, research and development needs to be close to where related products are produced. Those countries that specialized in lithium batteries for computers invented and created the lithium batteries now being used in automobiles. No U.S. manufacturer is competitive.  

He writes: "As happened with batteries, abandoning today’s 'commodity' manufacturing can lock you out of tomorrow’s emerging industry.” Without U.S. factories to produce innovative products, “we don’t just lose jobs -- we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate."

He maintains that U.S. businesses must stop outsourcing the production of their products. “If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.” And “If what I’m suggesting sounds protectionist, so be it.”

Unfortunately, he suggests no way to get American businesses to invest in building factories in the U.S. rather than outsource their production.. Foreign governments offer great incentives to American manufacturers who choose to locate factories in their territory. Within five years, nearly all of the managers, superintendents, and foremen will be drawn from the local population. The technology will be learned and applied to related industries. No wonder Japan first, then China, grew by leaps and bounds.

The factories U.S. businesses supposedly own abroad are not U.S. factories. During WWII, German factories in the U.S. became American factories overnight. Indeed, Lenin is reputed to have justified his New Economic Plan in the early 1920s by saying, that the foreign capitalists will produce the rope that we will hang them with. So when, as, and if, China decides to risk war with the U.S. over Taiwan, our multinationals will have made it possible.

We have a way to discourage U.S. start-ups from outsourcing and to encourage our companies producing abroad and exporting to the U.S. to produce their products here. All we have to do is insist on balanced trade with nations with which we are experiencing large chronic trade deficits. The tariff would not apply to goods coming from nations with which trade is in reasonable balance, e.g., Brazil. Those contemplating outsourcing would have to believe that if and when the country they are outsourcing to enjoys a large trade surplus, we would impose a compensating tariff to ensure balanced trade. They would avoid outsourcing to countries that already have large trade surpluses with the U.S, With those expectations, outsourcing will appear much less attractive than it is now with the expectation that we will welcome their imports under the foolish free  trade policy we have been pursuing since WWII.

We have a huge chronic trade deficit with China and smaller ones with many other countries. Under World Trade Organization rules, countries, such as the U.S., experiencing chronic trade deficits  are authorized to impose tariffs and other barriers on goods exported to them by trade surplus countries until trade between them and us is brought into reasonable balance.  

Nobel prize-winner Prof. Paul Krugman, a free trader, believes China exports four times as much as its imports from us because China has not allowed its currency, the yuan, to rise to its true value relative to the dollar. He proposed a 25 percent temporary tariff on all imports from China to force it to allow the yuan to fluctuate freely and stated that we did not need to fear retaliation. We believe that is a correct observation. Some fear that China might retaliate by selling its hoard of U.S. government obligations. And what would it do with the dollars? Convert them into yuan?   

We believe China’s huge trade surplus is the result of mercantilist practices and revaluing the yuan will accomplish little to balance trade. An initial across-the-board tariff on all imports from China would make all Chinese-produced goods more expensive to American importers. It acts a bit like a revaluation of the yuan. The difference is that the U.S. will gain huge revenues as a result of a tariff whereas under a currency revaluation, the rise in prices as a result of the tariff would gain China more revenue per unit exported and the U.S. no revenue gain. U.S. goods under a currency revaluation will be cheaper to the Chinese but would they import more from the U.S.? In our view, that depends on China’s policies with respect to imports. If it does not make dollars available to the public, there will be little or no increase in exports to China. American firms producing or out-sourcing production in China that export to the U.S. will find their profits reduced under the tariff and to a lesser extent under a currency appreciation. Start-ups would be discouraged from outsourcing to countries with which we have large trade deficits. The tariff would serve notice on the Chinese that we will raise the tariff to whatever it takes to get trade into balance.

Comment by Mark Benz, 7/11/2010:

I think that the huge chronic trade deficit is not with China but with Japan and Germany. The entire rest of the world has had a trade deficit with both Japan and Germany since the end of World War Two. The trade deficit with China, though huge is not with Chinese products but with products from other country's companies, including a lot of Japanese and German companies. China doesn't control the exports of foreign companies in their country, the companies do. I find it difficult to see as well why China should be described as a "present enemy" when their companies aren't exporting anything and why Japan and Germany should just be described as "former enemies" when they are still agressing against other countries and have been since the end of World War Two. In fact,  find it hard to find any way in which the German and Japanese governments have not acted aggressively and offensively to the entire rest of the world for their entire histories, whether economically always or militarily, and through the use of infections, genetics and mass extermination and starvation during World War Two and One and often other times by proxy. Every single treaty they have signed and every agreement has been a lie, including the GATT and WTO agreements where both agreed to open their doors to other countries goods, services and capital and never did while using other country's open doors to agress against them.

Response to this comment by Raymond L. Richman, 7/11/2010:
Mark,there is a lot of merit in what you write. I read your comment after doing some editing of a few paragraphs toward the end of my posting that friends said need clarification. It is true that the exports from China are principally from companies "owned" by German, Japanese, American, and others. But I believe that all the factories nominally owned by foreigners are Chinese because China can expropriate them tomorrow.  More important nearly all of the foreign enterprises have Chinese partners, Chinese managers and supervisors, Chinese foremen, and increasingly R&D departments staffed by Chinese. Our proposed tariffs will apply to Germany and Japan and a number of other countries.