Why would America’s Blue-Chip firms oppose “Buy American”?

By Mitch Gurney, March 2009

“Institutions have a way of evolving over time – after a few years they no longer resemble the originals. Early in the twenty-first century the United States is no more like the America of 1776 than the Vatican under the Borgia popes was like Christianity at the time of the Last Supper, or Microsoft in 2005 is like the company Bill Gates started in his garage.” (Bill Bonner and Addison Wiggin, Empire of Debt)  

As the global economy suffers from a deepening recession the drumbeats for protectionism grow louder in the U.S. and abroad. But what do the advocates for protectionism mean in relation to the dynamics of a fully integrated 21^st century globalized economy?

I realize the drumbeats for protectionism is about protecting jobs and I’ll return to this shortly. But I raise the question for several reasons, the explanation of which is best conveyed by contrasting international trade today versus that of the 17^th century where protectionism has its roots.

The traditional interpretation of protectionism as defined by Webster is; “an advocate of government economic protection for domestic producers through restrictions on foreign competitors.” Protection is defined as “the freeing of the producers of a country from foreign competition in their home market by restrictions (as high duties) on foreign competitive goods. Wikipedia explains protectionism as “…the economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies” Similar explanations are also available at Investopedia.

International trade is explained as “…the exchange of goods and services between countries.”

These interpretations largely reflect 17^th century international trade relevant at the time when a nations producers where domestically based and more proprietary in nature. Nations primarily traded for goods and services they either could not produce themselves or not as efficiently as someone else. Traditionally a nation’s collective domestic producers (DPs) were their source for attaining stature and wealth in relation to other nations. Gross Domestic Product (GDP) is the accumulative total of all that a nation’s DPs produce. The nation’s DPs are their family jewels so to speak and protectionism came out of a desire to guard these treasures. Traditionally nations were more independent and their DPs expanded, invested, and were the source of jobs within their own borders.  

The key distinction to make is that our traditional understandings about protectionism are actions undertaken by a country to protect its domestic producers from foreign competition within their home market. The debates waged over the merits for protectionism remain constructed along these traditional interpretations but as we will see a dramatic structural shift has occurred in global commerce rendering, in my view, traditional protectionism obsolete.

 “The first protectionist movement in the U.S. was launched in 1820, headed by the Pennsylvania iron industry…in grave danger from …foreign competitors.” These measures were undertaken as they were deemed a necessary defense from foreign competition and perhaps they had merit considering how international trade was generally conducted at the time.

More recently protectionist provisions have been “Buy American” written into the Obama stimulus package, the “American Recovery and Reinvestment Act 2009.” These provisions “…mostly bar foreign steel and iron from the infrastructure projects laid out in the economic package, requiring with few exceptions, that all stimulus funds use only American-made equipment and goods.” Obviously the purpose for these provisions is to create jobs in the U.S.

But the provisions have met strong resistance from “U.S industrial giants including Caterpillar, General Electric and the domestic aerospace industry as well as the Chamber of Commerce.” Why would U.S. companies and the Chamber of Commerce oppose “Buy American” legislation? “Opponents, including some of the biggest blue-chip names in American industry, say it amounts to a declaration of war against free trade and might spark trade wars.” For some of us Americans this may not make much sense but the following information could shed some light on the subject lending credence to my suggestion that traditional protectionism is obsolete.

 The dynamics of trade began to change drastically in the late 1970’s when many U.S. companies facing stiff foreign competition began to transfer the manufacturing of their products to other nations in order to survive and recapture lost market share. This was the spawning of today’s multinational companies (MNC) and launched the march toward a globalized economy. As a consequence international commerce today consists of a labyrinth of MNCs with production capabilities and various affiliations with entities located outside their country of origin and these practices have blurred national borders and commerce interest between companies and nations from those of the past.

The transferring of manufacturing occurs through various methods which most of us are familiar with. Although the methodologies may vary the negative affect on U.S jobs are equal. I briefly summaries them here as each play an integral role in contributing to the structural shift that has occurred through globalization.

The most recognized is perhaps outsourcing which refers to a U.S. MNC contracting with another company in another country or within the U.S. to perform task that were done in house, replacing its own labor with that of another. When contracting involves a company in a foreign country these products are exported to the U.S. MNC becoming an import to the U.S when the U.S. MNC orders these products for distribution in our market. Outsourcing provides generous profit potentials for U.S. MNCs.

Another is offshoring which refers to a U.S. MNC substituting foreign workers for U.S workers. Offshoring differs from outsourcing in that the U.S. MNC establishes subsidiaries or affiliates in another country. These affiliates are often owned either entirely or in part by the parent U.S. MNC thus creating integration in partnerships that mostly operate independently of governments. As with outsourcing, offshored products shipped from foreign affiliates to U.S. MNCs are imports when destined for distribution in our market.

During the late 1970’s the manufacturing infrastructure was underdeveloped in many parts of the 3^rd world countries necessitating the need for development in these areas with a focus in Asia and especially China. Once established, outsourcing and offshoring began in earnest in the mid 1980’s continuing to this day.

The third method receives very little publicity and is virtually unregulated by the U.S. government but is known as trade offsets. This is the “transferring of technology and/or production by U.S. MNCs to another country in return for a sale and involves high-paying, high-technology jobs in the export sector, typically the defense sector, potentially impacting national security. Offsets can involve outsourcing, licensing procurement, subcontracting, research and development, foreign investments, countertrade, financing, and co-production. Over [a] 14-year period 1993-2006, U.S. companies reported over 8,500 transactions, valued at $42 billion that involved the transfer of production and technology to 42 countries. A U.S. government report concludes that over 16,000 jobs were lost each year over the 2002-05 periods due to offset transactions in the defense industry.”

Boeing, for example, as part of its “$4.4 billion contract in 2002 with South Korea for 40 F-15s “committed not only to hiring South Korean workers for the current purchase but for future F-15 work as well, that if it sells F-15s to other countries, South Korean workers will build the same parts and do the sub-assembly for those new Boeing customers.” News accounts reported at the time that it would “create more than 30,000 jobs in South Korea, jobs performing work that once was done by St. Louis workers” The agreement also stipulated “Boeing will transfer jobs and skills to South Korea that will enable it to produce its own fighter jet by 2015.” (See Offsets Report)

The framework for these relationships between U.S MNC and their affiliates, subsidiaries, and other associations may vary in structure from how I have described here but the point is that this is where globalization becomes extremely complex and quite a labyrinth of integrated dependency between companies and nations transforming the traditional relationships of the 17^th century.

U.S MNCs make up almost half of the worlds top 100 companies. Forbes reports in 2004 that of the world’s top 100 leading firms, 47 are U.S companies, all of whom are MNC with affiliations around the world.

The following excerpts are from a report “U.S. Multinational Companies Operations,” that illustrate these complex relationships. Although the report details the development and expansion of foreign affiliates by U.S MNCs in 2005-2006, it is important to recognize that foreign multinational companies (F.MNC) have established similar foreign investments and foreign affiliates as well.

Some of the terminology utilized in the report is explained as follows; “foreign affiliate refers to those “foreign business enterprises in which there is U.S. MNC direct investment and where the combined ownership exceeds 50 percent.” U.S. MNC parent refers to a U.S. based multinational company. Value added refers to the foreign affiliates “contribution to the gross domestic product in its country of residence, which is the value of goods and services produced by labor and property located in that country.”(See, pg 11)

 “In 2006, U.S. MNCs acquired or established 786 new foreign affiliates, which had a combined value added of $15.6 billion and a combined employment of 160,700 workers. For affiliates by industry and by area see; Table 11, pg 9. In 2006 these affiliates accounted for 87 percent of the employment of all foreign affiliates of U.S. MNCs, up from 84 percent in 1999.” (See, Table 1, pg 2).

“By industry, manufacturing continued to be among the leading industries for new investments in 2005. New manufacturing affiliates accounted for 30.4 percent of all new affiliates, for 29.0 percent of their value added, and for 58.7 percent of their employment.”(See, pg 10)

“New affiliates in China and Mexico accounted for over half of the employment of new affiliates in low-to-middle-income countries. Roughly half of the production by new affiliates in these countries was directed toward customers in the host country and the other half was directed toward customers in other foreign countries or in the United States; sales to the United States accounted for 29.0 percent of their total sales in 2006. For new affiliates and ongoing affiliate operations combined in these two countries, sales to the United States accounted for 17.2 percent of their total sales.”(See, pg 10)

“In 2006, U.S. MNC exports of goods and services to their majority-owned or minority-owned foreign affiliates and to other foreign affiliates owned by F.MNC was $531.7 billion.” (See, Table 3, pg 5) The U.S Census Bureau, Foreign Trade Division reported total U.S. exports in goods and services in 2006 was $1.4 trillion.

 “Products (imports) manufactured by the U.S MNC foreign affiliates and shipped to the parent company was $678.2 billion in 2006. U.S. MNC and F.MNC companies combined were responsible for 62.4 percent of all U.S. imports, with the U.S. MNC leading the way with $678 billion, 36.4 percent and F MNC owned affiliates pulling in $482.4 billion, 25.6 percent.” (See, Table 3, pg 5).

The $678 billion shipped to U.S. MNC represents the products outsourced to their foreign affiliates and provides a snapshot of the amount of American brands manufactured abroad. This figure may not capture all of the activity as some industry sectors were not reported.

A U.S. MNC would obviously be the first in line customer when placing orders with their affiliates for these products destined for distribution in the U.S market. U.S. retail customers would be the second in line when purchasing, for example, an HP laptop from a retail outlet such as Best Buy. The “U.S Census Bureau, Foreign Trade Division” reported total imports in goods and services to the U.S in 2006 was $2.2 trillion with a U.S trade imbalance of $753 billion. The $678 billion in imports shipped from foreign sources to U.S MNCs is nearly 90 percent of the trade imbalance. If we were to adjust the trade deficit by the U.S. imports from their affiliates and for energy imports from U.S. integrated oil companies with capacity worldwide, the actual U.S. trade imbalance would much less and perhaps no more than 2% of GDP or less.

According to the “U.S Bureau of Economic Analysis” report released February 2009, “the goods and services trade deficit was $677.1 billion in 2008. As a percentage of U.S. gross domestic product the goods and services deficit was 4.7 percent in 2008. The U.S. Trade in Goods and Services historical trend reflects a continuous imbalance going back to 1977.

Typically when speaking about “imports” we generalize by simply referring to them as foreign “imports” without distinguishing foreign proprietary products (i.e. Sony) versus our American brands (i.e. Apple – made in China) manufactured abroad. The general consensus holds that the Chinese for example need Americans to continue to buy “their” products. Although true in form the statement falls short on the details. Even without these import figures visual verification is easy if we look at what we already own plus conduct store surveys and observe where products are made and the name of the company. We are talking about lots of products covering many sectors typically high volume consumable products; electronics, clothing, toys, light bulbs, food, and lots of American companies; Apple, Intel, Cisco, HP, IBM, Microsoft, Weber, Pfizer, Proctor & Gamble, and Hershey, to name but a few. If you have an iPod or iPhone, you own a China made import. American MADE brands in the U.S. marketplace are sparse. It could prove extremely difficult at the consumer level if Americans were to pursue protectionist measures to “Buy only American MADE” products.

Outsourcing and offshoring is not just about displacing jobs, it’s also about transferring manufacturing. It seems we have been in a 30 year long X-Files episode with workers disappearing from the workforce while more and more American branded products are “imported” with most of us hardly even noticing.

A recent report from the Congressional Budget Office (CBO) in December 2008 lightly covers the competitive challenges of foreign manufacturing and consequences of outsourcing without referencing the specific activities of U.S. MNCs transferring manufacturing as a contributing factor on job loses but notes:

“Although the decline in manufacturing employment in recent years is not a departure from long-standing trends—the sector’s share of total employment has been falling steadily for more than half a century—the recession of 2001 hit manufacturing particularly hard. Manufacturing employment had already fallen by 700,000 jobs by the time the 2001 recession started, after reaching a cyclical peak in 1998. Thus, this most recent decline in manufacturing employment is now a decade-long phenomenon.”

A commentary by the Federal Reserve Bank of Cleveland in January 2006, “Are we Engineering Ourselves out of Manufacturing Jobs” focuses on productivity improvements made in manufacturing as a factor for declining manufacturing jobs and as is often typical with studies of this nature generalizes “imports” without making any distinctions between foreign proprietary products versus American brands manufactured abroad but concludes with:

“As recently as 1990, roughly 30 percent of U.S. gross purchases were domestically produced goods…now only 25 percent of U.S. purchases are domestically produced goods. About half of this decline is attributable to the rise of imported goods…”

Even though it may have gone largely unnoticed by most, clearly we operate under a new paradigm in global trade, a shift in the making for over 30 years. For U.S MNCs it is no longer about country first and never will be unless it benefits their bottom line. The globe is their marketplace and consequently they do not perceive the global marketplace and its labor force in terms of borders or along political party lines. Their business models and strategies are based on a global economy and have been for years. U.S. MNC have adapted to the new paradigm, in fact they created the paradigm.

In summary, these observed contrasts between 17^th century and 21^st century are:

In the17th century a nations DPs solely contributed to that nations GDP and net worth. In the 21^st century U.S. MNC not only contribute to the GDP of the U.S. but also to the GDP of foreign nations through the manufacturing of their products by their affiliates. These contributions can be influenced by other financial strategies that some U.S. MNCs employ to reduce their tax liabilities as explained in the “US Multinational Companies Operations Report”:

“Because firms can exercise discretion over where they recognize income resulting from the use of an intangible asset, the geographic allocation of value added can become disconnected from where the intangible asset is produced. A U.S.MNC might, for example, produce a commercial innovation in one country and then locate the ownership rights to that innovation in an affiliate in a lower tax country to reduce the tax liability on the stream of income generated by this innovation. Some analysts believe that strategic considerations compel companies to attribute a disproportionate share of income to host countries in which the tax or regulatory requirements are relatively light.”(See, pgs 10, 11)

In the 17^th century countries traded for products or services they could not produce themselves or as efficiently as others. In the 21^st century these disparities through comparative advantage and absolute advantage by one country’s DPs versus another have nearly disappeared. U.S. MNCs confronting these competitive disadvantages have merely overcome them by outsourcing the production of their products to other areas to capitalize on these advantages.

HP laptops, for example, are no longer manufactured in the U.S. but in China, the production of which contributes to China’s GDP but not to the U.S.’s. It would be more accurate when speaking about “imports” to say, in this example, that all three; China, HP, and their affiliates in China need American consumers to continue to buy “their” products.

In the 17^th century the labor force primarily competed for a finite number of jobs within their own borders. In 21^st century globalization we now compete with a larger labor pool on a global scale. The workforces of higher cost nations compete with those of lower cost nations and U.S. MNCs support labor at all points along this spectrum as they can move around the world for cheaper labor and other lower cost advantages. Today, the reality is if anyone any where on the planet will do your job cheaper than your job is potentially at risk.

The drumbeat for protectionism today is about protecting jobs but I can’t help wondering how much of this is just lip service to pacify an agitated public. But obviously the devastating consequences from outsourcing need to be addressed. In the U.S. from 1979 through 2007 some 20.3 million manufacturing jobs have been lost in the US. While some of this loss can be attributed to normal fallout as a result of typical business cycles and advancements in automation and productivity, research indicates that 38 percent or 7.6 million – which I suspect is a conservative estimate – jobs were lost as a consequence of outsourcing and off-shoring.

Collectively these factors provide some answers to the question posed earlier as to why U.S. MNCs would oppose “Buy American” legislation. In opposing the measures blue-chip companies argued that the measures “could violate trade deals the United States has signed in recent years…but most damaging, critics say, would be the “protectionist message” attached to imposing such barriers on foreign companies. It is important to bear in mind these agreements are made between governments and done so through the lobbying efforts of U.S. MNCs. But more notable is their verbiage; “imposing such barriers on foreign companies.” How many of these “foreign companies” are affiliates owned by these American blue-chip industries?

We do indeed live in a more complex era. Few things in our human endeavors and enterprises are simple. Usually they are far more complex and multi-faceted. These circumstances present an intriguing conflict of interest for all parties plus a boatload of other complexities for America in general and American policy makers in particular. How does the higher cost American labor force (and those of Western Europe as well) effectively compete with the lower wages of the 3^rd world countries? This does not bode well for the higher labor cost areas. U.S. MNC outsourcing may well have caused a pronounced decline in wages with more declines yet to come. How do America’s policy makers protect American jobs from our own U.S. MNCs who have over the past 30 years channeled campaign and lobbying monies to sway the re-arrangement of national policies enabling them to achieve globalization?

In a recent Wall Street Journal interview, New Zealand’s Prime Minister Kohn Key replied when ask by the reporter about the “Buy American” provisions:

“Mr. Key chuckles when I ask him about the “Buy American” provision tucked into the Obama administration’s stimulus package. The previous government’s “Buy New Zealand” campaign got a “lukewarm” reception, he recalls. “There are so many component parts manufactured in different parts of the world, you’re chasing your tail the whole time about where something’s actually made.”

From a traditional perspective how does a country protect its DP’s or their labor force in their home market from foreign competition when the DP’s themselves have essentially become the competition, are no longer domestically based, are transferring national wealth, proprietary knowledge, technology, and products to foreign nations through their foreign associations, whose dependency encompass the globe, and whose profit decisions are often self-serving and potentially detrimental to their country of origin? From a 21^st century perspective, if protectionist measures are necessary, what form should they take, who would we impose them on, and what are the potential consequences? Whatever the answers to these questions might be it seems clear we need to think before we react.

These matters more importantly demonstrate that if there is a negative aspect to democracy it would be that it is high maintenance. It requires vigilance by its citizens over those in power. Our President and legislators in Washington need to hear from us in numbers to great to be ignored and through every means possible; letters, emails, phone calls, and marches. For additional ideas on real change see; An Agenda for Real Change.

By Mitch Gurney