Tag Archives: protectionism

Save Our Crude

Saudi Arabia has recently cut the price of crude oil exports to America, while holding the line in Asia. Oil experts are analyzing the latest price schedule relative to the price of domestic oil from fracking. Depending on your perspective, this is either simple capitalism, an attack on our oil industry, or proof that fracking is evil.

OilIt would make sense for the Saudis to undercut American producers, in a bid to put some of them out of business, while supporting their revenues with shipments elsewhere. Whether this is an “attack” or simply meeting the market price depends on the cost of production for each well. Below $85 a barrel, many producers will be shaken out.

Abdalla El-Badri, secretary-general of Opec, said he expected a reduction in higher cost oil production such as US shale if Brent remained around $85 a barrel.

Readers may be forgiven for assuming that there is a single, world price for oil. Opponents of fracking argue that American oil will flow to the world market, diluting the advantage of domestic production. In fact, American oil producers are not allowed to export. It’s a form of protectionism.

Jeremiah is generally against protectionism, but on a case-by-case basis (see On Protectionism). You have to look at who is being protected. In the case of prescription drugs, for example, trade restrictions benefit pharmaceutical companies at the expense of consumers and taxpayers.

In this case, American oil producers are harmed because they cannot sell in higher priced markets. The benefits accrue to American consumers, in the form of lower factor prices – and cheaper gas at the pump. That seems like a good deal, but it makes us vulnerable to dumping by the big, global producers.

Jeremiah would place this one in the “shortsighted” category and call for liberalization, except for one thing – the curse of oil. Ours is not meant to be an extractive economy.   Those countries have some nasty tendencies, which ours has lately come to emulate. The last thing America needs is an economy that resembles Venezuela.

See also: The Case for Allowing U.S. Crude Oil Exports

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Made in America

President Obama once asked the late Steve Jobs why the iPhone wasn’t made in America.  The answer was a terse, “those jobs aren’t coming back.”  This week, as unrest simmered in Foxconn city, we wondered how much profit Apple was making from oppressed Chinese workers.

Not much, it turns out.  Technology experts reckon each iPhone has only about four hours of labor content, for an estimated $60 cost savings versus American labor.  Multiply that by millions of iPhones, and it’s a lot of money, but still a fraction of the total cost.

The real reason those jobs aren’t coming back was explored in January, by the New York Times.  This is a sobering article, and anyone with ideas about “saving the middle class” should read it.  The short version is that China enjoys huge advantages in terms of infrastructure, scale, education, and logistics.  No approach to industrial policy in America makes sense unless it can address these advantages and, since they were once American advantages, how we lost them.

“Chinese schools graduate roughly 600,000 engineers a year, versus about 70,000 in the United States.”

Not as sober is the reply from Alexander Cockburn.  He is too eager to believe that greedy Mr. Jobs sold out his fellow Americans for an extra penny of EPS, and he disregards the fact that Apple must sell into a global market, against global competitors – or maybe he just didn’t read the article.  Finally, The Atlantic takes up the challenge and offers some practical ideas.

America needs an industrial policy, but this is a tricky area, and our results haven’t been good.  We need enough government support to offset that of our competitors – think Boeing versus EADS, or GM versus Toyota – but not so much that it interferes with market mechanisms.  Government support also invites special pleading, if not flat-out corruption – think Solyndra.

The Atlantic observes that, while the right dislikes government “picking winners and losers” at the federal level, they accept industrial policy at the state level.  This is actually not inconsistent, if you look at results.  Governors are good at it, and Washington is not.  Maybe that’s the answer.  One wonders if state funding might have kept the iPhone glass business in New York.

America also needs educational reform.  China has an advantage in skilled labor, midlevel engineers, and industrial engineers.  These are not the sexy jobs American kids go to college for, any more than they want to assemble iPhones – or pick strawberries, for that matter.  So, there is a disconnect between wanting the factories in America, and actually staffing them.

One criticism of vocational streaming is that, like generals preparing for the previous war, it can produce an army of obsolete graduates.  On the other hand, America has never seen a glut of computer programmers.  Silicon Valley perennially begs CIS for more Indian kids to have H1-B visas.  Here, a combination of vouchers, incentives – and a culture shift – might do the trick.

American trade negotiators could also press China, under threat of tariffs, to improve conditions for Chinese workers.  We would have the moral high ground, helping them to become more comfortable and less competitive.  Unfortunately, we would have only our American consumer market as leverage – in Apple’s case, less than half their sales.

Jobs’ blunt assessment may be the final word.  The supply chain, the infrastructure, a growing consumer base, and even the supply of minerals favors China and the Pacific region.  This is a process that started thirty years ago, with competition from Japan.  Even if we could reverse it, we would need another thirty years to rebuild.

The best scenario for America would be the emergence of a new and unforeseen industry.  Al Gore, and now President Obama, thought it might be “green energy,” but this has proved not to be a game changer, in terms of global competition or employment.  By definition, an “unforeseen industry”  is not amenable to central planning.

We have a culture that encourages risk, forgives failure, and celebrates success.

Google, Facebook, and Amazon are made in America because we have first-rate universities and a system of free enterprise that favors innovation.  We have a thriving venture capital industry, light regulation, low barriers to entry, and pragmatic bankruptcy laws.  We have a culture that encourages risk, forgives failure, and celebrates success.  This is our “comparative advantage.”  If we have no other industrial policy, we should at least cultivate this one.

See also:  On Protectionism

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Boeing 0, Airbus 1

The Boeing case is a good example of what Jeremiah calls “squabbling over the spoils.”  The National Labor Relations Board has enjoined Boeing from opening a new facility in South Carolina, claiming that the move unjustly punishes unionized workers at another facility in Washington.  Roughly 8,000 jobs hang, unfilled, in the balance.  Washington is a “blue” state, South Carolina a “red” one.

So, is this a victory for union labor?  No.  It is a victory for Airbus, Boeing’s European rival. Instead of going forth to take market share away from Airbus, and maybe create more jobs all around, the mentality of American decline says, “Let’s fight hard over our slice because the pie is only getting smaller.”

In the end, we’ll have an iconic American company laid low by expensive labor, crushed by foreign competition, and in need of a government bailout.  Now, where have we seen that before?

See Also: Boeing Threat to American Enterprise.  Nice to see the union’s perspective stated in terms of American competitiveness, instead of class-war rhetoric.

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President Pushed Leftward

This week’s Economist agrees with Jeremiah that the Chinese tire tariff was a bad call.  The Economist, which had endorsed President Obama, now calls him a “weak president being pushed leftward.”  Even National Socialist Radio, picking up the topic, chose to sympathize with American tire buyers (and dealers) over the interests of the steelworkers’ union.

So, why did he do it?  Pandering to special interests, says The Economist, and it’s hard not to agree.  Candidate Obama enjoyed strong support from the steelworkers, teamsters, service employees, culinary workers, government workers, auto workers, teachers – virtually all the unions – and now is payback time.  Vice President Biden said as much when he addressed union leaders at the Fontainebleau earlier this year.

We would all like to protect those union jobs, but this move does more harm than good.  It’s just an example of the President being pushed around by the unions.  Jeremiah feels bad for him, and hopes that we’ll soon see evidence of some leadership.

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Bad Call On Chinese Tires

President Obama made a poor decision to raise tariffs and lock Chinese tires out of our market. This is not a good time to start a trade dispute with China. The president should certainly protect American jobs, but we have to pick our battles. If he wants a trade war with China, Mr. Obama must first clean up the nation’s balance sheet. China holds about $1 trillion of our national debt.

Trade restrictions can and should be used to protect American industry – but only as a short-term measure. This is a tactic, not a strategy. If an industry can’t compete in the world market, it must be left to its fate. Our workers need to be deployed where they can do the most good for the economy.

The downside of protectionism is that it raises factor prices for other American industries, raises consumer prices, and leads to retaliation from our trading partners. In this case, consumers will lose access to cheap tires. We may save jobs in manufacturing, but we will lose jobs in distribution and retail. Significantly, no American tire manufacturer asked for the tariffs.

President Bush made the same mistake in 2002, protecting the steel industry. This cranked up steel prices and made American cars more expensive.

See also: China-U.S. Trade Dispute Has Broad Implications, Obama slaps duties on tire imports from China.

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