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"Congress have repeatedly, and not without success, directed their attention to the encouragement of manufacturers. The object is of too much consequence not to insure a continuance of their efforts in every way which shall be eligible." George Washington
Trade, FDI, and the Dollar: Explaining the U.S. Trade Deficit
By Michael Blaine
October 15, 1996
The persistent U.S. trade imbalance may have two causes: a declining manufacturing base and the shift of the U.S. economy toward services. Correcting the imbalance will require a substantial commitment to expand America’s manufacturing base.
Ten years ago, Peter Drucker offered three reasons why the foundation and structure of the world economy had changed:
In the decade since, a fourth factor has been widely recognized: the uncoupling of nations and firms, with firms’ strategic decisions emerging as a critical determinant of international flows of trade and investment.2 Taken together, these factors have undermined — perhaps permanently — the integrity of traditional models of trade and investment. At the very least, they have introduced a new level of complexity into the analysis.
For example, a basic tenet of economic theory is that currency depreciation promotes exports and improves a nation’s trade balance. However, between 1970 — just before the collapse of fixed exchange rates — and early 1995, the U.S. dollar lost more than 70 percent of its value against the yen and 60 percent of its value against the mark,3 yet, in 1994, the United States had a $69 billion merchandise trade deficit with Japan...
By Michael Blaine
October 15, 1996
The persistent U.S. trade imbalance may have two causes: a declining manufacturing base and the shift of the U.S. economy toward services. Correcting the imbalance will require a substantial commitment to expand America’s manufacturing base.
Ten years ago, Peter Drucker offered three reasons why the foundation and structure of the world economy had changed:
- The uncoupling of the primary products and the industrial economies resulting in a decline in the comparative advantages of natural resources.
- The uncoupling of employment and production within the industrial economy due largely to productivity gains associated with technology.
- The partial uncoupling of trade and economic growth, with capital flows replacing trade as the engine of the world economy.1
In the decade since, a fourth factor has been widely recognized: the uncoupling of nations and firms, with firms’ strategic decisions emerging as a critical determinant of international flows of trade and investment.2 Taken together, these factors have undermined — perhaps permanently — the integrity of traditional models of trade and investment. At the very least, they have introduced a new level of complexity into the analysis.
For example, a basic tenet of economic theory is that currency depreciation promotes exports and improves a nation’s trade balance. However, between 1970 — just before the collapse of fixed exchange rates — and early 1995, the U.S. dollar lost more than 70 percent of its value against the yen and 60 percent of its value against the mark,3 yet, in 1994, the United States had a $69 billion merchandise trade deficit with Japan...
A 1996 classic, to be sure.
I understand the de-couplings. I understand the growth and power of trans-national corporations and our virtual enslavement of our governments and most of the world's people to these lords of industry.
Blaine attributes the U.S. trade deficit to the declining capacity of the United States to satisfy domestic demand for manufactured products with domestic production. Every year, more Americans buy more from other countries than foreigners purchase from the United States. U.S. companies have contributed to the problem by shifting their manufacturing to companies overseas. At the same time, foreign firms are exporting more goods to the United States. Thus, says Blaine, the bulk of trade occurs between foreign units of companies rather than between independent companies located in foreign countries. According to Blaine, in his study of extensive data from a multitude of sources, multinational corporations will have a greater role in shaping international trade flows than will nations themselves. This, in turn, diminishes the efficiency of traditional macroeconomic policies. And countries like the United States that rely on the exchange rate to give firms an incentive to increase exports are less successful than countries like Japan that develop policies to give firms an incentive to increase export activities. Thus, says Blaine, changes in the value of the dollar will have only minimal effect on the trade deficit. The only way to correct the trade imbalance, then, is for U.S. firms to increase domestic production and stop satisfying U.S. demand with products made abroad.
I understand that the US has relied upon its status as world power, US$ as a world currency, Earth's largest uniform market in value of consumption, and a cheap dollar.
I realize that Japan (as well as China and many other countries) have necessarily assumed their role as the ying to the US' yang, taking on a policy of export, so as to compete and supply to the US' consumerism.
We lost our way, when in spite of the guidance of Washington, Madison, Jefferson and others, we sacrificed manufacturers and manufacturing on the alter of consumerism.
How do we reverse this trend and cure the disease of consumerism?
Whether domestic or foreign, manufacturers must offer the customer something better than the competitors.
There are only 9 Competitive Factors upon which they can sweeten the deal for customers (1:Technology, 2:Price, 3:Profit Margin, 4:Quality of Design, 5:Quality of Implementation, 6:Order Lead Time, 7:On-time Delivery, 8: Features & Services (non-product related), and 9: Sales, Marketing, Brand Name, & Reputation.
The consumer weighs each of these 9 factors differently on each purchase. Sometimes they look for the lowest possible price, sometimes they want all the bells & whistles, no matter the cost. Sometimes it's the fastest delivery that wins the sale.
If a supplier can provide the best in all 9 Competitive Factors simultaneously, they are the obvious winner of that market, and that customer's purchase.
I remember the "cheap Japanese transistor radio" of my childhood. Amazing as long as it kept working, not as good sound quality as large furniture units of RCA, but served a market niche.
I remember a village in Japan who changed their name to "USA", so that when their products were marked, "Made in USA", they could benefit from the mistaken impression that these were made in the United States of America, avoiding a lost sale due to the Japanese image of "cheap Japanese junk".
So how is the domestic manufacture to be born again? How will they compete? Labor rates, taxes, bloated government regulations, loss of skilled workers, antiquated technologies have all contributed to the downfall of the domestic manufacturer. The rust belt has its name for good reasons.
Look to the dogs of today to understand our plight. Dogs came from wild wolves. Wolves, both then and now, are extremely efficient and effective at what they do. Wolves have maintained their competitive edge for more than 500,000 years. Now that is a champion and sustainability!
In spite of man, wolves have survived and flourished, even though they have had huge encroachment and extinction in some regions due to human's chemical warfare (poison bait), weapons of mass destruction (guns), and ethnic cleansing (habitat destruction) . Wolves survived because they avoided the contamination of humans, and stayed as far away from humans as possible.
Look at the breeds of dogs that are found in 1/3 of all homes today. These pets, far from wolves, can last only as long as the food and water bowls are filled by their human masters. Through selective breeding by mis-directed humans, we have enslaved the dogs by removing their self-sufficiency and ability to survive on their own.
What would happen if dog owners were ordered to take a week, or even a year, to prepare their pet dogs for their pet's release into the wilderness, never again to be fed by humans? Their pet dogs must learn how to survive on their own from now on, for ever more. How would the owner of a chihauha, or a minature poodle, or all the other "cute" breeds prepare their past pets for the brave new world?
I own and love a Chesapeake Bay retriever, a huge dog who is also far from a wolf. While she is able to do limited hunting on her own in our woods, the rabbits sometimes lose, but chipmonks and squirrels regularly get the better of her. I'm sure she wouldn't make it through the first winter.
How long will it take to reverse-breed the retreivers, minature toy poodles, and other ineffective breeds of the world back into wolves that can fend for themselves?
Yes, there are some wild dog packs that exist, but most of these are on the fringe edges of human society, scavangers and opportunists from human wealth and wastefulness; far easier than the existance of wolves in the wild.
I would suggest that no matter what was done, the vast majority of these released pets would die within 3 months; starvation, eaten by real wolves, or fighting amongst themselves.
Can we expect anything different from our domesticated, in-bred, dependant manufacturers?
Some manufacturers have sought and achieved rugged individualism, self-reliance, and business excellence; a regular "Atlas Shrugged" kind of company of whom Ayn Rand would have been proud. In my experience, these represent 0.5% of the manufacturers that exist today.
The excellent manufacturers are regularly looked upon as idiots, suckers, and toys to be played with by banksters and their lot, pawns to be used to further the needs of the FIRE economy.
Most manufacturers work hard to gain an average ROCE (Return on Capital Employed) of around 5%. It's not easy struggling against all odds, risking everything, when I can sell the company to M&A artists, take my money, and use it to clip coupons, or invest it all into a FIRE scam and become a millionaire or billionaire.
Obviously, some will survive the shock of this sudden turfing out from their manufacturing "feather bed", but what good will that do? All who worked for the dead 95% of the domestic manufacturers are out of work. These unemployed people will soon be eaten by their own type of wolves: the banksters and creditors.
The only way to protect these weak domestic manufacturer are trade barriers or subsidies in the short term.
It may be insufficient to have barriers at just the national borders. One domestic manufacturer who is a little stronger or faster will quickly become the national giant, beating all other domestic weaklings in short order.
It would require having national, as well as state/province trade barriers. The anti-thesis of what has been occurring for the past 50 years.
So how do we help the 99.5% of manufacturers regain their wolf-like competitive skills?
How do we kill the domestic consumerism on a planet-wide basis, and get over to efficient and effective manufacturing and agriculture to better meet the needs of all people?
"We must now place the manufacturer by the side of the agriculturalist" Thomas Jefferson
"There is no subject that can enter with greater force and merit into the deliberations of Congress that a consideration of the means to preserve and promote the manufacturers which have sprung into existance, and attained an unparalleled maturity in the United States." James Madison
"We should become a little more Americanized, and, instead of feeding paupers and labourers of Europe, feed our own." Andrew Jackson