From SCDigest's On-Target E-Magazine
May 23, 2012
Supply Chain News: Two Steps to Revive US Manufacturing
It is a Mercantilist World, Not a Free Trade One, Former IBM Exec Says; Tax Incentives and Smart Tariff Policies Could Work
SCDigest Editorial Staff
Despite overall perception that we operate in a world of free markets and free trade, that isn’t really how the manufacturing game is played. The truth, especially with regard to China, is closer to mercantilism.
That can be seen by what is happening in China and with regard to other countries, especially the US. That according to a recent column sent to SCDigest by Ralph Gomory, a research professor at NYU, president emeritus of Alfred P Sloan Foundation, and for high level executive at IBM.
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The lever in this plan: a company cannot import into the U.S without buying certificates whose face value equals that of the planned import.
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Mercantilism, according to Wikipedia, is an economic doctrine that believes that government control of foreign trade is of paramount importance for ensuring the prosperity and military security of the state. In particular, it demands a positive balance of trade.
"In this mercantilist world there is a fundamental divergence between the goal of our corporations, which is to maximize profit, and the goal of rebuilding manufacturing here in the United States." Gomory says.
He adds that "the modern Chinese government wisely exploits the fact that our great American companies take as their main mission in life to make as much money as possible for their shareholders. China does that by offering companies from the US and other nations subsidies, in the form of tax breaks, shared investment, and an undervalued currency, to bring their manufacturing operations to China, he says.
"These are the factors that in high-tech manufacturing are far more important than lower wages," Gomory argues. And, he says, "In this real world a determined and effective government, like that of China, can make that shift of our production to their country happen on a large scale."
A large scale indeed. As we have noted on numerous occasions, the US trade deficit with China reached $295 billion in 2011, and is on a pace to exceed that again in 2012. Over the last decade, the cumulative US trade deficit with China is around $2 trillion dollars.
"The inducements offered to our companies are working and our domestic manufacturing is disappearing," says Gomory.
Steps that Could Change the Tide
Gomory believes there are two steps US government could take that would be both effective in retaining existing US manufacturing while luring some firms back from offshore, and which would be consistent with the type of policies and tools the government has experience in (versus say trying to provide direct subsidies).
(1) Tax incentives: The US is used to the idea of R&D tax credits for corporations, Gomory says, so why not corporate tax credits for companies that have high value added in the United States? The idea would be to make the corporate income tax lower, but make it lower in proportion to the productive activity that these companies actually have in the United States, not somewhere else. The corporate income tax rate would be used as an incentive to produce in the US rather than somewhere else.
(Manufacturing article continued below) |
"This is not necessary; we can and should balance trade, and U.S. tariffs have a long history of contributing to that goal in the past," Gomory says.