Editor’s Note: Edward Alden, former Washington bureau chief of the Financial Times, is a senior fellow at the Council on Foreign Relations, where he specializes in U.S. economic competitiveness. This is an excerpt from his new book, “Failure to Adjust: How Americans Got Left Behind in the Global Economy.”
For most of my life, the United States has faced a deep schism over how to respond to the competitive pressures of the global economy. As a reporter, I covered the negotiations that concluded in the North American Free Trade Agreement in 1993 and the bitter fight that followed over its ratification in Congress. I spent many sleepless nights in hotels in Geneva reporting on the talks that lead to the creation of the World Trade Organization. I watched the wrenching debate that finally led Congress to support China’s admission to the WTO in 2001. And that same year, I got tear-gassed in Quebec City at a “Summit of the Americas,” where leaders were talking about expanding NAFTA across the Western Hemisphere, and those locked outside the old city walls were protesting.
Today, these issues have become, if anything, even more divisive, with some leaders in both the Democratic and Republican parties calling for a halt to further trade liberalization and even a reversion to protectionist tariffs on imports from big developing countries like China and Mexico. The same fears that turned so many Americans against NAFTA have been on full display as President Barack Obama tries to persuade Congress — and in particular, the skeptical members of his own party — to support the Trans-Pacific Partnership trade agreement with Japan and 10 other countries. The debates have a depressing similarity. Supporters of the trade agreements promise more jobs, higher wages from exports and a consumer cornucopia, while opponents warn that trade will send away jobs, drive down wages and increase inequality.
Americans can’t quite make up their minds about which side to believe. When asked by pollsters whether America’s integration into the global economy “is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheap labor,” about half have responded each way. The pessimists gained a bit of ground during the deep recession that followed the 2008 financial crisis, and the optimists later recovered along with the economy, but there has been no clear trend up or down over time.
It’s almost like Americans are telling the pollsters to ask a different question. The right question is not whether trade is good or bad for the United States; a better question is whether the United States has used the new opportunities created by international trade to boost American living standards while minimizing the costs for those who lose out to import competition. Trade remains highly contentious because the United States has done rather poorly at both.
To caricature only slightly, the U.S. approach to the global economy for the last half century has been “Build it, and we will succeed.” In other words, if trade and investment rules are liberalized, then competition alone will lift up Americans.
Few other countries behave that way. China, Korea, Japan and most other Asian countries subsidize their companies or protect their markets through discriminatory regulations to gain an edge in global competition. Germany nurtures its competitive manufacturing industries, trains its workforce and heavily promotes its exports around the world. Denmark and the Nordic economies have generous schemes for upgrading the skills and education of their employees to help them move to new careers.
For some Americans — those with the right mixture of education, ambition and connections — the lack of support doesn’t matter very much. Highly educated Americans have been enormously successful in the more open global economy, building and staffing some of the world’s most innovative and dynamic companies. And the United States, largely because of its unmatched universities, continues to attract the lion’s share of the brightest, most ambitious immigrants.
But far too many Americans are simply unprepared for the competition they are now in. They are like overmatched boxers who keep getting knocked down, only to be told by their corner that they just have to get back in the ring and keep taking the punches in the hope that eventually they will become better fighters. It would make more sense to pull them out of the ring for a year of training and conditioning before sending them back again.
Back in 1971, when he was an economic adviser to President Richard Nixon, Wall Street mogul Pete Peterson warned that the consequences of failing to respond to the new competitive challenges America was for the first time facing since the end of World War II would be severe. With capital moving more freely and transportation costs falling, the pressures for adjustment would “come faster and harder than anything experienced in earlier years,” he wrote. “The rising pace of change poses adjustment policy problems which simply cannot be ignored.” Failure to adjust, he warned, would be “paid for in abnormal unemployment and wasted opportunity.”
Today, even with the strong job growth of recent years, fewer Americans are working than at any time since the mid-1970s, and wage growth continues to be anemic. For more Americans to prosper in the hypercompetitive global economy, governments need to recognize that they are in a competition. Peterson had hoped that Washington would take the lead. For the most part it has not, but fortunately there are signs that state and local governments are recognizing and responding to at least some of the challenges. With greater support from Washington, they have the potential to build the sort of competitiveness strategies that the United States has been lacking for far too long.
Facing the competitive challenge
In early 2015, Sweden’s flagship car producer Volvo (now owned by a Chinese billionaire) announced that it would build its first North American plant just outside Charleston, South Carolina. The $500 million plant is scheduled to open in 2018 and employ about 2,000 people. It comes at the same time that Germany’s BMW has announced plans to expand in the state and create its largest production facility in the world in nearby Spartanburg. The state government of South Carolina has established permanent foreign offices in Shanghai, Tokyo and Munich. Exports have doubled as a percentage of the state’s output over the past decade, and the state has a higher percentage than any other of employees working for foreign-owned companies. Nearby, Daimler, the maker of Mercedes, has its largest SUV production facility in Alabama. Tennessee lured the South Korean tiremaker Hankook Tire in 2014, and the company is expected to invest $800 million and create nearly 2,000 jobs. Chattanooga is already home to Germany’s Volkswagen, which chose the state based on a package of expensive incentives that included the creation of a new job-training program tailored to the factory’s needs.
For decades now, the U.S. share of global investment has been shrinking in the face of competition from Asia. But led by the states and many cities, America is fighting back.
More than two dozen American cities, from large ones like San Diego and Los Angeles to mid-size ones like Portland and Columbus, have developed their own strategies to boost exports, attract investment and gain jobs in the traded sectors. The most successful cities are busily promoting businesses in which they are already world leaders — medical devices in Minneapolis-St. Paul, aircraft and parts in Wichita, life sciences in San Diego. Portland, which has long been a hub for exports because of chipmaker Intel, has launched a new initiative for boosting exports of clean technology and has undertaken trade missions to promote its athletic and outdoor industry, which was built around Nike. The athletic footwear company, which became the poster child for outsourcing to low-wage countries like Vietnam, has recently announced that it could create as many as 10,000 new jobs in the United States based on new advanced manufacturing techniques like 3-D printing that could revolutionize how the soles of athletic shoes are made.
These are some of the encouraging signs that at least some American political leaders are finally waking up to what it will take to prosper in the competitive global economy that the United States itself did so much to create. Some of the response is coming from Washington. The federal government, for the first time since the late 1980s, when the semiconductor industry was facing crippling competition, has become serious about boosting advanced manufacturing in the United States. The Obama administration expanded the first real national effort to attract foreign investment in U.S. history. And the government has become more aggressive in demanding that other countries adhere to negotiated trade rules.
But for the most part Washington remains mired in foundational disputes over the proper role of government that have prevented an effective response. Once noncontroversial policies — like incremental increases in the gas tax to pay for roads, bridges and rail lines — have become impossible to enact. Even as other countries are aggressively promoting their exports on global markets, the U.S. Congress shut down for nearly six months the U.S. Export-Import Bank, which helps American companies sell in developing country markets, and refused to make a needed appointment to the bank’s board of directors, which blocked it from making any new large loans. And even as other countries are trying to educate their citizens for the jobs of the future, U.S. public education is hostage to constant skirmishes over national versus local control. In a competitive world, such ideological battles are a luxury that the United States can ill afford.
The good news: Thinking globally, acting locally
The real progress has been not in Washington — where the idea of an active government role in promoting economic competitiveness remains suspect — but in the states and the largest cities. More and more local governments have taken the lead in developing competitiveness strategies that start from the premise that local prosperity depends in good part on success in international economic competition.
Nearly every state — from the biggest, like Texas and California, to smaller ones, like Tennessee and Nevada — is now competing aggressively for job-creating investments, promoting exports and trying to build a stronger foundation for future job growth. Too often this is a competition only with other states that does little to benefit the U.S. economy as a whole and instead simply diverts business from one state to another. And too often as well, governments dole out costly tax breaks and other incentives only to discover that the promised benefits fall short.
Despite some blunders, more and more states are going global in their search for both investment and new markets, especially for advanced manufacturing that creates higher-paying jobs with a range of spin-off benefits for the local economy. The most successful states and regions are boosting their competitiveness not just — and sometimes not even — by cutting business costs through low taxation or subsidies, but instead by investing in infrastructure to help get products to market, by encouraging the commercialization of university research and by working with companies to ensure they will have the trained workforce they need.
Washington should follow their lead. For the past half century, the federal government has seen its role almost solely as the champion of rules that allow large corporations to invest and move goods freely around the globe. Successive trade agreements — under terms devised largely by the United States — have eliminated quotas and import taxes on most imported goods and offered unprecedented protection for the investments that companies make almost anywhere in the world. But the federal government has done little to help the United States actually compete for those investments and for export market share. Washington needs to follow the lead of the states and cities, standing behind them to help build, attract and retain businesses in the internationally competitive sectors that provide many of the best jobs in our economy. The timing is right: With its lead in innovation, the falling price of energy and labor costs that are highly competitive compared to Europe or Japan, the United States is becoming one of the most attractive places to invest in the world.
The federal government needs to go further, however, by negotiating with other countries to create better rules for international economic competition and enforcing those rules vigorously. The trade and investment agreements of the past have made it easier for goods and capital to move around the world, which has brought gains in productivity and efficiency. But those same rules have too often made it easier for large corporations to simply play one country off against another. Companies have enormous leverage to demand government subsidies, tax cuts or a compliant, low-wage workforce as a condition for investment.
Even as it competes fiercely for investment, the United States must lead a new international effort to curb the destructive effects of unbridled competition. New rules should be put in place to set higher standards for business around the world, to discourage corporations from racing to the lowest tax jurisdictions and to create the conditions for fairer global economic competition. And those rules must be enforced with a vigor that has too often been lacking. The United States needs to launch a new effort to negotiate and enforce rules that will bring the benefits of a global economy to the many rather than the few.
Americans have been told too often by their political leaders that the global economy is something beyond control, that the United States has no choice but to bow to the creative destruction of the market. In his 1971 memo to Nixon, Pete Peterson roundly rejected that view. The United States, he argued, must “meet head-on the essential — if demanding — task of improving our productivity and competitiveness in an increasingly competitive world, to seize the initiative in designing a new, comprehensive program designed to build on America’s strengths, and to encourage a competitive world trading system that comes from having a sense of our future.” In short, he wrote, the United States must lead “a conscious effort to shape our own future rather than resign ourselves to whatever it may bring.” That same challenge remains today.