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Trade debate masks America’s competitive disadvantage

Editor’s Note: The Trans-Pacific Partnership — a massive trade deal in the works between the United States and 11 other nations — may be out of the headlines momentarily, but it continues to be as contentious as ever.

In a strange twist, Republicans have become temporary allies with President Barack Obama in insisting that the trade deal would serve as a boost to the American economy by lowering tariffs and opening new markets for U.S. businesses. On the other side of the coin, congressional Democrats and labor unions, who usually align themselves with the President, oppose the trade deal, arguing that it will hurt American workers and incentivize more American businesses to take jobs overseas.

But is the debate really that simple? George C. Lodge, professor emeritus at Harvard Business School, argues that politicians and economists are failing to address a key issue: the U.S.’s ability to compete in the world economy. National competitiveness, as defined by Lodge and his colleague Bruce Scott, is the ability of a nation’s people to earn, not borrow, a rising standard of living. And government, he says, plays a large role in a nation’s ability to compete globally.

Before becoming a professor at Harvard, Lodge had a distinguished career in the Navy and Washington. He served as Assistant Secretary of Labor for International Affairs in both the Eisenhower and Kennedy Administrations. In 1962, he ran against Teddy Kennedy, as his father had against John F. Kennedy a decade earlier. (His great grandfather Henry Cabot Lodge Sr. was the senator who was key to undermining the League of Nations in favor of a more isolationist approach.)

George C. Lodge has written for Making Sen$e before, most recently applauding President Obama’s diplomatic efforts with Cuba. Today, Lodge spells out why national competitiveness and cooperation between business and government ought to be central to U.S. trade negotiations.

Kristen Doerer, Making Sen$e Editor

Debate over the Trans-Pacific Partnership is centered on whether or not the U.S. ought to lower barriers to trade in the Pacific Basin. But the debate fails to include the real issue: the ability of the United States as a country to compete in the world economy, especially in Asia. If U.S. ability to compete is increasing, lowering trade barriers would be helpful because it means that U.S. exports will flow more easily into foreign markets. If, on the other hand, it’s decreasing, lowering trade barriers will ease the way for imports and not do much to increase exports. We need to ask, is the U.S. ability to compete in the world economy increasing or decreasing?

Today, U.S. exports, the presumed beneficiaries of lower barriers, are largely agricultural products, financial services (banks and the like), aircraft, natural resources, such as coal, oil and gas, and cultural products, such as movies. The Trans-Pacific Partnership helps such exports. When it comes to high-value-added, high-wage, high-tech manufacturing, the unfortunate fact is that most of it has already moved abroad, mostly to China and other Asian countries.

There is very little of it left to benefit from free trade, and what is left needs help. The manufacturing of machine tools, flat panel displays (the heart of all TV sets, computers, airplanes and submarines), rare earth (critical to all electronics) and more have all gone abroad. Every bit of Amazon’s Kindle is made abroad, including its assembly. Lowering trade barriers in the U.S. will make those products less expensive for U.S. consumers and will swell the trade deficit, but it won’t do much to increase the number of well-paying jobs in America. To do that, the U.S. needs to increase its capacity to compete. Maintaining trade barriers to protect uncompetitiveness will not help the economy in the long run.

So the trade policy debate is beside the point. The real problem is that the U.S. is losing its capacity to compete. To solve that problem we need a national economic strategy to determine what we want to produce in the U.S. and how to do it. During the Cold War, Soviet pressure forced us to create such a strategy, administered by the Defense Advanced Research Projects Agency (DARPA) in cooperation with the nation’s top electronics firms. Thus, we came to lead the world in computer technology and the miniaturization of such technology, which in turn led to electronics like the iPod.

After the Cold War, ideologues refused to continue the strategy, arguing that the market should decide who makes what and where. Unfortunately, our competitors don’t follow such an ideology. In China, government and business work together, following the pattern the United States developed so successfully in the ‘70s and ‘80s. As a result, China now dominates world production of solar panels, as well as the manufacturing of rare earth, which is crucial to all electronics.

The strategy of the DARPA-led coalition of high tech firms was by no means a full-blown industrial policy. Its purposes were militarily, but the innovations it spawned had far-reaching commercial effects. This joint effort between business and government created computers, the miniaturization of technology, and even the internet.

When the Soviet Union broke apart in 1989, the strategy ended. Some suggested that it should be continued to help shape U.S. competitiveness in the future, but the prevailing ideology dictated that the government should stay out of the marketplace. Thus exports declined, imports increased, and the trade deficit soared, financed by borrowing from abroad — mainly China. Today, Congress appears to adhere even more fervently to an anti-government creed. So we stagnate, our export profile resembling that of a less developed country, while our competitors in Asia take the lead.

Let me be clear: I am not talking about U.S. companies. Generally speaking, they are highly competitive, often becoming so by going abroad. Their management and shareholders benefit; the stock market flourishes. But the rest of the country, the American community, workers and their families are not reaping the benefits. This is one reason that income inequality is at record levels. Many Americans feel the system is stacked against them; unprecedented numbers fail to participate in elections; and democracy is imperiled.

This is not to argue that no companies should invest abroad. That would be nonsensical. But we do need to decide what businesses should stay in America and what package of carrots and sticks are required to make them stay.

A winning strategy for the U.S. today requires much more than cooperation between government and business. We need a highly skilled work force, which in turn means a world-class education system and access for all. We need to repair and improve our infrastructure — highways, bridges, public transportation and the like — to lower the costs of domestic manufacturing and increase efficiency.

Lowering trade barriers in the Pacific will have little impact on the nation’s deteriorating ability to compete in the world economy. In the name of realism and the national interest, it is time for a national economic strategy. Its aim? To make the most of our resources.

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