The MADE IN AMERICA PROJECT
A White Paper
by James S. Edwards, Executive Director
and John V. Westberg, President
The New Hope for America Foundation
March 11, 2009
Abstract“We discovered that this proven trade strategy would solve many of the economic and national security challenges we face in this uncertain time of economic instability.”
U.S. Defense contractors outsource parts and offshore production of many of their final- products to Communist China and other nations, just as most other American final product manufacturers do - that are still in business. If our defense related trade partners decided to cut- off the supply of parts and finished products to the United States, this would leave our nation in a very precarious situation. In this white paper we present an effective solution that addresses this serious situation. During WWII, the tremendous growth of U.S. military needs required that thousands of consumer goods and commercial equipment manufacturers convert to making wartime materiel in order to win the war. If a major military conflict emerged today, the U.S. would be in the ominous position of needing these manufacturers to convert once again to military production. However, with the massive loss of manufacturing in the past twenty years in the U.S., and with the majority of the manufacturers that are still here outsourcing many of their parts to China and other nations conversion to wartime materiel production is no longer a viable option for the United States.
The solution we propose is based on an economic model that has already been proven to be effective and successful. It is derived from an Asian nation that used this strategy to develop into one of the worlds great economic achievements. This solution would resolve the adverse military condition that the United States faces today due to the loss of a significant portion of our nation’s manufacturing base.
In researching to find a solution for America’s defense and national security, we discovered that this proven trade strategy would also solve many of the economic and national security challenges we face in this uncertain time of economic instability. We then took a look at what the result would be if this strategy was implemented throughout the entire manufacturing sector in America.
Background“… every branch of the U.S. military, U.S. national security and U.S. homeland security are dependent upon China!”
Although we have been generally concerned about weakened U.S. national security due to: massive manufacturing loss, the highest trade deficits in the history of the planet, the selling off of U.S. capital assets to potential enemies and other factors we focused our concern on the foundational issues of off-shoring and outsourcing parts for U.S. weapons systems to China and other foreign nations. This led us to a unique yet proven and effective pro-active solution.
Like most publicly held companies, an obligation to their shareholders to create shareholder value entices defense contractors to look for the most profitable way to do business. With production labor that costs 94% less in Communist China than in the United States, outsourcing to China has become the most common way for defense contractors ( as well as most other U.S. manufacturers that are still in business) to augment profits. The problem with this scenario is that Communist China, the country that has been stealing our weapons technology, the country that is building what soon may be the largest military in the history of the planet, the country that the U.S. had a $270 billion trade deficit with in 2007 - is making parts for our weapons systems. The $270,000,000,000 trade deficit with China in 2007 is for one year and is not an anomaly. The U.S. trade deficit with China has been rising substantially for the last 25 years! (See graph: “US Trade Balance with China”.
If China decided to cut-off parts supplies for our weapons systems at a time when a major military conflict emerged - what would the United States do? What could the United States do? Ramping up significant U.S. production of military equipment and materiel is no longer an option. U.S. defense contractors, in outsourcing parts for much of our nation’s weapons systems, have put thousands of U.S. suppliers out of business. Consequently, every branch of the U.S. military, U.S. national security and U.S. homeland security are dependent upon China! “Reactive” legislation to rebuild our manufacturing base in this case would be too late.
Inherent in the word “reactive” is the urgent need to respond to a situation. When that urgent situation depends upon skilled employees, processes and high-tech machinery that take years to build and develop it puts the vulnerable reacting party at great risk. In this case, what is at risk are the freedom, sovereignty, and security of the citizens of the United States of America. The longer U.S. policy-makers delay in making proactive decisions to solve this problem, the more tenuous U.S. freedom and sovereignty becomes.
CHART 1: “US Defense Spending WWII and % of federal budget” showing the importance of non-defense manufacturing that was converted to making war materiel in WWII.
During WWII the United States was capable of converting traditional non-defense manufacturing into wartime materiel producers. Between 1943 and 1945 as much as 90% of the war materiel production came from non-defense manufacturers.The United States has lost tens of thousands of factories in the last ten years. If a major military conflict erupted under prevailing conditions, the U.S. could not convert enough non-defense manufacturing plants over to producing wartime materiel for two reasons: 1) there aren’t enough final-product manufacturers left in the U.S. that could convert to a massive wartime effort and, 2) those manufacturers that are still in the U.S. outsource many of their parts to Communist China and other nations making the United States extremely vulnerable.
In its 2007 annual report to Congress, The U.S.-China Economic and Security Review Commission gave 42 recommendations including the following: “The Commission recommends that Congress require the Department of Defense to prepare a complete list of the country of origin of each component in every U.S. weapon system to the bottom tier.”
The notion that our own defense department doesn’t know where parts for U.S. weapons systems are made does not bode well for America’s security. Even if this information becomes available, we still will not know the true scope of China’s involvement in our defense supply chain. Defense contractors outsource parts to Europe, but they don’t know how many European parts are coming from China. There is only one secure solution for making weapons systems and other high tech national defense materiel; produce all defense related parts and products in the United States by U.S. owned manufacturers! The requirement for these manufacturing companies to be U.S. owned is critical to insure that engineering, programming and tool-making is done in the U.S.
From Vulnerability back to Self-Reliance
“(During WWII) Non-defense or, consumer related manufacturers produced as much as ten times more defense goods than traditional defense manufacturers. It is imperative that the United States have a strong consumer and commercial industrial base in place to protect the freedom, sovereignty and security of our nation.”
In his book The Wealth of Nations, Adam Smith, the “father of free trade” stated: “It is of importance that the kingdom depends as little as possible upon its neighbors for the manufactures necessary for its defense".
A senior fellow at the American Enterprise Institute wrote: “The government should be able to get between me and the person I want to trade with only if that trade threatens the interest of national securityand if we are at war, or close to it.” In today’s complex high-tech world, we believe that waiting until we are at war or close to it would be too reactionary, too late, and would result in the defeat of our nation.
In agreement with Adam Smith and other free trade proponents, our proactive strategy is to take all other nations out of the defense manufacturing picture by requiring all U.S. weapons systems and all parts for U.S. weapons systems to be made by U.S. manufacturers within the sovereign borders of the United States. However, since that is such a radical (although critically important) move, we propose a gradual, but aggressive implementation process in the defense industry. This would require that all final-product manufacturers and all parts suppliers would be limited to importing only the type of products that they produce. And, all imports of parts and products for U.S. weapons systems would be frozen at today’s import penetration level. Over the next few years the import penetration percentage on these parts and products would be adjusted down to zero resulting in our defense related manufacturing base becoming firmly re-established in the United States.
For example, let’s say that Lockheed Martin outsourced diffuser cases for the F-16 Fighting Falcon. They bought the diffusers from two sources: one source was in the United States and one was in Communist China. Let’s hypothesize that out of all the jet aircraft diffuser cases that are sold in the United States, 50% are made in the U.S. and 50% are imported from China. Under our proposal, Lockheed Martin could not import diffuser cases from China, unless they manufactured the same types of parts. They would be required to buy these parts from U.S. manufacturers that make diffuser cases. Thus, Lockheed Martin could only buy the diffuser cases from a U.S. manufacturer of jet aircraft diffuser cases. And, only U.S. diffuser case manufacturers would be able to import diffuser cases from China. Since the import percentage is initially frozen at today’s import penetration level of 50% in this hypothetical example, 50% (or less) of the U.S. diffuser case manufacturer’s sales could be from imported diffuser cases and 50% would have to be made domestically. Each subsequent year this import percentage would be reduced until imported diffuser cases have been purged from all U.S. defense weapons systems.
This not only takes U.S. vulnerability out of the equation, but the opportunity to compete in a growing domestic market would create more competition and entrepreneurship in defense manufacturing within the United States. With the thousands of parts suppliers that are needed for defense manufacturers to produce their final products, a resurgence in defense related manufacturing would occur. This would create an economic lift a welcome by-product in making the United States more secure. As you can see in CHART 1, the majority of defense manufacturing in WWII came from non-defense manufacturers that were converted during the war. Non-defense or, consumer related manufacturers produced as much as ten times more defense goods than traditional defense manufacturers. It is imperative that the United States also have a strong consumer and commercial industrial base available for wartime conversion to protect the freedom, sovereignty and security of our nation. This fact inspired us look at how the same trade strategy explained for the defense industry above, should be integrated throughout the U.S. manufacturing sector. However, import percentages for consumer related products and parts could be reduced at a more gradual rate until balanced trade is achieved for the U.S. In addition to solving a major national security problem for the United States, there are many other profound advantages for the United States that could come about from this strategy.
Solution for America
The “Made in America Project”“Products are allowed to be imported into the U. S. only through U.S. manufacturers of the same types of products” . . .
Although, imports should not be a part of any U.S. weapons systems - international trade is acceptable for consumer goods and is actually very important to the U.S. economy and to the rest of the world. However, given the disparity in manufacturing costs that exist around the world today, U.S. manufacturers are in a serious non-competitive position as evidenced by the on-going exodus of U.S. manufacturing jobs. The same strategy, described earlier in this white paper for the defense industry, would solve this non-competitive problem and create a “level playing field” for the manufacturers of the United States. Once this “level playing field” has been achieved, the exodus of jobs going overseas would end. Since international trade in consumer goods has become important to our economy, this strategy would be implemented with less import percentage restrictions than for the critical area of defense manufacturing.
The essence of the new trade strategy:
Products are allowed to be imported into the United States only through U.S. manufacturers of the same types of products” and. . . the import percentage for each manufacturer’s annual sales would be limited to the current penetration of that particular “product-type” marketOver several years the import percentage allowed for each product type would be gradually reduced until the desired balanced trade is achieved for the U.S. This import reduction strategy would be applied more aggressively in strategic industries such as defense and energy at first, as compared to the import reductions applied to consumer and commercial industries.
This strategy would eventually create a global competitive environment where “fair” free trade could exist. In the meantime, it would make all the unfair practices and policies of other nations a non-factor for U.S. manufacturers. U.S. manufacturers would begin participating in what could be the biggest economic boom in the history of our nation. Job growth and job security would steadily rise and would result in significant increases in tax revenues for all levels of government.
To give you an idea of how this new trade strategy would work, let’s assume that the import penetration for roller skates in the U.S. was 75%, and the domestically made share of the roller skate market was 25%. Under this new strategy, the import level would be frozen at the 75% level. And, the only businesses that could import roller skates would be the U.S. companies that make roller skates. Thus, at the beginning, 75% of the sales of each roller skate company could come from imported roller skates while 25% would have to be made by the U.S. roller skate factory. Over the next few years this import penetration percentage could be reduced each year until balanced trade is achieved for the United States.
The roller skate final-product manufacturer could only import roller skates as a complete final-product. He must buy any parts that he doesn’t make from a U.S. parts manufacturer of those parts. Thus, if the roller skate manufacturer buys wheels he would have to buy them from a wheel manufacturer in the U.S, rather than importing the wheels. The U.S. wheel manufacturer is the one that would be able to import wheels, since it is the same type of product that they make and sell. The wheel manufacturer would then be subject to the import penetration limits for that particular product market. In the short term, this strategy would immediately create a “level playing field” for U.S. manufacturers, and become an instrument to achieve balanced trade for the United States. In the longer term, this strategy would become the catalyst that would drive the global manufacturing arena toward a “fair” free trade environment. It would allow companies to develop comparative advantages without the fear of absolute advantages gained from low wages or other governmental, political, or military interference. Once this “fair” free trade environment has been established in global manufacturing, this U.S. trade strategy would no longer be needed, and the prevailing condition will be influenced by and be the result of the power of market forces!
U.S. Trade Partners - The China Strategy
“Although China has hundreds of millions of people employed, they have managed to keep production workers in the low poverty range of the wage scale, (while business owners and Communist Party members get wealthy).”
Our main trade partner, Communist China, has 94% lower wages for production workers than does the United States according the International Labour office in Geneva Switzerland. In addition, Chinese laborers average 80 hours+ of work per week in manufacturing. U.S. manufacturers, as optimistic as many may be, can not compete with the low wage condition in China. There is a direct correlation between loss of U.S. manufacturing jobs and the trade deficit with Communist China.
CHART 2: U.S. Trade Balance with China (showing the U.S. deficit with China increasing drastically since the mid-eighties as a result of low-cost foreign competition forcing U.S. manufacturing jobs and knowhow to go to China. Consequently, nearly everything we buy is “MADE IN CHINA”)
The low wage condition in Communist China has created an environment where the U.S. has lost tens of thousands of U.S. factories, millions of good paying U.S. manufacturing jobs, and we have been impacted with enormous record setting trade deficits in the past 15 years.
If the United States the largest market for Chinese imports were to implement the strategy proposed in this white paper, the U.S. would gradually import less and less from China. This would create a dilemma that China would have to deal with. Although China has hundreds of millions of people employed, they have managed to keep production workers in the low poverty range of the wage scale, (while business owners and Communist Party members get wealthy). With the implementation of this trade strategy causing the loss of much of their exports that had been going to the United States, business owners and party members would have some choices to make in order to keep their business going.
•shrink company operations and pay the owners less to stay in line with lower sales.
•increase margins by raising prices (which would reduce sales even more.
•replace lost sales that once went to the United States (explained in the following paragraphs).
With dropping sales, the easiest way to cut expenses is to lay off millions of people. However, that would be highly undesirable in a Communist country that is trying to keep its people employed and engaged in a productive society. The best solution would be for the Chinese to replace the lost export sales with domestic sales.
Here is where China has the greatest opportunity. According to NBC news, half a billion people live on less than two dollars per day in China. If wages were to increase to the point that their own people could afford to buy the products they produce, businesses could easily replace lost sales by selling more products to people within the most populated country on earth their own. This upward pressure on wages, a result of the power of market forces without governmental interference, would only be the beginning of driving the global manufacturing arena toward a “fair” free trade environment. Eventually, this increase in wages in China would help to increase U.S. exports to China.
With China’s seemingly endless supply of low-wage workers, and China’s improvements in manufacturing technology, many other developed countries around the globe have also experienced manufacturing job-loss due to China’s absolute advantage in manufacturing. Even “so-called” free trade agreements such as NAFTA have been adversely affected by the policies of Communist China.
NAFTA, which has been bad for the United States, has been even worse for Mexico. The trade deficit that the U.S. has with Mexico makes the NAFTA agreement appear to be a success for Mexico. However, Mexico lost much of its small agricultural operations to U.S. imports due to NAFTA. Mexico has also lost much of its traditional product manufacturing to Communist China, where wages are 80% less than in Mexico.
CHART 3: “U.S. Trade Balance with Mexico”. U.S. trade deficits with Mexico have been increasing significantly since the inception of the misguided North American Free Trade Agreement (NAFTA) in 1994.
With the advent of NAFTA, the maquiladoras were greatly expanded in Mexico to assemble products for U.S. producers using parts that were made in the U.S. They have dominated Mexico's manufacturing sector since that time. More recently, the maquiladoras have conveniently evolved into facilities that import parts from China for assembly and shipment of the final products to the U.S. to take advantage of NAFTA.
Mexico has a large trade surplus with the U.S. but has a growing deficit with China due to Chinese imported parts going to the maquiladoras as well as the influx of Chinese made consumer goods being imported into Mexico from China. Consequently, the trade deficit dollars that the United States sends to Mexico are being used to settle Mexico’s trade deficit with Communist China. In essence, the U.S. trade deficit with Mexico translates into an additional trade deficit with China!
Mexico's manufacturing wages are lower now than they were prior to NAFTA, due to the downward pressure on Mexican wages in the maquiladoras to compete with the low wage condition in Communist China. Most recently, many U.S. companies have been shutting down operations in the maquiladors in favor of importing finished goods directly from Communist China. With fewer jobs in agriculture, fewer jobs in manufacturing, and with downward pressure on wages in the maquiladoras - Mexicans are leaving their families, leaving their tropical climate, and are often risking their lives to illegally immigrate to the U.S. to find work. Hence, Communist China is a major driving force behind illegal immigration into the United States!
If this new trade strategy were to be implemented in Mexico, and Canada, they could also experience explosive growth in their respective economies and NAFTA could be replaced with “fair” free trade! Indeed, the more nations that engage in this trade strategy, the sooner global manufacturing will get to the desirable “fair” free trade competitive environment. Can this strategy really work? It is a modeled after the essence of a strategy that has already been used successfully and has been proven to be very effective by Japan!
JAPAN- a post-war economic success!
“How is it possible that a nation torn apart by war, only about the size of the State of Wyoming in terms of square miles, and with very few natural resources, was able to become the second biggest economy on earth within about 25 years?”
After WWII Japan was a devastated, demoralized, defeated country. How is it possible that a nation torn apart by war, only about the size of the State of Wyoming in terms of square miles, and with very few natural resources, was able to become the second biggest economy on earth within about 25 years?
Japan inherently knew that the key to producing wealth, the key to civilized society, and the key to their independence was to make things! Japan developed a strategy after WWII that forced Japan to grow exponentially by developing a strong, resilient manufacturing base. It employed millions of people, it grew its economy, and it eventually made Japan a world leader in technology, engineering and manufacturing.
Our proposed trade solution is based on an already proven Japanese trade strategy that launched this small nation to the forefront of manufacturing and economic strength for over 40 years. The benefits have been historically significant for Japan, and could similarly result in a new wave of prosperity and entrepreneurship for the United States of America.
Benefits for America from . . .
the “Made in America Project”
“All of these profound benefits are achievable from one new already-proven trade strategy!”
The following are the profound benefits that could result from this new trade strategy. This new trade strategy would:
1)revive the U.S. economy without needing a “stimulus” package
2)stop the massive manufacturing job-loss trend in the U.S.
3)stop the rapid selling-off of U.S. owned capital assets in the U.S. to foreigners
4)create an indisputable “level playing field” for U.S. manufacturers.
5)eliminate all tariffs.
6)eliminate all nation-focused quotas.
7)eliminate import-related anti-dumping legislation.
8)allow balanced trade to be achieved.
9)create stable domestic oil market allowing U.S. oil companies to invest in new high-tech oil extraction
10)revive idle U.S. factories.
11)stimulate entrepreneurship in manufacturing.
12)improve and have more control over our national security.
13)significantly improve Federal, State, and Local tax revenues.
14)reduce the cost of government’s attempts to protect U.S. jobs.
15)eliminate U.S. trade deficit and the related sending of billions of trade-deficit dollars overseas which puts downward pressure on the value of the U.S. dollar.
16)U.S. dollar would become much stronger
17)higher education would see increased enrollments in engineering, math, and science.
18)computer programming jobs would return to the U.S.
19)tool making, mold making, and machinist’s trades would be revived.
20)eliminate the pressures to “outsource” which today is putting U.S. suppliers out of business.
21)indirectly cause the creation of a large middle class in developing nations.
22)improve our export potential while at the same time reducing our volume of imports.
23)improve the security of import inspections due to reduced volumes of imports.
24)see unprecedented U.S. economic growth.
25)improve U.S. international relations.
26)the workers of Mexico would be paid billions more per year, creating a large middle class.
27)illegal aliens from Mexico, now in the U.S., would want to return home to Mexico.
28)with improved wages in Mexico, illegal aliens would not enter the U.S. looking for work.
29)reduce the amount of money available to Communist China for building their military.
30)reduce the money available to Communist China for buying influence around the world.
31)imports of tainted drugs, food, toys, plastics etc. would be stopped by U.S. manufacturer’s quality control
32)have a true transition to “fair” free trade without need for nation-focused quotas and tariffs.
33)America would once again become “the land of opportunity” to start new manufacturing businesses.
All of these profound benefits are achievable from this already-proven trade strategy!
Conclusion“Government interference is the great intruder against natural market forces. . . .”
“. . . . allow the power of market forces and the free market system to do what it does best create a healthy competitive environment that would lead to fair prices, quality products and “fair” free trade for all.”
Free trade proponents advocate trade between nations without limitation or government interference. With the rules of the game of manufacturing in Communist China, and other places, so radically different than in the United States - free trade has proven to be disastrous for the United States as well as Mexico and other nations. U.S. manufacturers can not compete against manufacturing costs that are 94% less in a Communist controlled country that will not allow market forces to work. With balanced trade, market forces can create the needed conditions for production wages to rise to a fair level. Government interference is the great intruder against natural market forces!
Our “fair” free trade strategy has taken ideology from both protectionism and free trade to develop a short term, temporary trade strategy. It takes U.S. trade partner’s low-wage absolute advantage as well as other foreign government policies out of the picture.
Under this strategy it doesn’t matter whether China:
•is using child and other slave labor
•does not have environmental standards
•does not have health standards
•is “dumping” products* into the U.S.
•continues to allow it’s currency to be tied to the U.S. dollar
•keeps production wages 94% lower than the U.S.
•or if they implement a variety of other anti-competitive factors beyond U.S. control.
(In reality, some policies, such as the “dumping” of products into the U.S., would become a benefit to the United States under the new strategy.)
This temporary trade strategy immediately eliminates the impact of anti-competitive interference and unfair policies of China or any other trade partners, without the need for tariffs and other protectionist measures that would become obsolete. Foreign government interference would be irrelevant, as U.S. manufacturers enjoyed the “level playing field” created by this new trade strategy.
By creating an immediate “level playing field”, and gradually driving the world’s economy to balanced trade, this new trade strategy would provide a tremendous boost to the U.S. economy without any need for government “stimulus” money. This new trade strategy would also allow the power of market forces and the free market system to do what it does best create a healthy competitive environment that would lead to fair prices, quality products and “fair” free trade for all.