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The Crisis of U.S. Manufacturing in the Age of a Global Race to the Bottom

February 24, 2016

In a global economy driven by a race to the bottom in wages, industrial America is under attack. Our trading partners, ranging from China and Russia to South Korea and Brazil, desperate to prop up their exports in the face of weak global demand, are violating trade agreements and trade laws. The result is the decimation of manufacturing in the United States.

In the first 10 years of this century, America lost 56,000 factories. That’s 15 a day. Some just close. Others move offshore for the low wages and even lower environmental standards. American workers are left jobless. American communities are left bankrupt. And America’s capacity to construct the products it needs is diminished.

As a result, the U.S. manufacturing trade deficit reached a record high of $681 billion in 2015. That is a significant increase over the previous peak of $619.7 billion in 2007. The nation’s trade deficit with China hit an historic $365.7 billion last year. Rapidly growing trade deficits were responsible for most, if not all, of the 4.8 million U.S. manufacturing jobs lost since the turn of the century. American manufacturing and American workers will continue to suffer if these growing deficits are not addressed.

The Need for Reassessing U.S.-China Economic Relations

China is the center of the downward pressure in the global economy. China’s failure to move toward a demand-driven economy has led it to attempt to maintain economic growth through unfairly traded exports. The result has been a catastrophe for the U.S. steel industry. China has maintained, and continues to expand, its massive excess steelmaking capacity, exporting the surplus at below-market prices. During a time of lackluster global growth, this practice has caused irreparable harm—crushing prices, closing American mills, coke batteries and ore mines. It has devastated communities and cost thousands of workers their jobs.

For far too long, we have lacked a clear, consistent and comprehensive set of policies that address the reality of China’s approach to economics, trade, security and international affairs. It is time for a wholesale re-evaluation and articulation of a new approach.

Since 2000, when Congress granted China Permanent Normal Trade Relations, the bilateral accumulated trade deficit has grown to $3.66 trillion. China’s manufacturing capabilities have grown along with it, as evidenced by our Advanced Technology Products trade deficit with China. This year, China is expected to export assembled motor vehicles along with high technology equipment and countless other products that represent increasing competitive challenges to the U.S. manufacturing base.

Too many corporations, however, appear ready to “double down” on the failed model of U.S-China trade relations through their advocacy of a U.S.-China Bilateral Investment Treaty (BIT). Today, almost half (46%) of all China’s exports come from enterprises significantly funded by foreign investment. The proposed U.S.-China BIT, with its special rights for investors and absence of labor and environmental protections, reinforces the current dysfunctional and unbalanced model of U.S.-China trade.1

Transparency is also a problem when it comes to Chinese investments in the United States. Chinese state-owned enterprises are on a buying spree, with tens of billions of dollars in announced acquisitions in recent weeks. These investments may pose significant risks to U.S. national and economic security, but insufficient information is available to make a determination. The current draft BIT does nothing to address these transparency issues.

China also is seeking to reject the basic rules of economics and have the United States, the EU and other countries grant them Market Economy Status. Granting China Market Economy Status would undermine the most effective tools we have to respond to China’s unfair trade practices. A cursory review of the Chinese government’s interventions in its stock and currency markets over the last several months demonstrates the degree to which China remains a non-market economy. Government leaders in the United States, the EU and elsewhere should make it clear that China’s status will not be altered as long as it continues its current level of state intervention in its economy and state support for its global firms. Should the EU grant China Market Economy Status, the United States should reconsider proceeding with the Transatlantic Trade and Investment Partnership (TTIP) negotiations.

The Broader Crisis of U.S. Basic Industry

More broadly, other U.S. industries, such as paper and aluminum, confront the same type of trade law violations and overcapacity that are destroying the U.S. steel industry. U.S. aluminum manufacturers are reeling. Ormet permanently closed its Ohio smelter. Noranda and Sherwin declared bankruptcy. Alcoa and Century closed all or parts of several smelters. Thousands of aluminum workers from Kentucky to Washington State who had good, family-supporting jobs, are unemployed.

Too many corporations have responded to trade violations by moving their factories and jobs to Mexico, China or other low-wage and low environmental standard countries. Just this month, United Technologies Corp. announced that despite earning more than $6 billion in profits this past year, it would ship its Carrier and Electronic Controls factories to Mexico, costing 2,100 Indiana workers their jobs. United Technologies Corp. follows American icons like Hershey’s, Nabisco and La-Z-Boy out of the country.

Corporate-dominated trade policies have failed American manufacturing and American workers by encouraging that exodus. The latest of the ilk, the proposed Trans-Pacific Partnership (TPP) trade deal, with its special rights for corporations, insufficient rules of origin, inadequate standards for state-owned enterprises and a total lack of currency provisions, would be a massive license for global corporations to ship even more American factories and jobs overseas in search of lower wages and weaker regulations.

Manufacturers that want to remain in the United States and labor unions have responded to violations by filing trade cases. But to win, U.S. law requires that industry experience substantial losses. This is unconscionable. American workers should not have to suffer to stop flagrant trade abuses.

The Obama administration has taken more action than any before it to enforce U.S. laws, but must go further to address the unfair and predatory trade practices that are destroying American manufacturing. Bilateral and multilateral dialogues have become a substitute for action. And as the diplomats talk, U.S. factories close and Americans lose their jobs.

For American manufacturing to survive and thrive, the old, failed model of corporate-dominated trade agreements must be dismantled and discarded and a new prototype developed, one that is in the interest of the people of the United States, one that values U.S. manufacturing and innovation, and one that has as its goal the prosperity of the United States, not the profits of global corporations. In addition, an enforcement structure must be developed that penalizes violators before American manufacturers go bankrupt and workers’ lives are disrupted permanently.

America’s manufacturing sector has been a vital path to the middle class. Manufacturing made America a strong nation, economically and militarily. Today, in almost every other advanced economy, a healthy manufacturing sector is key to maintaining high wages while innovation in the sector drives overall productivity. In contrast, the radical decline in American manufacturing employment is a fundamental part of the story of runaway inequality in America. America’s manufacturing crisis threatens the future both of our economy and of our democracy.

Washington must recognize the crisis. It must develop a comprehensive action plan—an industrial strategy—to renew America’s manufacturing sector and the nation’s economy.

1. For more details on why a U.S.-China BIT is a bad idea, please read “A BIT with China is the Wrong Solution to the Wrong Problem.”

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