Mauldin Economics' Patrick Watson argues globalization is slowly reversing meaning politicians should try to minimize the pain instead of adding to it

By Patrick Watson*

Here’s a question whose answer is rarely pleasant: “What could go wrong?”  

We see a real-time demonstration in the Trump trade war. The president’s idea was to bring lost manufacturing jobs back to the US.  

However, the administration’s chosen weapons appear to be sending factory jobs out of the US. And while they are punishing some foreign competitors, they actually reward others. 

It’s one thing for a plan not to achieve its goal - it happens. But when your plan is making the problem worse, common sense says you stop immediately.

Trump tapped the brakes at his G20 summit meeting with Chinese president Xi Jinping. He agreed to delay the 25% tariffs that would have gone on Chinese goods beginning January 1.

But the train is still rolling downhill, and more Americans are going to learn it the hard way… like thousands of Midwest automotive workers did last week.


Photo: AP

'Unallocated' factories

You probably heard that General Motors (GM) said it would close several US plants and lay off thousands of workers. Ford (F) made a similar announcement in October.

This was bad news for the GM workers but good for GM shareholders. Their shares rose after the optimistically titled General Motors Accelerates Transformation news release.

(In GM-speak, those plants aren’t closing, they are being “unallocated.” The layoffs are a “staffing transformation.”)

So, GM management just did what some investors think management should do: maximize shareholder value. But what took away their other choices?

Part of it was long-term consumer trends. The cuts focused on passenger car production, which has been declining as Americans buy more trucks and SUVs. But that’s nothing new.

President Trump’s steel tariffs are new and reportedly raising GM’s costs up to a billion dollars annually. Hence the need to unallocate plants and transform staff.

(The latest meeting didn’t change those tariffs, by the way. They remain in effect.)

However, we can’t place all the blame on Trump. Congress helped too.

Last year’s “Tax Cuts and Jobs Act” was long on tax cuts and short on jobs. Its hastily drawn provisions include one called GILTI that can reward US companies for moving production overseas. In certain situations, they pay a lower US tax rate than they would by making the same goods in the US and exporting them.

That was not the intent, I presume, but it happened. And politics being so gridlocked, we don’t know when a new Congress will fix the problem. Meanwhile, GM and others have a tax incentive to kill American jobs.


Photo: AP

Chinese customers

Other and bigger things are happening.

Industrial technology is pushing production closer to consumers by making international wage differences less important. Unlike people, robots cost about the same everywhere, so businesses are better off building factories near the people who buy whatever they make.

For GM and other auto manufacturers, the customers are increasingly foreign. In this year’s third quarter, GM sold 835,934 cars in China and 694,638 in the US. It built many of those directly in China and has every reason to make more there, tariffs or not. Ditto for the entire automotive industry.

That’s not what President Trump wants, of course. He wants them to build cars in the US and ship them to China. The US will then, he thinks, become a manufacturing powerhouse again and the much-hated trade deficit will shrink.

That’s the theory. Unfortunately, his tariffs help convince the car makers to do the opposite, as does the GILTI tax. And even without those, shorter supply chains are making that kind of exporting uncompetitive.

Like it or not, the world is changing. Those manufacturing jobs are not coming back to the US. But that doesn’t mean the tariffs have no impact.


Photo: Wikimedia Commons

Vietnam wins

Like many in the US, Chinese companies feel the tariffs. The added costs and reduced sales are forcing them to make changes, much like GM did.

Here’s the lead from a November 29 South China Morning Post story.

President Donald Trump’s tariffs on Chinese imports are having the desired effect of driving production out of China – but not to the United States.

Less than a month after the Trump administration hit US$200 billion worth of Chinese imports with a 10 per cent tariff, leading Hong Kong based furniture maker Man Wah Holdings – which has more than 18 million square feet of manufacturing space in China – broke ground on an expansion of its facility outside Ho Chi Minh City in Vietnam.

In June the company, which specialises in reclining chairs and sofas that have become a fixture in middle-class American living rooms, bought what was already one of Vietnam’s largest furniture factories. By next year, it will be the biggest.

Chinese manufacturers are moving tariffs to places like Vietnam where costs are lower and US tariffs not (yet) applied. Good news for Vietnam, obviously, but also for the Chinese companies and government. Chinese workers? Not so much.

US consumers, meanwhile, will stay mostly oblivious to the national origin of their purchases. Most won’t care if a product comes from Vietnam instead of China as long as price and quality stay the same.

study by World Bank economist Massimiliano Calì estimated Vietnam’s GDP will grow 4.4% if it replaces all the Chinese exports on products it already produces, with the Philippines and Cambodia benefiting as well.

How does that help American workers? It doesn’t. It hurts them. A separate study (funded by Koch Industries, so not a left-wing source) estimates trade policy will cost the US economy $915 per person in 2019 alone, reducing GDP by 1.78 percentage points.

That’s next year, not way out in the future. The damage is happening now.

As I noted last week, much of this damage is already locked in. Companies have built inventory ahead of the now-postponed 25% tariffs on many Chinese goods. At some point, they have to stop buying and sell down that inventory.

So it’s good that Presidents Trump and Xi agreed to negotiate further, but their public statements don’t suggest either side will give up much. They have deep, structural differences.

But the bigger trend won’t change. Globalization is slowly reversing, and no one can stop it. We should try to minimize the pain. Instead, we’re adding to it.


*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a regular Mauldin Economics series called Connecting the Dots. It first appeared here and is used by interest.co.nz with permission.

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30 Comments

"So, GM management just did what some investors think management should do: maximize shareholder value. But what took away their other choices?" Herein lies the fundamental problem. The current economic model, that amongst other things is based on a perpetual growth myth, but more importantly places shareholder value above societal value, is just plain wrong! These global corporations, and fundamentally all publically owned (i.e listed on a sharemarket) companies focus on "shareholder value" rather than the value they return to societies. This focus sees CEOs get huge pay packets while their employees essentially get screwed, all in the name of shareholder value! The organisations work very hard to avoid paying taxes in the societies within which they operate, while making use of the education systems, power, communications and transport infrastructure of those societies - all in the name of shareholder value! They avoid accountability for ecological damage, they seek to operate in the lowest paid, weakest regulatory environments to maximise profit - all in the name of shareholder value!

These organisations somehow act as thought they believe that somehow they are apart, separate, and above society. A law unto themselves. The truth is they are not.

This is the way the global free market operates as well as sharemarkets all over the world. It is also why Governments need to look at who is operating here and ensure that ALL taxes are properly paid. If there is a regime that allows a company to sell products in NZ, but allows them to off set thei profits to a headquarters somewhere else, Singapore for example, then this must stop! If they want to take advantage of and profit fromus, then they must be made to pay their fair share of that that makes it possible for them to operate here.

The sole and complete focus on maximising shareholder value actually seemed to become more explicit following Milton Friedman, from what I've seen and heard. Before that, companies did have a broader focus (at least in the USA, where this discussion was focused).

Even so, a strict focus on shareholder returns might work well for society so long as that return is going to shareholders within the society. The combination of transferring those returns outside of society while benefiting greatly from society doesn't seem to be working so well.

Question is, how best to address it? Governments becoming shareholders and reaping the benefits? Broader basic incomes (e.g. combine a level of social security as a base, with the freedom for capitalism across the top?).

I seem to recall Ronald Reagan saying that socialism only works in two places, heaven where they don't need it, and hell where they've already got it.

Surprisingly it would seem capitailsm is heading down the same path. I think any model taken too far becomes unsustainable - perhaps we need a better socialist/capitalist mix? Paying CEO's multi million dollar salaries I don't think is beneficial for anyone - not the person, the company nor society. And yet the gap between workers and management keeps getting larger. Where does it end?

good read
https://www.amazon.com/Myth-Capitalism-Monopolies-Death-Competition/dp/1...

The Myth of Capitalism tells the story of how America has gone from an open, competitive marketplace to an economy where a few very powerful companies dominate key industries that affect our daily lives. Digital monopolies like Google, Facebook and Amazon act as gatekeepers to the digital world. Amazon is capturing almost all online shopping dollars. We have the illusion of choice, but for most critical decisions, we have only one or two companies, when it comes to high speed Internet, health insurance, medical care, mortgage title insurance, social networks, Internet searches, or even consumer goods like toothpaste. Every day, the average American transfers a little of their pay check to monopolists and oligopolists. The solution is vigorous anti-trust enforcement to return America to a period where competition created higher economic growth, more jobs, higher wages and a level playing field for all. The Myth of Capitalism is the story of industrial concentration, but it matters to everyone, because the stakes could not be higher. It tackles the big questions of: why is the US becoming a more unequal society, why is economic growth anemic despite trillions of dollars of federal debt and money printing, why the number of start-ups has declined, and why are workers losing out.

Thanks Henry - might be worth a read. Cheers.

And the outright myth that is "economies of scale". That is just an excuse to take production and ownership of production off individuals and sme's and put it all in the hands of massive corporations who wrap everything in plastic to get it to you from halfway around the world. Thus far, no-one has been able to offer me a good explanation for the wrapping of toilet paper in plastic.

Myth? Are you kidding? Your comment just proves the benefits of economies of scale by talking about how production is more competitive in larger businesses than small businesses.
You talk about taking and giving as if there is some great deity in charge of who gets to be in business.
In fact this is what happens when you leave businesses alone; the best businesses succeed.

Want to change packaging materials? Come up with a better solution.

Want to stop fucking the planet, you had better come up with a better solution. Seems the average muppet is quite happy to buy it wrapped in plastic.

"Thus far, no-one has been able to offer me a good explanation for the wrapping of toilet paper in plastic."

You haven't asked any smart people then.

Plastic = waterproof, so when the pallet is sitting outside from being unloaded from the truck and a rain shower comes through your toilet paper stays in sale-able condition.
Plastic: clear and easy to print on so marketing department can show off the product and whatever marketing guff they want.
Heatshrinkable so it consolidates the TP into a relatively space efficient and easily handled package and doesn't need some expensive wrapping machine to wrap it in something else.
Plastic= cheap & light.

Cheap? What is the cost of it floating around in the ocean?

It doesn't appear on the balance sheet, or the price tag in teh supermarket.

What has built the modern world with it benefits of fairly decent free speech, medicines, public education and libraries, greatly expanded lifespan, massive reduction in death by warfare, international travel, interest.co.nz, and other goodies has not been capitalism nor socialism but competition. Success of big firms has been surrounded by innumerable small businesses in frantic competition; for example China today, Japan when I was younger and Birmingham in the past. America revived a century ago when anti-trust laws broke up standard oil and later modern comms evolved from the breakup of AT&T. Time Fonterra was split??

i.e. capitalism with good anti-trust laws.

Agree, there is nothing wrong with having corporations focused on shareholder value, but there needs to be adequate counter-balances from Govn / society hence the so called free market mantra is naive and is a really bad idea IMHO.

Steven,

I have no idea what your background is,but in my view,there is a great deal wrong with companies being primarily focused on shareholder value. I say that as a very long- term investor,who derives much of my retirement income from dividends.
The best companies focus not on short-term shareholder returns,as is all too common in the US,but on their staff and customers. Over time,this increases shareholder returns.

who derives much of my retirement income from dividends.

Probably not for much longer. Certainly not past ten years, perhaps a lot less than that. But good you are aware.

If I were a capitalist interested in maintaining my right to own and control the means of production and extract surplus value, I'd be having a s long hard cold look at France with their "gilets juanes" in the last few days and then think about the whole shareholder value thing a bit harder and see if you might come to some different more pro-social conclusions. You can only drive down labour income share and sustain consumption levels on debt for so long. Eventually people get angry and organised.

I had the impression the French were protesting as they are very highly taxed (45% of gdp) and the recent fuel tax was the straw that broke the camels back so to speak.

Yes but we are taxed a similar amount.

Are we? Here’s a Forbes article showing France with the second highest tax burden - https://www.google.co.nz/amp/s/www.forbes.com/sites/niallmccarthy/2017/1...

Yes but we are taxed a similar amount.

I reckon Macron's Armistice Day speech where he claimed nationalism was unpatriotic was the catalyst.

In this case the protests seem to be over the rises in petrol tax rather than anything else I can see.

However I really suspect your general vein is spot on. Unless there is a society and economy for all then we'll see revolution/revolt at some point, but we do indeed seem to be in a 2nd guilded age the first was just before the 1st Great Depression. That thought should give you goose bumps.

The yellow shirts movement is morphing into a generalized disaffection with inequality and anti elite anti austerity movement and is has sure rattled Macron. Watch this space...

We seem to be at the crossroads of capitalism alright. The big can't just keep on getting bigger. Well, they can, but it's not ideal, is it?
To me, there seems to be two parts to it: the original capitalism (OC) that underwrote the new world democratic nations over the past 200 years, driven by good education systems & a mobile labour force etc. Then along came demand capitalism (DC) driven by the top tier tyrants with everyone doing as they're told & working day & night to make a small group at the top very wealthy.
Mind you, OC created a small group that are very wealthy as well, so we can't throw too many stones here.
Re the socialist/capitalist mix mentioned above, we've been doing this for over 80 years now. This is what the West already is, get rich if you want to work hard, or get looked after if you want to do nothing. It has a few issues, sure, but it's still the best system available that I've seen in my 60 odd years.
I think what might be lacking at the moment in the OC world is the collapse of our governmental systems. OC governments currently have no respect from their people, that's probably because OC governments have no respect for their people. This is both a complicated & negative situation that, from what I can see, effects most western governments today in some way, shape or form.
This dismantlement, is replicated in the left-right political divide we see & hear about every day, that is breaking down our once great culture, one family & one relationship at a time. In other words, it's destroying us. This is quite sad.
Suggestion: Perhaps we need to create a better system of democracy that includes a better capitalist system that has greater goals than just shareholders? The banking system in Australia is going through this discussion as we speak. We need to ask ourselves, what is important here? Is it the over-arching society that creates all these wonderful opportunities, or is it the shareholders that underwrite it? Or is it the workers that do a great job (on the whole) or is it the young mums at home doing the toughest job in the world & not being recognised for it? The answer is that it is all of these things... & more.
The key here is to sustain our cultures well enough, so everyone can do what they legally like & have a half decent life in the process. The essential ingredient to the success of this, is in keeping our families & relationships functional, but that's a story for another day.
How do we do this? Well, I feel we have to start small. Start by incentivising the regions into regional self-governing businesses or units if you like. Install bright people who can manage these 'large' regional operations and run them like beneficial regional businesses. Why ? Well, for a start, everyone will know everyone else. Or if they don't, they soon will, as the whole region eventually becomes one team all working for the good of the whole region. It's a bit like regional rugby but for real. And every region has its wise old men (or women) which everyone knows about. Right? It's the regions remember.
This way local decision-making will benefit local people & local people will have an interest in the region doing well. Which in turn, will attract (or not) others to the region that have a better lifestyle, because that region's got its act together & I'm getting a great house for half the price & a great job with some great social opportunities to go with it, etc etc.
Yes we still meet centrally & we still have a national system for some things, but that is only about half of what it is now. Education is a great example of how regions could create top people for specific roles so each region could master in a mathmatics, or science, or software building or whatever they choose to help create their region into being the best region for these skills.
What I'm raving about here is the dismantling of the bigger systems, which are essentially failing their people & themselves, by (basically) starting again. Let's go back to the drawing board (regions) and let's come up with a better system of both democracy & capitalism/socialism, that gives the people as say in their affairs once again, that feels like they're being heard & looks like their actions are their accountabilities mean something & that they feel as if they have a say in their futures once again. Democracy: Version 2.0.
Just a thought!

Is France telling us that we may be on the verge of removing globalists from politics and MSM. NZ is very much behind most "western" nations where events have drowned MSM propaganda. I very rarely visit these pages now because the really important issues around our planet are mostly ignored. This is a glaring example.
https://www.youtube.com/watch?v=FFTxZ7Xfbvo

One look at the comments under that video.. sheesh.

I find it interesting that the author doesn't mention China's protectionist policies. Is the author aware that the US imposed these policies in retaliation to China's existing policies? Maybe not (but I think they do...).
The author even talks about the detrimental effect this trade war is having on Chinese workers. But the topic of the whole piece is about the actions of the US.
Anyone else find this interesting?

Australia banned Huawei from its 5G network over the summer, with the country’s spy chief voicing similar concerns over foreign entities hijacking the networks critical for healthcare, energy and other systems.

Yet we allow Spark, Chorus, Vodafone etc to put Huawei spyware in every house.