Foreign Trade or Isolation?
A Trade Policy for the 1960s
Trade, Investment and Deindustrialization: Myth and Reality
Beyond Free Trade
Competitiveness: A Dangerous Obsession
Workers and the World Economy: Breaking the Postwar Bargain
Trade Policy for a Networked World
Toughest on the Poor: America's Flawed Tariff System
Offshoring: The Next Industrial Revolution?
Globalization and Unemployment
The Downside of Integrating Markets
Why the Negotiations Are Doomed and What We Should Do About It
The Truth About Trade
What Critics Get Wrong About the Global Economy
NAFTA's Economic Upsides
The View From the United States
Inequality and Globalization
How the Rich Get Richer as the Poor Catch Up
The Strategic Logic of Trade
New Rules of the Road for the Global Market
The TPP's Promise and Pitfalls
How to Free Trade
And Still Protect Democracy
The American labor movement has basically concentrated on domestic issues-with the notable exception of its vigorous efforts to further the cause of human rights, free trade unionism and political democracy throughout the world. This focus on the United States has been the result of both the sheer size of the American economy and work force and the specific circumstances which gave rise to the rapid growth of the labor movement in the 1930s.
The renaissance of organized labor in this country during the depression years was based mainly in the manufacturing sector. In those days, international trade accounted for a minute part of the nation's total output of goods and services. It was, therefore, manifest that the problems of the national economy that culminated in the Great Depression resulted from deficiencies in domestic policy. Gradual economic revitalization in the New Deal years reinforced the views of labor leaders that the viability of the American economy was inextricably and almost exclusively linked with the domestic scene.
In the early 1960s, workers in a number of labor-intensive industries, particularly the apparel industry, began to experience economic distress. For some, the problem was outright loss of jobs; for the majority, earnings failed to keep pace with average manufacturing wages. That this could occur during what was to become the longest period of sustained economic growth in American history was cause for consternation. What was happening compelled those affected to look beyond our borders.
It rapidly became obvious that the dilemma was due to market dislocations in the wake of a growing tide of imports. Unions might have been expected to respond by calling for a cessation of all labor-intensive imports. The International Ladies' Garment Workers' Union, however, did not follow that path. Unlike most unions in the United States, the ILGWU was founded by immigrants who arrived in this country with a firm commitment to the international solidarity of working people. The ILGWU leadership needed no lessons in the importance of international economic cooperation to maintain world peace. It rejected and continues to oppose a philosophy of extreme protectionism.
The threat to American jobs and living standards that had been limited to a few industries has now multiplied to the point where it affects workers-and many employers-in almost every industry. The issue is no longer the viability of entrepreneurial manufacturing. The specter of deindustrialization is not only apparent, but has continued to grow at a geometric pace.
In the course of more than 40 years as an officer of the ILGWU, I have been closely connected with the industrial scene. Especially since becoming the union's president in 1975, I have often discussed the loss of American manufacturing with my corporate counterparts. I have heard the concern of other union leaders in the highest councils of the labor movement and that of workers on the shop floor, along with the thinking of my opposite numbers in the developed and developing nations. Insights have also been gained in exchanges with government leaders in the United States and abroad and through participation in negotiations affecting both bilateral and multilateral trade.
The experiences of the apparel industry in particular and of the nation's manufacturing base in general have compelled me to think through more thoroughly the current implications of postwar national economic policy. I would like to share these explorations and some of the resulting conclusions.
By the end of the Second World War, U.S. trade policy had shifted radically from the autarky of the 1930s to an ideology of "free trade." International cooperation created by the wartime alliance and the emergence of the United States as the dominant Western power were catalysts in this change. In the immediate postwar years, the output of the United States represented an unprecedented share of global industrial production. By 1948, three years after the end of the war, American output still represented more than half of the world's industrial product. America's newfound love affair with free trade was, consequently, solidly based upon a pragmatic assessment of domestic potential.
Prosecution of the war had brought important changes in the American economy. Fabrication of war material and the growth of the armed forces had reduced depression-related unemployment to a point where the dream of a full employment economy seemed possible. Capital outlays, encouraged by military needs, and research and development, both of which were underwritten by the government, had helped to modernize industry, yielding impressive gains in output and productivity.
Military expenditures declined sharply with the end of the war and millions of discharged servicemen reentered the domestic work force. The likelihood of a postwar slump was advanced by most economists, who foresaw a severe downturn once pent-up demand for consumer goods, created during the war years, was satisfied. The most effective way to avoid that prospect was to ensure new outlets for American industrial capacity.
If only in purely economic terms, the postwar U.S. commitment to a greater degree of unrestricted trade made a great deal of sense. Given the destruction of industrial plant in much of Europe and Japan and the time period they needed to rebuild, extraordinary advantages of the United States in capacity, technology and productivity permitted the economy to prosper. While Europe and Japan were rebuilding their industrial bases, American manufacturers enjoyed an unchallenged share of world markets which helped to facilitate rapid conversion of the economy to peacetime production and avert an economic downturn.
Postwar trade policy also enhanced opportunities to attain strategic political goals. The United States sought through the Marshall Plan to assist in the reconstruction of devastated European economies as an integral part of an effort to create and strengthen stable democracies. The Marshall Plan contributed significantly to Europe's recovery as did investment by American corporations, encouraged by government policy.
While the U.S. economy initially benefited from this policy, there were mid-and long-term costs associated with these efforts. In time, financial assistance, investment, shared industrial know-how and the rebirth of war-devastated economies began to diminish the advantage American manufacturing enjoyed in the period immediately following World War II.
As American investment in Europe continued to grow, the relative availability of capital for domestic investment declined. Earnings of European subsidiaries of U. S. corporations were not fully repatriated, further increasing the gap between potential and actual domestic capital formation. While overseas investments by U. S. corporations enhanced the profitability and competitiveness of these corporations, they restricted growth possibilities in the domestic economy.
The implicit restriction of domestic growth and the conscious sharing of the global market had aims which could not be calculated in purely economic terms. They were linked with efforts to avoid social unrest in Western Europe and to the establishment of a strong Western Alliance. The absence during the past 37 years of global military conflict, and especially of regional warfare in Europe, has been one outcome of U.S. policy. Its value is incalculable.
American policy toward postwar Japan had similar ramifications. Emergence of a stable, friendly and economically viable order in Japan was, as in Western Europe, a vital American concern. Japan, and Asia as a whole, however, did not readily offer as significant a market in the immediate postwar years as did Europe. Nonetheless, for similar strategic reasons the United States provided aid and shared technology. The Korean War contributed to the rebirth and growth of basic Japanese industry as Japan became an important supply base for American and U.N. forces. Further substantial gains to the Japanese economy took place later, during the Vietnam War. The United States also provided an additional critical inducement to Japanese industries by establishing and helping to maintain until 1971 a foreign exchange rate favorable to the Japanese, even as that country pursued a highly protectionist trade policy.
America's postwar export predominance could not continue indefinitely, especially after Germany, France and Japan re-created and further developed their industries with the most advanced available technology. Throughout the 1950s and into the early 1960s, aided by the absence of large-scale military expenditures, both Japan and the principal countries of Western Europe enlarged plant and equipment and increased consumer output, thereby creating near full-employment economies and raising living standards. As their industrial plants grew, these nations devoted greater attention to increasing exports. American multinationals captured a share of the domestic and export markets in Western Europe and, to a far lesser extent, in Japan. Initially, the domestic economy in the United States was not as severely affected as had been anticipated earlier. The unbroken domestic growth of the 1960s made the markets of Western Europe and Japan relatively less important.
As a result of U. S. government policies and private encouragement, as well as the need to pay for raw material imports used in its growing industrial machine, Japan increasingly pursued a model of export-oriented development in a number of key industries. In this, of course, Japan was not alone. If Japan were an isolated case, perhaps trade policy would not bear so heavily on our current economic problems. But Japan is not an isolated case. Rather than acknowledging that there are limits to the American economy's ability to absorb imported goods, U. S. policy has been one of encouraging developed and developing nations to increase their exports to this country.
Continuation of a policy of relatively unrestricted trade without incurring disastrous internal results must be viewed both in the context of the domestic economic circumstance and, because the actions of the United States have international implications, in terms of foreign policy goals.
The consequences of this policy for domestic manufacturing have changed and intensified in the course of the last two decades. Yet, despite the growing importance of the problem, discussion of import-penetrated industries was, as recently as ten years ago, extremely narrow in scope and short in duration. The sectors concerned-primarily labor-intensive industries-were few, and, to most observers, imports did not appear to be a general threat to U.S. manufactures. Industries experiencing difficulty competing with foreign goods were viewed merely as isolated cases.
In the 1970s the nation came to learn that excessive import penetration was not peculiar to such labor-intensive industries as apparel, textiles or home electronics. The experience in these sectors was merely a preview of similar dislocations which have now affected almost every facet of American manufacturing.
Many nostrums have been suggested over the last 20 years. When the members of the ILGWU were first confronted with the rising tide of apparel imports from developing countries, we were advised that the solution in our labor-intensive industry was simple. Domestic industry, it was said, should become more competitive by improving worker productivity.
Even in the less-developed countries, however, apparel is manufactured with essentially the same state-of-the-art technology employed in the advanced nations. Frequently, manufacture abroad has been implanted by American corporations. Designs and production techniques created in the United States and supported by American merchandising skills are used in the developing countries. Capital, technology and managerial know-how have been internationalized, leaving no opportunity for domestic apparel manufacturers to obtain a meaningful edge in productivity. Consequently, wages represent the only area in which the domestic industry can compete in an open market with imports from the developing world.
By the standards of other manufacturing in the United States, wages in the domestic apparel industry are not high. Across the country, a sewing machine operator earns an average of $5.00 to $5.50 per hour. With benefits, this comes to total compensation of roughly $6.75 per hour. But workers in the major exporting countries earn a small fraction of this amount-less than $1.00 per hour in Hong Kong, less than 40 cents per hour in Taiwan, Korea or Singapore, about 20 cents per hour in India and even less in Sri Lanka and the People's Republic of China. For garment workers in the United States to compete with such wage levels, even taking into account shipping costs and applicable tariffs, would mean that they would have to accept total compensation of hardly more than $1.00 per hour.
When we brought this to the attention of the policymakers, they responded that additional constraints on apparel imports were still unwarranted. If the domestic apparel industry could not compete on a global basis, so be it. The displaced workers, they contended, would find other work in such industries as shoe production, novelties or plastics, where the skills were highly compatible. Yet these labor-intensive industries were afflicted with the same malady-they too were losing jobs in the wake of growing imports from low-wage areas.
Policymakers and corporate spokesmen then suggested that the loss of labor-intensive manufacturing jobs should not be cause for alarm. People displaced by imports, they maintained, could be retrained for better jobs in capital-intensive industries-autos, steel or, better yet, the technology-intensive growth industries. Such a stratagem, however, had first to cope with limitations on upward or even horizontal job mobility.
Even under the best of economic circumstances, occupational adaptability is far from perfect. As the shortcomings of the War on Poverty of the late 1960s clearly demonstrated, the American labor force has a broad spectrum of skills. High levels of employment and minimal unemployment, therefore, require a full spectrum of job opportunities-from the least skilled to the most advanced. Fitting people into job slots is a complex and frequently disheartening exercise, especially when an industry or a substantial fraction of it is phased out of existence. Limitations on occupational adaptability, which some economists slough off as "structural unemployment" (as though there are no human bodies behind that bland concept), are compounded by constraints on mobility created by family ties, inadequate financial resources, educational limitations, lack of access to information regarding available jobs, or de facto sex or racial discrimination.
In periods of economic stagnation or retrogression, it is difficult, if not impossible, to upgrade workers whose skills have become technologically or economically obsolete. Particular attention must, therefore, be paid to the availability of jobs in industries where skills are roughly compatible. Otherwise, massive sectoral unemployment results. Trends in several key industries thus have a critical bearing upon trade policies and, more broadly, upon industrial development and growth.
Between 1965 and 1981, the import share of developed countries in the domestic U.S. auto market grew from six percent to over 27 percent. Foreign-made trucks accounted in 1973 for only five percent of domestic purchases; in 1981, the figure had risen to 20 percent. The pattern in steel, the nation's backbone, parallels the auto industry's experience. From barely five percent in 1962, the import share of the developed countries in the domestic steel market increased nearly fivefold to almost 25 percent in 1981.
It is currently being said that the decline in the market share of domestic auto and steel output, as in many labor-intensive manufacturing industries, may well be an affordable price to pay for a productive restructuring of the American economy. This argument suggests that basic manufacturing is a drain on the resources available to technology-intensive industries. The latter, it is contended, should be the mainstay of an economically advanced nation. The proponents of this view concede that it will result in some permanent unemployment, but, they argue, the long-run result will be a more competitive economy. The problem presented by occupational adaptability is acknowledged, but subordinated to the conclusion that promotion of high-technology industries will ultimately produce the most effective means to secure real economic growth. Such growth, it is said, would in time provide for considerably lower levels of unemployment.
Even if the enormous problem of occupational adaptability is ignored, dependence upon technology-intensive industries as the primary source of manufacturing employment is conceptually flawed. It fails to take account of the small labor component in technology-intensive production, compared with either labor-intensive or even most capital-intensive manufacturing.
Thus, under the most ideal of circumstances, reliance on technology-intensive production could not support present levels of manufacturing employment, let alone reduce current high unemployment. The practical deficiencies of this development concept are underscored, moreover, by evidence that the market shares for domestically produced technology-intensive goods are themselves declining.
A case in point is the American electronics industry, a field that truly grew out of American ingenuity. The basic new discoveries in the industry were made in this country over past decades, with defense and space programs providing enormous resources for research and development and guaranteeing a market for innovation. America's infrastructure has been second to none, and our ability to provide industry with the best trained minds has been unparalleled. As recently as 15 years ago, the global preeminence of the United States in electronics surpassed achievements in any other industry. Yet what should have been an enormous advantage has now dissolved.
The erosion began in consumer electronics. From negligible import penetration 20 years ago, we have moved to the opposite extreme. By 1978, the import share for videotape players and household radios was 100 percent. There was no domestic production in these products. In the same year, imports accounted for 90 percent of all domestic purchases of citizens band radios, 85 percent of all black and white television sets, 68 percent of all electronic watches and 64 percent of all stereo components. Even such sophisticated consumer electronics as color television sets and microwave ovens had large import shares. The figures (respectively 18 percent and 25 percent for 1978), however, do not tell the entire story; they understate the actual significance of import penetration because products assembled domestically and counted as American production include substantial overseas value-added in the form of foreign-produced components, sub-assemblies, circuit boards and complete chassis.
If the evaporation of American manufacturing leadership were limited solely to consumer electronics, perhaps we could console ourselves with the preeminence we have maintained in the most sophisticated areas of research. Even here, however, the outlook is increasingly distressing. Semiconductors, for example, represent literally the most home-grown U.S. industry, and epitomize the cutting edge of America's technological strength. Yet from a starting point of zero import penetration in 1975, Japanese firms alone have captured 40 percent of the U.S. semiconductor market and are rapidly moving into the international arena. Nor are the Japanese content merely to produce what has been created in this country. In less than a decade, they have made impressive progress in areas of high-technology research that were once the exclusive domain of American enterprise. The United States no longer holds the lead in such exotic processes as electron-beam lithography or memory circuit design. Rather, this country must now struggle to maintain parity in these and many other areas of high technology.
Even the computer, that great American technological achievement, is not safe from the mounting pressure of foreign competition. U.S. Industrial Competitiveness, a July 1981 publication of the Federal Office of Technology Assessment, concluded that, ". . . the Japanese have managed great strides since 1970. . . . Japanese hardware now seems largely competitive with American. . . . While . . . Japanese computer firms have yet to establish any real presence in the U.S. market, they clearly intend to try."
The demonstrated ability of foreign competitors to rapidly displace key American manufacturers in both the domestic and international markets suggests a fundamental weakening of the American economy. Lagging productivity is often cited as a cause. Yet, while the rate of productivity growth in the United States has been relatively low throughout the 1970s, the absolute level of American manufacturing productivity remains the highest in the world and the differential is substantial compared with that of our major trading partners. In absolute terms, Japanese and West German productivity levels in 1980 were respectively 66.3 percent and 88.3 percent of the American figure.1
Lagging productivity growth-from 1973 to 1980 it rose at an annual rate of only 1.7 percent-is itself symptomatic of a more profound malaise. Like any symptom, it raises a number of ancillary questions. Why has the American economy (not unlike that of Great Britain) increasingly failed to replace many of its worn-out, antiquated, uncompetitive factories? Why has plant capacity utilization been so low during most of the 1970s that it currently rests at one of the lowest levels since the Great Depression? Why have major American corporations been drawn increasingly toward acquisition of other large companies and toward continued high levels of foreign investment?
Broadly speaking, this country has been following policies which can only lead to intensified deindustrialization. Unrestricted import penetration (during more than a decade of economic stagnation and retrogression) and insufficient new investments have played a vital contributing role in this process.
To the extent that imports have captured significant shares of the American market, demand for domestically manufactured goods has declined and there has been a substantial drop in domestic output. The resulting excess of capacity requires fixed overhead to be amortized on the basis of fewer units of production. The consequently high capital consumption costs per unit represent an inflationary pressure which results in higher prices and lower profit margins. The former diminish the competitiveness of U.S.-based industry, and the latter decrease the attractiveness of new productive investment.
Another inflationary pressure which accompanies unused capacity is reduced labor productivity. Managerial and professional staff cannot always be reduced in proportion to cuts in output. The same is often true of technical, maintenance or clerical staff who must perform essential functions irrespective of the level of output. Increased unitized labor costs which accompany excess capacity place an added burden on import-penetrated industries. Additionally, layoffs of key managerial and professional personnel, now taking place at an increasing rate, lead to sizable losses in investment, both in skills and in special knowledge of the firm and industry.
The negative effects of high levels of unused capacity in key industries have become even more self-perpetuating for two reasons. First, in relatively short order, supplier industries are affected as demand for industrial commodities decreases substantially. The high and persistent unemployment caused by diminished output has a snowball effect, reducing consumption and restricting growth in nearly every economic sector. Second, excess capacity affects management investment decisions. In competitive, entrepreneurial industries such as, for example, apparel and consumer electronics, the general response to imports has been to shift further from manufacture to importation and distribution. Although the strategies vary among specific corporations, the major corporations in this country have dealt with unused capacity by increasing overseas investments, by mergers and acquisitions, or by speculation in currency, commodities and various financial instruments.
Finally, there is a propensity on the part of consumers who have altered their purchasing patterns in favor of imports to maintain that pattern. Irrespective of any future efforts by American producers to regain the market, a sizable residual level of demand for imports will remain.
From 1950 to 1980, direct foreign investment by American companies expanded from $11.8 billion to $213 billion, an average annual growth rate in excess of ten percent. The comparable average for domestic investment in the same years was less than seven percent. This latter figure, however, is deceptively high, since in recent years massive amounts of money counted as productive investment have actually been used to finance corporate mergers and acquisitions.
Direct foreign investments divert assets which could stimulate domestic growth, improve productivity and increase American competitiveness in world markets. Tens of billions of dollars have been used to substitute foreign jobs for jobs in the United States. Mergers and acquisitions, which have dominated domestic corporate finance in recent years, have neither spurred growth nor created jobs. Resultant concentration of ownership, however, has contributed to the furtherance of oligopoly and with it increased levels of inflation.
The rationale behind U.S. Steel's acquisition of Marathon Oil is a case in point. At a time when the American share of both domestic and world steel output is shrinking and when mass layoffs have crippled entire communities, expending $6.4 billion to purchase a thriving energy company would not appear to be the best way to serve the interests of the nation. The motivating logic was, perhaps, best expressed by Thomas Graham, Chairman of Jones & Laughlin Steel Corporation, who, in a November 23, 1981 interview with The New York Times, stated: "There's too much capacity in the free world. We in the U.S. have been victimized by imports for 20 years. It would be an imprudent businessman who would expand until those problems are solved."
What he describes is part of a vicious cycle. Low levels of real domestic investment in past decades and excessive import penetration deprive American manufacturers of the incentive to expand. Plants become obsolete, further eroding competitiveness. Firms that lack resources die or are swallowed up. Those that have resources produce an increasing share of their output overseas, adding directly to domestic unemployment, diverting capital from domestic investment and making the United States even less competitive. Others engage in acquisitions which neither increase output nor cut costs. Those with adequate resources have engaged in speculation in the dollar, earning huge profits at the expense of price levels. Investment in financial instruments in lieu of productive outlays is yet another variation of the domestic deindustrialization process.
On January 29, 1982, The Wall Street Journal reported that, rather than expand its high-technology base, Bendix Corporation "may be content to keep its $500-million pool of cash in short-term investments." Citing a rate of return for its investment portfolio more than double that of its manufacturing equity, Bendix Chairman William M. Agee concluded: "We may be an investor of money for an extended period of time."
These alternative processes have renewed and intensified the cycle of deindustralization; they are largely responsible for the loss of more than half of all the jobs in consumer electronics and large segments of steel, auto, home appliances, shoe production, tire and rubber output and apparel. There is no reason to believe that the trend will not continue to develop in every aspect of manufacture, simply because neither business nor government appears willing to do anything about it.
Since Japan has become the highly touted model of what to do, it is of interest that the Japanese have avoided this circular dilemma. As reported in The Journal of Commerce of November 6, 1981, Dr. Edwards Deming, often referred to as the prime architect of Japan's postwar boom, has observed:
Management has failed in this country. The emphasis is on the quarterly dividend and the quick bucks, while the emphasis in Japan is to plan decades ahead. The next quarterly dividend is not as important as the existence of the company 5, 10 or 20 years from now. One requirement for innovation is faith that there will be a future.
Dr. Deming's last point should be emphasized in view of the apparent conclusion in some quarters that American manufacturing is expendable. Some of our economic pundits even suggest that industrialized countries, particularly the United States, abandon manufacturing and concentrate on service industries.
The notion of an economy based entirely on services raises several distinct problems. Elimination of manufacturing jobs removes the usefulness of skills for which there is no analogue in the service sector, and creates insurmountable problems with respect to occupational adaptability. Loss of investment in the training of literally millions of industrial workers represents an additional massive cost to the economy. Because there are relatively few well-paying jobs in the service sector, an economy devoid of manufacturing would also necessarily experience a general decline in living standards.
Aside from the direct economic effects, a pure service economy in the United States would diminish and ultimately eliminate the nation's capacity to provide the technological edge upon which American defense strategy rests. The viability of defense industry is inextricably linked with the highly diversified nature of American manufacturing. Equally essential is the ability to produce components to maintain and operate the defense apparatus. Forfeiture of America's industrial base would, in time, reduce the United States to the status of a client nation with respect to the purchase of arms.
Additionally, an economy which forfeits its right to produce for its own needs would also be unable to encourage general technological skill or innovation. Forfeiture of this country's goods-producing sector would compel the best technological minds to migrate.
Unrestricted trade and the investment practices of the multinationals, as I have contended throughout this article, can only lead to an America ultimately devoid of manufacturing. Nevertheless, present trade and investment policies must also be viewed in a broader context than just the domestic economy. The United States has responsibilities and strategic interests that must also be considered. They relate as well to nations seeking economic development.
Developing countries have been encouraged to adopt a rapid industrial development model, one that is heavily dependent upon export-oriented manufacture. However, the proposition that rapid industrialization of developing countries via exports contributes to the establishment of stable democracies is highly questionable. American trade policy toward Japan, for example, was only one component in a comprehensive plan that included genuine fostering of human rights and the establishment of institutions necessary to the existence of a participative democracy, including the creation of a national labor movement. The absence of similar efforts in the developing nations has severely limited the liberalizing role of trade. This is particularly clear with respect to those nations' chief resource-cheap labor.
In a world in which capital, technology, managerial skills and transportation techniques are largely internationalized, labor costs take on a special importance. Often labor represents the only meaningful variable in production costs. Consequently, rising wages make national economies that are dependent upon export income vulnerable to competition from other developing nations. This vulnerability is exacerbated by the difficulties associated with transition from export-oriented rapid development to an integrated industrial economy.
In those nations that have been characterized as new industrial countries, the policy has been to maintain artificially low wage rates and to permit unconscionable employment practices. These practices have resulted in economic polarization and repression of workers' rights-outcomes which perpetuate autocratic rule.
In short, unrestricted trade and investment do not benefit the majority of American workers or employers who depend upon the domestic market, nor do they benefit the majority of people in the developing nations. They serve neither American strategic nor political interests. Who, then, benefits from present policy?
The multinational corporations have the best of both worlds in developing nations. Their massive resources place them in an enviable position to negotiate with a prospective host country, enabling them to exact favorable conditions. Tax abatements, donations of land, site preparation, and waiver of requirements that they comply with government regulations are among the standard concessions made to global firms. Less publicized is the de facto subsidization of profits which occurs when the host country takes measures to keep wages artificially low. The incentive for repressive measures in developing countries comes, additionally, from the certain knowledge that there are other developing nations eager to host multinationals, nations where living standards are even lower.
How then should the United States deal equitably with assistance to developing nations, and, at the same time, maintain existing jobs, create additional employment, arrest the declining role of American industry and rebuild its industrial base?
There are a number of specific measures that would facilitate reindustrialization in the United States and lead to positive development for both the United States and its trading partners. Implementation of a rational system of fair trade should certainly be a priority. Central to such a trade policy would be import quotas negotiated on a global basis in those sectors where import penetration has significantly diminished domestic employment and threatens to continue this process.
Increments in imports should be linked to the ability of the American economy to absorb them. Massive disruptions in domestic markets, the result of large increases in import levels from exporting countries, should be avoided. Negotiated import quotas would permit exporting nations to know in advance the potential size of the market in the United States and their share in it, and permit them to plan accordingly. Moreover, allocation on a global basis would prevent the rapid shift of market shares to nations where living standards are even lower than in the traditional exporting nations. A rational policy of fair trade can protect job opportunities in exporting as well as importing nations.
Let me emphasize that I am in no way advocating a revival of autarky. A return to the protectionism that characterized American trade policy in the 1920s and 1930s would be disastrous. I am just as convinced, however, that if we continue our present policy, mounting political pressure will make total protectionism unavoidable. Little time is available to begin corrective measures. The evident trend toward autarky is not likely to abate in the wake of anticipated levels of unemployment in excess of ten percent and the fear of continued high levels of unemployment, even with economic recovery.
Profit-seeking, regardless of its costs to our nation and people, has been central to the process of deindustrialization. The rate of return on U.S. direct investments abroad is, as I have observed, significantly higher than profits on domestic investments. Many of the largest corporations and banks make 50 percent or more of their profits abroad, providing an irresistible incentive to those with enough resources to operate on a global basis. The allure also holds for diversification, via mergers and acquisitions.
This is not an indictment of the business community. I am saying, however, that in the interest of short-term profits America may be losing sight of its priorities. Most critical among such priorities is an acceptance of the principle that full employment, a viable goods-producing sector and decent living standards are essential to the national interest and to the interests of those nations that depend upon the strength of our economy.
A rational policy of fair trade is only a starting point. A common ground among labor, industry and government in pursuit of full employment must be found. To those who counsel that such a goal would be excessively costly, I say simply that the costs are miniscule compared with the price of high unemployment. Economic chaos caused by the Reagan Administration's shortsighted policies now threatens to result in the highest federal deficits in American peacetime history. This cost is a mere shadow of the penalty that unemployment places on the national economy, in terms of foregone income and missed improvements in the quality of American life.
To compete in both the domestic and world markets, this nation must increase productivity, not lower the American living standard. A meaningful commitment to full employment will increase demand, allow idle plant to be more fully utilized and result in new productive investment and important increments in productivity. In such an environment, fears of technological or import-related displacement would be largely mitigated and technological innovation permitted to proceed at an unprecedented rate, to the benefit of Americans as well as the people of other countries.
1 These estimates are those of the Bureau of Labor Statistics. The BLS data were cited before a congressional subcommittee by Under Secretary of Labor Malcolm R. Lovell, Jr., who noted that: "International comparisons of productivity are very difficult to make. The best available data [by the BLS] show that the United States has a higher output per employed person than other major developed countries, but that the gap is being narrowed." Statement of Mr. Lovell before the Subcommittee on Trade of the House Committee on Ways and Means, October 21, 1981, xeroxed statement, p. 10. The relevant BLS table is unpublished but available on request under the title, "Real Gross Domestic Product . . . per Capita and . . . per Employed Person, 1950-1980." The figures presented by Mr. Lovell have since been slightly revised, to those given above.