The Rushford Report 2012
Made in America?
by Greg Rushford
Consider President Barack Obama's three favorite words: Made in America --- words which he hopes will help propel him to a second term in the White House, come Nov. 6. While the politics of economic patriotism may play well in certain parts of the American heartland, the fundamental economics are a different story. Thanks to complex global supply chains, labels like Made in America, Made in China, or Mexico, or wherever, have become increasingly misleading. Obama is hardly the only politician not to recognize the fundamental economic fact of modern manufacturing life: that workers who make things in the United States couldn't do so without access to key raw materials and component parts found outside U.S. borders. But if the president's Republican opponents catch on to the game --- which may be possible, if the economically literate Mitt Romney wins the GOP nomination --- Obama could end up looking like a man whose economics learning curve remains steep.
Nobody raised questions about the president's economic literacy last week, when he took his Made in America campaign theme on the road. On Feb. 15, Obama addressed an enthusiastic crowd including some 400 members of the United Auto Workers union who make padlocks for Master Lock. Co. in one of Milwaukee's most blighted neighborhoods. In his State of the Union address last month, the president had praised the 91-year-old iconic Master Lock --- well-known for its Super Bowl commercials showing a tough lock withstanding a bullet --- for having moved about 100 jobs back to Milwaukee from China. In Milwaukee last Wednesday, Obama drew cheers when he declared, "It's time to stop rewarding companies that ship jobs overseas, and start rewarding companies that are creating jobs right here in the United States of America." Two days later, Obama flew to Boeing's plant in Everett, Washington, where he boasted that "the world's most advanced commercial airplane" is made, referring to the new 787 Dreamliner. "And companies like Boeing," the president added, "are realizing that even when we can't make things cheaper than China, we can make things better. That's how we're going to compete globally."
When smaller concerns like Master Lock create new jobs, not in China, but in the U.S., Obama explained, the economic benefits extend beyond the corporate bottom lines. "[I]t's also good up and down the supply chain, because if you're making this stuff here, that means that there are producers and suppliers in and around the area who have a better chance of selling stuff here." And when Boeing makes its Dreamliners in Washington State, the entire U.S. economy gets a boost, thanks to "nearly 11,000 small, medium and large supplier businesses," Obama added. "Boeing has suppliers in all 50 states, providing goods and services like the airplane's ground-breaking carbon fiber composite aircraft structure from Kansas, advanced jet engines from Ohio, wing components from Oklahoma, and revolutionary electrochromic windows from Alabama."
To hear the president, the American economy is a self-sufficient island, where the most productive workers in the world make things to sell to envious foreigners. But in today's world of complex international supply chains, the operating economic realities have left such traditional political rhetoric behind.
To see why, let's first look at what could be called the political economy of Milwaukee.
A blighted neighborhood
For Democrats like Obama, the politics begin with economic miseries.
Milwaukee is a city much in need of all the presidential encouragement it can get. Master Lock's sprawling factory is in Zip Code 53210, one of the most blighted communities in America. Last November, reporter John Schmid of Milwaukee's Journal Sentinel wrote how "babies in China's industrial heartland now have a far better chance of reaching their first birthday" than those where Master Lock operates. In Milwaukee, one out of 95 infants dies before reaching the age of one; in Guangzhou, one baby out of 210 dies before its first birthday. Looking at Zip Code 53210, the numbers get even more depressing when they are tied to perhaps a 50% unemployment rate, violent crime, rising incarceration rates, and the scourge of narcotics.
To be sure, candidate Obama was playing to his base by going to the Master Lock factory. In 2008, Obama beat Republican John McCain 56.3% to 42.4% in Wisconsin, while winning nearly 70% in Milwaukee. Come Nov. 6, Wisconsin will be a "must win" for the Democratic incumbent. When Obama went to Milwaukee last week, he was clearly aiming at energizing his core supporters. At least Democrats show up in Zip Codes like 53210.
Of course, energizing voters does not necessarily include educating them. This is where Obama fell short in Milwaukee.
Locking in supply chains
"We need an economy that is built to last, that is built on American manufacturing, and American know-how, and American-made energy, and skills for American workers, and the renewal of American values of hard work and fair play and shared responsibility," the president told his Master Lock audience on Feb. 15.
As it turns out, there are intelligent workers outside U.S. shores --- and Master Lock needs them also.
In Milwaukee, Master Lock now employs more than 400 workers, some 100 of them having been brought back from its Chinese facilities. The company also has about 700 more workers in Nogales, Mexico. Together, the Milwaukee and Nogales plants account for perhaps 55 percent of the company's lock production, with the remainder still in China, according to press reports. (Master Lock declined to comment.)
It's the parts, stupid
Enter modern economics, where labels like Made in America, or Made in China or Mexico are not necessarily the whole truth. To turn a political phrase somewhat on its head: it's the parts, stupid.
While at first glance, a padlock seems like a pretty simple thing to make, Master Lock's unionized Milwaukee work force has reason to know otherwise. Master Lock's vice president for global supply chains, Bob Rice, wrote a memo to the company's Asian suppliers last year, listing as examples 20 different products the company needed to import from China, each with its own SKU number.
Locks have parts that come from just about anywhere: keys, cylinders assemblies, ball bearings, plated shackle stop pins, anti-saw pins, screws, cylinder external assemblies, cases and cylinder retainer blocks. In 1995, the last year for which publicly available documentation is available for U.S. Customs' records, Master Lock made nine of 11 such components in Milwaukee. But the lock case and cylinder retainer block were needed from Taiwan --- and those two parts represented an estimated 25- 35% of the total cost of the finished padlock.
More recently, in 2010 Master Lock made U.S. Customs officials work a bit to determine where one padlock model was really made. The padlock was made of ten different components from various countries, with the principal components being a lock body made in Milwaukee and a shackle from China. All the components were then assembled in Mexico. Customs determined that the finished padlock should be marketed as a product of Mexico --- but that "Mexican" padlock also employed workers from Milwaukee to the Middle Kingdom.
Sometimes, Master Lock imports parts from Mexico, like unfinished padlock lock bodies and shackle assemblies that are then finished in Milwaukee, where the cylinder locks are attached. Those padlocks are labeled Made in USA --- but again, there's more to the American success story. Workers of the World: you have really become united.
It's much the same story, only magnified greatly, for the Boeing Dreamliners that Obama praised. Last week, the president said that he had flown to Everton "because this is a great example of how we can bring jobs and manufacturing back to America." He added that his administration wanted "to make it easier for companies like Boeing to sell their products all over the world, because more exports mean more jobs."
The president didn't admit what every economist would immediately recognize: to export those Dreamliners, Boeing's workers need access to raw materials and components from all over the world.
Dreamliners may be Made in America, but with essential imports sourced from so many other places that it's difficult to know where to begin. There's the Integrated Surveillance System Processor and an Integrated Navigation Radio, from Canada. There's also a Valve Control Unit from Germany --- passengers can thank that for keeping their cabin air pressure within tolerable limits. And there's a turbine engine exhaust nozzle, brought in from Mexico from titanium sheets made in China. Those are just the first three telling examples that show up from a glance through US Customs records --- with each import necessary to the American workers in places like Everton.
That doesn't even get to the big-ticket items: the Rolls-Royce Trent 1000 engine, the testing in wind tunnels in the UK and France; the Mitsubishi Heavy Industries' wing; Italian horizontal stabilizers, doors from France, and other critical components from Sweden, India, South Korea --- it's a very long list. The Dreamliner is as cosmopolitan as the American people. Boeing's American workers should love imports, because their jobs depend upon them.
As he was flying to Milwaukee last week, the White House also put out a statement noting that Obama was making it a priority to encourage foreign investment in the United States. When Obama landed in Milwaukee last week, he was greeted by Wisconsin Gov. Scott Brown, who presented the president with a Milwaukee Brewers' baseball jersey: respectfully labeled "Obama 1." Too bad the governor didn't have the wit to suggest that the president might have put on that jersey and gone across town to Miller Park, where the Brewers have played since 2003, and where he could talk about...the benefits of globalization.
Miller Park was built by American (union) workers, with tons and tons of domestic materials. But that's not the whole story. The subcontractor for the stadium's renowned retractable steel roof was Mitsubishi Heavy Industries, Ltd. Mitsubishi bought high-strength steel from Luxembourg, which was shipped to Mitsubishi fabrication yards in China and Japan. The finished steel components were then shipped to the Port of Los Angeles, where they were unloaded by American longshoremen and then driven by Teamsters to Milwaukee.
Other steel that went into Miller Park came up the Mississippi River from the Port of New Orleans, according to sources at that port. And Haven Steel Products, Inc., headquartered in Kansas City, made the steel for the stadium's bowl that supports the roof. Other key work was done by Wisconsin Electrical Power Co.,not to mention the intrepid workers who put in the all-important beer-supply pipes.
Arup, the United Kingdom's experienced design firm, was responsible for most of the engineering design for Miller Park, working also with design teams from Dallas, Los Angeles, and Milwaukee. Arup, headquartered in London, has sent its consultants and engineers just about everywhere in recent decades: including New York's Tappan Zee Bridge, the 2nd Ave. Subway; Japan's Kansai International Airport, and the Sydney Opera House. Miller Park, like the others, was truly Made in the World (to borrow a phrase used by WTO Director General Pascal Lamy).
Buying into America
There was a sign last week, despite his chauvinistic refusal to acknowledge the importance of imports to American manufacturing jobs, that Obama is beginning to recognize that his Made in America rhetoric needs an adjustment to economic realities. On Feb. 17, the White House announced that the Obama administration will be cutting red tape and other wise easing government paperwork burdens that have long made life difficult for manufacturers ---- many of them foreign-based --- who operate in U.S. foreign trade zones.
As I have previously reported, there are about 750 of these zones (and sub-zones) across the country --- employing about 330,000 U.S. workers and exporting some $30 billion a year in manufactured goods. Ten foreign auto companies that have set up shop in the U.S. --- the likes of Honda in Ohio, BMW in South Carolina, Subaru in Indiana, and Toyota in West Virginia and Kentucky --- alone have been exporting about $11 billion a year, according to data compiled by the National Association of Foreign Trade Zones.
But because imports have been considered politically incorrect in the Obama White House, the president had not previously included the successful foreign-trade-zone operations in his initiative aimed at doubling U.S. exports by 2014. But last week that seemed to be changing.
The NAFTZ association's president, Dan Griswold, and its chairman, veteran Washington trade lawyer Lewis Leibowitz, have been pressing White House officials in recent weeks to include the zones in the president's export-promotion program. Last week, they greeted the president's call for the Commerce Department to simply some of the burdensome paperwork and regulations that have been holding the zones' export potential back. "We're glad the president has recognized the FTZ program as an important tool in promoting exports," said an obviously pleased Griswold.
Note to the White House campaign schedulers: If the president is looking for campaign stops to praise the contributions that foreign companies like Mitsubishi, BMW, et. al. have been making to the U.S. economy, he now knows where to look. Maybe the time has come for the White House to publicly acknowledge what economists have known for years: with more imports, come opportunities for increased U.S. exports.
Note to Mitt Romney or whomever the Republicans eventually tap to run against Obama in November: If the president refuses to commit economic truth, why not beat him to it? Voters will get it --- even union workers in Milwaukee and Washington State.