Where Is It Made?
Do you really know where the things you buy are made? Sure, you can look at most labels and find a country of origin. That tells you where it was finally assembled or packaged, but it doesn’t always tell you where it was really made. For that, you need to follow the supply chain back to the beginning. Where did all the parts and inputs come from?
Where's It From? (Photo by Lubyanka)
Take a look at your iPod. Find the fine print on the back at the bottom: “Designed by Apple in California; Assembled in China”. And that doesn’t begin to tell the story. Back in 2007, a team at the University of California-Irvine deconstructed an iPod to discover where all the parts were made: Japan, Singapore, Taiwan, China, Korea and, oh yes, the United States. And then you have to consider the design work, the marketing, and all the rest of Apple’s overhead. So, whose product is it? I dunno – and neither do trade policy makers.
That’s the point of Daniel Ikenson’s monograph for the Cato Institute, “Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete“, published in December 2009. If political troglodytes decide to enact trade barriers against, say, China (not too farfetched) and those Chinese-assembled iPods get caught in the net, who gets hurt? All those clever people who design for Apple in California, firms and factory workers in Japan, Singapore, Taiwan, Korea and the United States, American importers and retailers, any music firm that sells on-line, and – lest we forget – the U.S. consumer.
Some of you might think the iPod is a trivial case, but look deeply at almost any product. The United States applied antidumping duties to Chinese hot-rolled steel a while back, punishing those nefarious Asians for selling at unfairly low prices. So what actually happened? U.S. prices for hot-rolled steel naturally rose, increasing costs for any industry that uses it. That raised costs for makers of structural pipe, pricing U.S. exporters out of international markets. And, by raising the price of the Chinese steel in the United States, it caused a glut on the world market for hot-rolled steel, which lowered costs for foreign competitors for our structural pipe – a double whammy. So, when policy makers started out, did they intend to kill American exports? Probably not. It’s just that traditional trade policy leads to such results in a world as interdependent as what we have today.
I started out in trade policy at a time when policymakers could be somewhat mercantilistic. Trade negotiators, quite naturally, think in terms of having to get something for everything they give up. But increasing interdependence creates a new mindset, Ikenson points out. Old policy rules and methods have become obsolete, and one result is that the world has seen more unilateral liberalization of trade restrictions in the past decade or so than ever before in history. Tariff levels have tumbled; Ikenson says that, from 1983 to 2003, duties in developing countries plunged from an average of 29.9% to 9.3%. They are still dropping. Mexico launched a reduction last year to bring down customs duties on half of the country’s imports, expecting to achieve an average tariff of 4.3% by 2013. Tariffs are approaching trivial levels, but nontariff measures need more work.
The recession saw irresistible political pressure to build up government procurement preferences. The mercantilist assumption is that, if we are going to have a stimulus package, we must ensure that all the benefits go to workers in our country. The real-world impact of “buy national” policies may have quite a different result, depending on the foreign content of the products. Ikenson gives the example of Duferco Farrell, a producer of hot-rolled steel coils that are made from steel slabs the company imports for processing in Pennsylvania. As a result of stricter Buy America rules, Wheatland Tube, a steel pipe and tube manufacturer literally next door to Duferco, stopped buying Duferco’s product because it was competing to supply U.S. Government-financed projects. Duferco lost its best customer, a business relationship was destroyed, and American jobs endangered.
Give Ikenson’s piece a read. Thought-provoking.
