Needed: Tough, Rational U.S. Trade Policy

For years, American workers had been labeled the prime cause of this country’s incredible trade deficit--they are simply paid too much and have almost priced themselves, and their employers, out of foreign markets, according to many labor-bashing theorists.

Nowadays, of course, much of the blame for the trade deficit is placed on trade barriers put up by other countries so that they buy far fewer goods from us than we can sell to them. But American workers are still regarded in many circles as among the principal villains in making the United States the world’s biggest debtor.

It never did make much sense to damn workers for trying to increase their standard of living because that’s a laudable goal for everyone. Corporate executives trying to increase company profits and, not incidentally, their personal incomes, usually win high praise for seeking the same goal workers are “accused” of pursuing.

But even those who said they believed that U.S. labor costs were the critical factor in our competition with Japan and European nations can no longer make such a claim.

The fact is that manufacturing labor costs in Europe are now dramatically higher than in the United States. And in Japan, labor costs are now only 8% below costs in this country, according to a new study.

When you add the cost of shipping products to us across the Pacific, Japan’s labor cost advantage is, as they say, a wash. In many cases, the transportation costs are enough to actually give U.S. manufacturers an edge--one of several reasons that the Japanese and Europeans are opening plants here.

Labor costs in developing countries, however, are still far below those in the United States, Japan and Europe. “Runaway” American firms seeking cheap foreign labor are opening more and more factories in the low-wage countries.

Not even the most callous U.S. employers are suggesting that our workers accept the living standards prevalent in those nations. Instead, many American executives just move their operations to the low-wage nations where they seem to have no moral qualms about putting U.S. workers out of jobs and paying workers a fraction of what they would spend on even the lowest-paid American.

The dramatic change in the difference between labor costs here and in Europe and Japan came about partly because workers overseas in recent years have won wage increases and workweek reductions faster than their American counterparts.

But the really astonishing degree of change began in February, 1985, when the value of the dollar reached its peak and started its steep decline of about 40%. Europe and Japan have been rocked by the drop. The dollar value drop has not had the same impact on labor costs in countries such as South Korea, Taiwan, Malaysia, Indonesia, Brazil and Mexico, where workers bear the brunt of the change through low wages.

Roger Brinner, chief economist for Lexington, Mass.-based Data Resources Inc., updated his recent calculations so that they would reflect the value of the dollar as of last Thursday.

Brinner likes to use “unit labor costs” to demonstrate the scope of the changes in international labor costs. Unit labor costs are the total compensation per hour (wages, benefits, payroll taxes, etc.) divided by output per hour. That approach gives you an average cost for all manufactured goods.

As of last Thursday, West Germany’s unit labor cost was a whopping 53.6% higher than the United States’--$1.49 per unit of output for the Germans, compared to 97 cents for the United States. The other European countries’ labor costs are roughly in line with West Germany’s. The Japanese unit labor cost was 89 cents, just 8 cents below the U.S. figure.

It hasn’t always been thus, of course. In 1970, the German unit cost was less than the United States’ cost: 40 cents, compared to 47 cents. Japan’s was much lower: just 26 cents.

In other words, this country today should be able to compete nicely with Europe and Japan in almost every industry, based on labor costs and productivity per worker.

But some trade barriers in Europe and Japan are impossible for U.S. exporters to cross. And citizens of some countries are far more reluctant than Americans to buy foreign-made goods. Also, Japanese corporations, at least, are willing to take significantly lower short-range profits to keep and even increase their share of the U.S. market. American firms are far less willing to allow profits to drop in hope of long-range gains.

These facts, along with managerial skills, salesmanship and other even less tangible factors working for our foreign competitors, cannot be ignored. But in any case, it is now the Europeans who are at a serious disadvantage when it comes to competitive labor costs, and we cannot blame U.S. workers for the gains that foreign nations continue to make here.

The developing nations, too, have trade barriers and those once “backward” nations have gained or are rapidly gaining our technological expertise. They are getting it partly by legally or illegally copying Western technology. Our skills are not military secrets that we can put on some top-secret list.

And don’t forget that the U.S. firms seeking cheap labor take their American expertise to the developing nations to open plants there. So if those countries haven’t been able to figure out our know-how on their own, our runaway companies teach them, or they get help from other industrialized nations. Then, with their dramatically lower labor costs, the developing nations become truly formidable competitors.

One example: The autos introduced last year by South Korea’s Hyundai, which is partly owned by Japan’s Mitsubishi, grabbed a larger share of the U.S. market than any other new import in history. But Korean workers, on an hourly basis, make only one-tenth what U.S. workers do. Our workers cannot take a 90% cut in wages and benefits so that U.S. auto makers can match the Koreans’ labor costs. And U.S. firms cannot possibly increase productivity enough to overcome the Koreans’ labor cost advantage.

Those low labor costs for American firms in South Korea and other developing countries are slightly above the average there, but far below the wages for workers doing similar jobs in this country. American entrepreneurs couldn’t even hire illegal aliens here for the wages paid in developing nations.

Some generally well-heeled economists and corporate executives blithely argue that Americans are just going to have to accept the economic realities of foreign (and low-wage domestic) competition. Don’t fight it, one such comfortable economist urged American workers recently. Instead, he said, workers should “concentrate their energies not on social and political discontent, but on enhancing their productivity” to deal with low-wage competitors.

Even if American workers were uncomplaining boys and girls, and if their employers were to invest in the modern equipment essential to increase productivity, we could not match the low wages of the poverty-stricken workers in those nations without becoming like them.

Others argue that the United States shouldn’t worry about losing jobs to the developing nations because we cannot cut wages enough to compete directly. Instead, they say we should concentrate on creating jobs in such areas as finance, professional services, public utilities and communications.

The problem with that idea is that in the past decade, the United States has created a hefty 10 million jobs, mostly in those and other service industries. But about 60% of the new jobs, including full-time and part-time positions, pay less than $7,000 a year, surely not a viable alternative for middle-class Americans accustomed to earning well above that.

The real average weekly earnings of production workers have dropped by nearly 10% since 1979, in part because we are relying more and more on the service sector to replace jobs lost in manufacturing.

Thus, it no longer makes sense to try to meet foreign competition by asking American workers to keep slashing their incomes or for us to close down even more hunks of our manufacturing capacity.

One of the many things that must be done is for Congress to enact a tough but rational trade policy to slow the surge of foreign imports. Congress should impose the kind of restrictions used by most other nations and should limit imports from nations that allow their corporations, and U.S. firms, to shamefully exploit their workers.