Sucker Punching the American Economy

I’ve followed the "free trade’ movement most of my adult life. While, in the 1980’s, there was some resistance to the idea of buying imported goods (BUY AMERICAN!) a combination of shoddy quality and Government policy to "open up’ free trade with Mexico (NAFTA 1994), China (China Trade Relations Act 1999) and other "free trade’ policies has had the effect of gutting American Manufacturing to the point where it is literally impossible for many U.S. based companies to find a U.S. manufacturing plant to produce their goods. They must outsource manufacturing to factories off-shore. This is especially true in the consumer sector from clothing to appliances to electronics.

And while the U.S. has the largest consumer market in the world, we no longer have the ability to make most of the products we consume.

The hidden cost of off-shore production is not only the cost of manufacturing jobs, but is also a lack of opportunity for entrepreneurs to start businesses in the U.S.. Manufacturing has a cascading effect of producing companies and jobs to support the manufacturing effort. And without the ‘anchor’ manufacturer, these support businesses and jobs simply dry up.

As an example, let’s take the Apple iPhone 4. . . .

iSuppli of El Segundo, California is a market research outfit that specializes in ‘teardowns’ of products to produce a Bill of Materials (BOM) list and estimates as to component costs (Link). In its recent teardown of the Apple iphone 4 it developed the following BOM representing $187.51 in material cost (labor, overhead, shipping, etc. is not included)

iSuppli teardown: iPhone materials and parts suppliers
South Korea Cost
LG (or possibly TMD LCD Display $28.50
Samsung Flash Memory Chip 27.00
Samsung Application Processor 10.75
Samsung DRAM Memory 13.80
United States
Broadcom Wi-Fi, Bluetooth, GPS Chips 9.55
Intel Radio frequency memory 2.70
Texas Instruments Touch-screen control 1.23
Cirrus Logic Audio codec pack 1.15
Germany
Infineon Receiver/transceiver 14.05
Dialog Power Management 2.03
Italy/France
STMicroelectronics Accelerator and Gyroscope 3.25
Japan
AKM Compass 0.70
Other
Wintek or TPK/Balda Touch Screen 10.00
Unknown Camera 9.75
Unknown Camera, VGA 1.00
Unknown Battery 5.80
Unknown Other parts 46.25

This would indicate that the U.S. and Europe have a hefty chunk manufacturing the components for the iPhone 4.

But, not really. Nearly all of these corporations ‘located’ in the U.S. and Europe use "contract manufacturers" located in China or Southeast Asia. Essentially they outsource the manufacturing of their designs to factories in other countries. And these "contract manufacturers" in China in turn use local suppliers for packaging, raw materials, shipping, etc.. A whole supply chain of smaller companies and factories are developed to support each ‘contract manufacturer’.

Industries that support industry.

The fact is, manufacturing has a cascading effect of supporting a host of local companies that are needed to keep factories supplied with tools, machines, fuel, parts, supplies, shipping, etc..

In the early part of the 20th century Detroit had a similar effect on the economy of the U.S.. Not only were the car factories employing thousands, but their supplier companies – from the steel mills, to the tire plants, tool and die makers, headlight manufacturers, brake pad suppliers, foundries, etc. – also employed thousands. One car manufacturer could be the source of business and jobs for many more thousands.

This cascading multiplying effect of manufacturing on employment seems to be missing in the argument for ‘free trade’ and ‘globalization’.

While business leaders are quick to point out that the lion’s share of the iPhone’s $600 price tag will flow to Apple, which will in turn produce U.S. jobs for engineers and marketing, they fail to realize that engineering and marketing do not create a cascading effect of more jobs and business opportunities. At least not on the scale that manufacturing a product from raw materials can.

Apple, Dell, IBM, HP, Texas Instruments, Intel are all great companies that are part of the American Story small start ups that grew through innovation into huge companies. And, in the 1970’s and 1980’s they manufactured their products in the U.S. and created real wealth and a host of entrepreneurial enterprises to supply them. Wealth was created not only for the founders of these companies, but also for their communities.

But now that cascading effect of manufacturing in the U.S.is gone. All of the companies listed above manufacture the lion’s share of their products overseas. Their primary consumer country, the USA, is left with little more than ‘service sector’ jobs, empty and abandoned warehouses, and a trade deficit that redistributes our wealth overseas and leaves our country little opportunity for real job or business growth.

Henry Ford, the great American Industrialist, understood intuitively the importance of the American Worker to the growth of his company. He purposely designed and priced the Model T so that his employees could purchase one. He understood that one hand washes the other.

It is a lesson we’ve seemed to forgotten.

Free trade is neither free, nor fair. It is not fair to the American worker, and it is not fair for our nation. It is simply a redistribution of wealth that has sucker punched the American economy.

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