If it was only low wages, that would be fine.

The recent collapse of a factory building in Bangladesh is a tragedy. The massive loss of life and the large number of injured are appalling on many accounts. What this major tragedy shows clearly is that the lure of low cost countries for manufacturing is not just about the low pay for the workers. In many cases not having to worry about worker safety and building standards is where major costs are reduced.

To be clear, low worker wages is part of the overall equation, but it is not the whole story. Some studies indicate that if certain garments were made in the United States, the overall price increase would be about a dime per item. In many cases, the extra cost of a “Made in the US” garment is worth the additional cost since it puts a neighbor to work and it increases the overall domestic economy.

According to the OSHA website, http://www.osha.gov/oshstats/commonstats.html, there are, on the average, 13 work related deaths a day (2011) in the United States. This number is down from an average of 38 a day in 1970. Even with all the regulations, and the cost to the individual business of complying with the regulations, there are still deaths.

We can argue whether or not the cost justifies the need, but the goal of the safety regulations should be to make the overall environment safe. This costs money to do, and in some cases it impinges on productivity. Sometimes this makes it hard to compete with places like Bangladesh where the workers are paid less, the factory costs less to build, the equipment does not have all the safety features so they cost less, etc. The overall cost of doing business is less in almost all areas, but at what cost.

The United States does have its own problems. We might have the regulations, but as the explosion at the West Fertilizer Company proved, the resources are just not there to do proper inspections. This leads to some cases where there is a violation that leads to a catastrophe. Even with its flaws, the system in the United States is still pretty good and should be what other countries strive for.

As consumers, we need to understand what our purchasing choices are what they mean. The label “Made in the U.S.A.” means more than jobs for the domestic economy. That label also means that the people responsible for the goods or service we buy were able to work in a safe environment, and usually for reasonable wages.

Digging Ourselves Out

I was reading a book about cyber warfare last week and I came across an interesting statement concerning non-battlefield warfare.  The book sites a Chinese official statement indicating that non-traditional warfare, such as economic disruption and control of rare earth metals (REMs), will be as important as battlefield warfare in any major war.  The book, and the Chinese statement, was published several years ago.  Is it surprising to find out that today the Chinese control a vast majority of the world’s rare earth element mining?

Why is the control of REMs so important?  Basically, the REMs are used for much of our advanced military weapons, such as nuclear weapons, cruise missiles, advanced electronics, and more. Non-military usage includes many consumer electronic devices and much of the green technologies.  By controlling the market, China has already reduced the supply of REMs available to the rest of the world and this has increased the overall cost for other countries by imposing taxes on the REMs.  A more sinister use of their control of the REMs market would be to shut off supply in the time of battlefield war.  Opposing countries would start having difficulty resupplying equipment and munitions lost and used during the conflict.

The name rare earth metal is something of a misnomer.  REMs are not really that rare.  The U.S. and Canada have a large supply of such elements, in the ground, if needed.  The problem is that it could take over a decade to startup a new mine and generate a significant output level.  Even reopening or expanding an existing mine will take years to produce significant quantities.

Regulation and restriction on mining in the U.S. makes it a long and expensive process for any company to do mining.  Even with China artificially increasing the cost of REMs, they are still cheap enough where U.S. mining still will not be profitable enough to invest in new REMs mining here. 

What can the U.S. do to address the current problem and protect ourselves against a future cutoff of supply?  Under the goal of national security, the U.S. needs to subsidize domestic mining of REMs so that companies can adhere to U.S. regulations while still being able to be profitable.  Mining regulations are needed to protect our environment for the long term.  China will eventually have to address their growing national pollution problem due to their lack of environmental protection. 

Now is the time to put money into mining.  According to a 2009 study of the effect of mining on the economy in 2007, almost 1.5 million direct and in-direct jobs are due to U.S. mining operations.  For every one mining job, there are 2.9 other jobs created that are needed to support the mining job.  In addition, mining jobs average annual wage is about 33% higher than the overall national average for all industrial categories.

I honestly do not believe that China is thinking about a battlefield war with the U.S. anytime soon.  I do believe that China has already shown that they are in an economic war with the west.  If China feels that it is in their long term interest to cripple the U.S. economy, by any means, they would do it in a heartbeat.  It might not be in China’s interest today, but what about ten years from now.  Since it could take us that long to be truly prepared, we need to start now.  In the end, it is a win-win for us.  By taking REMs off China’s list of possible threats, the U.S. stimulates the economy effectively with high value mining jobs while protecting national interests against already identified threats.

There is a bill in congress, S.3816 – Creating American Jobs and Ending Offshoring Act, which has a stated goal of removing an incentive given to multinational companies to offshore jobs. The OpenCongress.org summary describes the bill as “This bill would give companies a two-year payroll tax holiday, reducing the amount of Social Security taxes they would have to pay, for new employees who replace workers doing similar jobs overseas…” In a time of high unemployment and an economy that is not creating enough new jobs, I thought this legislation would be a slam dunk and have broad support. Therefore, I was surprised to learn that the National Association of Manufacturers (NAM) actually opposes this legislation. NAM’s major concern is that the removal of a tax break for moving jobs offshore will put our multinational manufacturers at a disadvantage in penetrating new markets. There is also additional criticism, from both the left and the right that either the bill does not go far enough or is really just another tax on multi-national manufacturers.
The opposition by NAM had me worried that the bill threw the baby out with the bathwater. I do think it is reasonable that some tax deferments be made for US base multinational manufacturers that need to develop manufacturing in other parts of the world to gain market access. I was perplexed to find that the bill actually addresses this concern and is only subject to jobs moved offshore that produce products that are imported back into the United States. In other words, if the offshore job is to gain access into other markets everything remains the same. If the offshore job is to produce goods for the U.S. market then that job should not be subsidized by our taxes. I could understand why multinationals would be against this bill, since it remove their incentive to offshore jobs.
For the timing of the bill, it comes at a good time both politically and economically. Politically, it should play well with most voters, but will have a tough time with our elected officials who are tied to big business. Our voters just need to let their elected officials know what they want. Economically, we are starting to see some companies already starting to re-shore some manufacturing jobs. This could only help tip the scales for those companies looking for a better ROI on re-shoring jobs.
Criticism calling this bill a tax might be technically correct, but it is disingenuous at best. This bill does not create any new tax; it just removes a tax deferral for moving a job offshore and provides a tax break for moving that job back to the United States. Other criticism is that after the two year tax break, companies will re-move the jobs back offshore. This is just speculation and if true, we can look to expand the tax break, but at least there will be no government sponsored incentive to move the jobs back offshore.