Q: The U.S. manufacturing trade deficit rose from $470 billion in 2003 to $550 billion in 2004. What is causing that and what should be done about it?
Vargo: Overwhelmingly, it's been the weak foreign currencies that started in 1997. The euro went from $1.18 to about 85 cents. Nobody could compete against European products at that very unnaturally low level. The previous administration and this administration let the dollar get too strong. The Bush administration recognized that something had to be done and did it.
European currency has moved a lot, to $1.30 or so. By the fundamentals, you can't argue that it needs to move a lot more. But the Asian currencies haven't moved, particularly the Chinese currency, which is still where it was in 1994.
Q: Obviously the growth of the Chinese economy, currency issues, intellectual property issues, are all front and center. What does NAM see as the best course of action for trade policy with China?
Vargo: There are really two things. One is to get the Chinese government to stop governmental intervention in trade. They are definitely intervening in the currency. Many of our companies feel they are intervening in the form of subsidies.
Two, they will follow the rules they signed up to when they joined the WTO, very importantly, providing effective protection for intellectual property. Three years have passed now. They are not doing that. They are certainly making improvements, no question about that.
Q: There has been a lot of discussion about the gap between how large, multinational-oriented manufacturers see trade - as reducing supply-chain costs - and how some smaller, domestically oriented manufacturers seem to see it - with skepticism that globalization benefits them. Is there a significant difference in how you see those companies affected by globalization?
Vargo: All companies are affected by globalization, and small companies, large companies, any company, doesn't have the luxury of saying, ``I don't like globalization, I'm going to walk away from it.''
We've got to make America a more-efficient place to produce; we've got to lower the cost of manufacturing. We tax manufacturers more than other countries. Health-care costs are soaring double digits every year. When the cost of regulation and the cost of having anti-trial bar insurance keeps soaring, you have to address that.
Second, you have to level the playing field, and we've been talking about that in terms of currency [and] other things. And third, you have to ensure that we have the skilled workforce to meet those needs, and we don't.
What worries me is that China is now graduating something like 350,000 engineers every year, something like five times what we are graduating. That is a concern, and people need to wake up to that. If that goes on year after year, the locus of global research and development will move from out of the United States to China, and we are toast.
When you look at the production of our multinationals, about two-thirds to 70 percent of the production of a U.S. manufacturing multinational is still in the United States. Thirty percent, on average, is in other parts of the world. The vast bulk of that is produced for consumption there.
That doesn't mean that some manufacturing has not moved to China. Absolutely. The auto parts industry is an example of an area where we are really concerned. The large U.S. automakers are under enormous price pressures ... and they turn around to their suppliers and say you have to meet the China price. We are just at the beginning of the curve.
Q: Let's talk about the role of manufacturing in Washington. According to NAM figures, manufacturers exported $612 billion in 2003. The agriculture industry exported $61 billion. There's a cabinet-level Department of Agriculture. Manufacturing has a subcabinet-level position in the Commerce Department. Does manufacturing get enough attention in Washington?
Vargo: It has not in the past. The current administration is the first one, with the release of the manufacturing report last year.
What this comes down to is [whether] the White House is going to say, ``The time has come; you've got to keep manufacturing in mind.'' We hope it has.
Q: How much of a connection is there between trade policy and the loss of jobs?
Vargo: A lot less than people think. Everybody thinks we outsourced 2.7 million jobs. We lost 2.7 million jobs between the years 2000 and 2003. What happened there in trade? The manufactured goods trade balance fell by $90 billion. However, that's a combination of two numbers. A $70 billion collapse of our exports, and a $20 billion increase in our imports. A $20 billion increase in imports over three years, that's not unusual. But a $70 billion collapse of exports - unprecedented. People haven't focused on that. That's not outsourcing. Why did we lose those exports? The obvious reason is the dollar.
Frank Vargo is the National Association of Manufacturers vice president of international economic affairs.
