Patriotism Is Bad Business

Almost with the inevitability of spring following winter, the presidential election campaign moving to America’s Midwest rustbelt has taken on a protectionist edge. Echoing then presidential candidate Sen. John Kerry in 2004, Senator Barack Obama has embraced economic nationalism, but with a positive spin. While Kerry threatened to take away tax advantages from ‘Benedict Arnold CEOs’ — named after the general who betrayed America during its war of independence — for shipping jobs overseas, Obama promises rewards for patriotic employers. A Democratic Congress could help a President Obama to deliver on his campaign promise but tax incentives alone would do little to halt relocation of industry and global redistribution of jobs. History is replete with examples of economic nationalism’s failure to roll back the quest for profit and good life that drives global trade.

Obama’s promised Patriotic Employer Act, would give tax breaks to “companies... who create good jobs with decent wages right here in America.” Rival Senator Hillary Clinton is equally tough. She has pledged, “We’re going to end every single tax break that... gives one penny of your money to anybody who exports a job.” These fighting words are welcome in Ohio, a state which has lost tens of thousands of manufacturing jobs since 2000. But the emphasis on tax measures overlooks the more compelling factors that lead companies to move abroad. To be competitive, they go where there is a market for their products and where production is cheaper.

US manufacturing jobs have been in steady decline for decades as industry has moved to lower-wage countries and factories have automated. Compared to 1979, when one in five American workers were in manufacturing, now it is only one in ten. Economists estimate only 11 per cent of this decline can be traced to trade. Ironically, during the same period, productivity per worker has more than doubled, indicating use of higher technology and educated workers.

The historical fact is that factories and jobs move with changing technology and changing markets to locations offering the most efficient access to labour and capital. In the 18th century, America’s industrial revolution began with textiles in the northeastern states before higher wages, land prices and availability of resources drove manufacturing south and west. The rise of Asian economies, coinciding with plummeting transportation costs and tariffs, extended the boundaries of where US industry could relocate or have their components manufactured at a cheap price. Unable to compete, many industries have shut down, some have gone abroad, and others have improved productivity. In the process, new high-tech industries have emerged.

Offshored industry and supply-chain production have kept America’s shopping malls full with low-cost goods and its inflation rate low. Industries that have taken production offshore have not only increased their earnings, but low taxes have boosted profit margins as well.

Obama’s enticement of a patriotic tax credit to keep jobs in the US would work only if tax breaks were a central incentive for factories to shift abroad. Instead, the main reason why operations are sent offshore was on display the very week he called for helping patriotic employers. In Obama’s hometown, the Chicago Sun-Times newspaper group announced that it would be laying off an unspecified number of workers whose print and online ad production jobs would be outsourced to India and the Philippines. The move is expected to stem red ink by trimming $3 million a year. As with most companies, the media group would prefer to stay in the black than drift into the red while wearing a medal of patriotism.

In history, the discouragement of high tariffs and the emotional appeal of patriotism have succeeded in keeping foreign goods away, but only for a period. Ultimately, business’s desires to maximise profits and the consumer’s desire to live better have triumphed. Two thousand years ago, the Roman emperor Tiberius condemned luxury imports as unpatriotic, decrying the system “which drains the empire of its wealth, and sends, in exchange for baubles, the money of the commonwealth to foreign nations”. The admonition was backed by high tariffs but to little avail.

Obama and other politicians will find that fostering conditions to nurture new industry and training people for new jobs have a better chance of protecting American workers than by legislating patriotism.