Origins of America's Economic Decline: Bad Trade Policy Started Long Before NAFTA
Ken Davis Jr. interviewed by Will Wilkin
Part 2 of 2
Part One of the interview is found here: http://westhartford.patch.com/blog_posts/lets-think-big-again-a-growth-program-to-put-america-back-to-work
America's huge trade deficits have transferred more than $8 Trillion of America's wealth out of the country in the past 37 years. This loss hasn't just been in dollars, it has been in millions of manufacturing jobs and several tens of thousands of factories. It has been a historic disintegration of much of our country's industrial ecosystem, and it is continuing still, with no end in sight.
In the first half of this interview, Ken Davis Jr. described how a Balanced Trade policy would cut $600 Billion every year from import purchases. That policy would transfer $600 Billion every year to American industry, creating over 4 million jobs directly and millions more multiplier-effect jobs, resulting in a revived American economy. Mr. Davis explained how that creation of new wealth, of new jobs and factories, would grow our GDP and tax base to support a Growth Program to rebuild our crumbling infrastructure and strengthen our scientific and technological capabilities, our education and training, AND get America out of debt and able to pay for Social Security, retirements and health care. The "fiscal cliff" would be obsolete and America would be prosperous and growing.
But how did we get into this mess in the first place? What were the policies and assumptions that led us to not just a "fiscal cliff" but, more importantly, an industrial and employment meltdown. In this second of two parts of the interview, Mr. Davis describes the origins of the disastrous trade policies that have been at the heart of America's decline. He was Assistant Secretary of Commerce under Richard Nixon from early 1969 to mid 1970, and resigned in protest against the new wide-open trade policies even as they were being born. He was prescient about the disastrous results, and his insight into how and why this happened is still relevant, because the thinking behind our trade policies has hardly changed in 40 years.
WW: Ken, earlier you explained how the trade deficit is the single biggest measure of the terrible results from our policies of the last 4 decades. Did we formerly manage our balance of payments better?
KD: Yes! If we go way back in the nation's history, we were very protectionist for years and years, while we built our industries. We always had a policy of keeping economically strong. There was no law that set up the balanced trade practice we had, but up until 1970, but we managed our finances that way. My main job as Assistant Secretary of Commerce was supposed to be keeping a positive balance of trade.
WW: [Paging through Ken's Washington DC scrapbook] Is this article about you?
KD: Yes, it is the first mention of me in the NY Times, there was a very good economic writer for the Times, named Ed Dale. He and I talked about the complacency I saw there about the trade troubles we had. Our economists were especially relaxed.
WW: [Reading article headline] "Some economists' lessening concern over balance of payments is decried."
KD: Yeah, they were saying they were going to float the dollar and that would handle the problem. I didn’t believe that for a minute!
WW: When you negotiated trade, were you assigned to certain countries, or were you a chief negotiator for many countries?
KD: No, even then there was a U.S. Special Trade Representative who was the official negotiator. And he did not report in the Commerce Department, which is where he should report. Instead he reports separately to the White House, and that was a political move that was established because one bunch of legislators wanted to get it away from Commerce, so they could put direct pressure on him. No doubt it was from those who wanted to be more liberal about trade. The Commerce Department worked to help the industries that were in trouble. The textile negotiators were in Commerce, the ones who negotiated textile import quotas every year.
WW: Were those negotiations bilateral, with each country getting a quota?
KD: Overall it was not negotiated with every country, we had a broad framework, and when some new country came along and wanted a quota, they were told what they would get, there was no negotiation. Once they were in the system, they'd make their case for an increase, and those discussions would be bilateral.
WW: How did off-shoring start? Wasn't there always foreign investment by American companies?
KD: Before I joined the Nixon administration, when I was at IBM, if we wanted to invest abroad, we had to go down to Washington to get approval. If we wanted to build a plant or a laboratory, we went to Washington, they had an office in the Commerce Department called OFDI, Office of Foreign Direct Investment. You'd have to go down there and present your story on how this would work out for the US, are you going to make more profits to bring back to the US, etc?
WW: So they'd ask how it affects the country, not just your business?
KD: Oh yeah, they were very concerned how our foreign investments would affect the USA.
WW: Did that change while you were Assistant Secretary of Commerce?
KD: When I arrived the pressure was now on from the liberal establishment, particularly the multinational companies, who saw globalization was just dawning and as a piece of that they wanted the US to be much freer with our trade. Wall Street, the banks, David Rockefeller was a big booster for free trade. So there was this huge free trade movement going on. There was a new organization called the ECAT, Emergency Committee for American Trade, they were pushing for free trade.
WW: What were our domestic industries saying?
KD: There was a big war going on between the free trade international companies and our domestic industries. We still had some big domestic industries. Textiles were huge, two million employees, steel, automobiles. There was also a big industry forming in consumer electronics, and they had issues. They were beginning to feel the Japanese in particular, before China was so strong, the Japanese were leading the charge on us.
WW: Did this split between domestic and multinational industries affect your work at the Department of Commerce?
KD: The thing that led to my finally resigning was the Japanese were coming over to negotiate a change in our textile quota program, and the word from the White House was that Nixon was inclined to go along with it, and not back the extension of the quota legislation. And here in my department I had the guys who negotiated those agreements, and they believed in what they were doing and wanted to continue it.
WW: What happened?
KD: I had a speech planned for a big consumer organization in New York, at the Plaza Hotel, and I made my case there. I said "I'm talking to you today because I'm trying to reach the President, I believe he is getting bad advice about what to do in our trade, particularly textiles. An unemployed textile worker is not a very good consumer, and they'd like to continue to be consumers, so its not a bad thing that we are trying to help that industry." I wondered "how am I going to get this in the NY Times tomorrow?" So I said "the President is getting bad advice and let me tell you who is doing it. First of all Dr. Kissinger."
WW: We don't normally associate Kissinger with trade policy, do we?
KD: Kissinger kept trade policy as one of his policy levers even though he was mostly military and political. I then named Dr. Paul McCracken, he was chairman of the Council of Economic Advisors, and a man named Peter Flanigan, who was a kind of business representative to the White House. I said "those people are all saying to the President that he should give in on textiles and I'm saying that is a very bad move."
WW: How did Nixon respond to the NY Times coverage of your speech?
KD: The reaction was more immediate than that. As I was leaving the stage there was a phone call from Mr. Stans, the Secretary of Commerce, he said "you're supposed to clear your speech first, what are you doing? You're going to cause us all kinds of trouble with the White House." And I said "Well they ought to be listening, I'm trying to get their attention, I'll be back as soon as I can." By the time I got back there was more furor down there, and I tried to see the President. Today you couldn't even think of trying to see the President but at that time there weren't that many people around him, he had two main gatekeepers, everything went through those 2 guys, so I called over there and said "I'd like to see the President, I'm sure he's going to be upset when he hears about my speech." John Ehrlichman said "the President can't see you, he's just swamped, but I'll see you." A few days after that, I resigned.
WW: So that was the genesis of a new policy, we were turning away from any control of our trade balance. Floating the dollar would supposedly keep us competitive. That was the popular belief, and you were already opposing it. Would you say there were mostly economic and business interests driving it or were there other over-riding considerations that gave impetus to this new free trade?
KD: It was mainly economic, banking and interests driving it, and, by the way, I said we had been protectionist for many years, but that was in our early years after independence, while we were industrializing to become truly independent. By the 1950s, we were very strong economically, and with our strong military position we could afford to be liberal on trade. In all the years I was at IBM, we didn't think we were a protectionist country, in fact our company motto was "World Peace Through World Trade" and we thought the country and IBM were doing everything it should to expand globally.
WW: How would you describe the global economy at that time?
KD: An important development was the new emergence of state economies, like Japan with so much government control. These were just coming along. And there was growth happening in so many countries, expanding markets. So what happened was that the economic reason for wanting to push for free trade was that the big international companies, and Wall Street and the big international banks, did not think we were as open as we should be to make maximum use of the new globalization. If we were more open on trade, their thinking went, then other countries would be too. This was before the WTO was even thought of. So they were pushing hard, and the domestic industry just wasn't as potent, there were a lot of smaller companies but there weren’t as many huge industries to stand up to them.
WW: Where was Congress in all this?
KD: There was a very visible division in Congress between global free traders and those supporting domestic industry. I remember a Congressman from New Hampshire, Jim Cleveland. He had in his district two of the last three high-precision ball bearing manufacturers in the country, the other was Barden, in Connecticut. The Japanese were going after them, they had come over and visited the companies, gathering a lot of information on what kind of machine tools they were using, what kind of clean rooms and so on. They went back and set up their own, and then come back to sell the products here. It was very much like the Chinese do today, they identify a strategic item, and focus on gaining a dominant position. Everything in the defense industry had these precision bearings, the trigger on the atomic bomb even had them. So the Congressman from New Hampshire came down and said "these companies are really concerned they are going to get wiped out, the Japanese are dumping these bearings in the US."
WW: Was there anything domestic companies could do in such a situation?
KD: They filed a national import relief petition, which you could do in those days, if your company was impacted by imports and it affected national security, you could ask for relief. So they had filed the petition and had lawyers retained, but were concerned the Administration wasn't going to back them.
WW: What did you do about it?
KD: I decided we should try to help them. When we first got the letters on this from the interagency review board asking for our position, I didn't see the incoming letter, it went to the appropriate bureaucrat who drafted a letter for me to sign. So the first time I saw the incoming letter was with a letter back for me to sign. And it rejected their petition. I said "I don't think I want to sign this."
WW: Why would a Commerce staffer draft a letter for you that did not defend a domestic industry?
KD: He said "Well all the agencies are against it, the only one for it is Defense, Treasury's against it, and Labor, nobody's concerned, they don't think its a big enough deal." I said "Don't you think we ought to go visit them?" So we visited all three companies and it was really impressive, so we went back, I rewrote the letter myself, supporting the American companies.
WW: Did it have any impact?
KD: Soon thereafter I got a call from the Deputy Secretary of Defense, that was David Packard, a co-founder of Hewlett-Packard. He said "Ken I don't think we are going to succeed with these other agencies, but I have a way to handle it, I can issue an Armed Services Procurement Regulation that says all precision ball bearings must be procured from domestic sources."
WW: What about other industries?
KD: That kind of thing was going on in other industries too, like in consumer electronics. Zenith was competing very effectively with Sony but they were having trouble because they couldn't get into the Japanese market. Finally the Chairman, Joseph Wright, came to me and said "we’re doing really well, we've got better color TV than them and we're gonna beat them if we can get into their market, but with their protected market I don't know how we're going to compete with them. We need reciprocity in our trade." I said "That is a very reasonable request, this is one I'll have to take to the top policy man," who was Dr. Kissinger.
WW: How did that go?
KD: I went over to see him, and he said "Mr. Davis I'm very busy with the Japanese right now, I want to put our missiles on Okinawa." I don’t know where they were aimed. But he said "I can't bother the Japanese with a commercial thing right now." I said "But one has nothing to do with the other, and this is only fair, we are just asking for reciprocity." He said "I just can't do it now, tell them I'm too busy."
WW: Tell Zenith "I'm too busy"?
KD: Yeah, tell Zenith I'm too busy. And this was the problem with our government, we couldn’t even get reasonable support for domestic companies, and that pattern has continued over the years. It wasn’t always a matter of specific legislation but rather instructing the Special Trade Representative to make individual deals on a much freer basis, just instructing the Special Trade Representative to be liberal, just as he’s been told today on the new free trade agreement Obama is letting multinational company lobbyists write even now, the Trans-Pacific Partnership (TPP), with a dozen mostly low-wage Pacific Rim countries.
WW: So was 1970 the beginning of wide open US trade policies and fewer bilateral country by country negotiations?
KD: Yes, and as the years passed, new international organizations were formed, like the WTO, that diminished US control of our bilateral trade arrangements. And that's where we went wrong.
WW: Wasn't anyone else worried about stopping our mounting trade deficits?
KD: The economic case made for it was we would free the dollar, go off the gold standard and the Bretton Woods system, which we did in 1971. The whole economics fraternity, the Council of Economic Advisors, every agency had an economist, they all said "This is the answer. Don't worry, we'll never have a trade deficit of more than 15 or 20 billion dollars a year, and the dollar will adjust it’s value, and restore our competitiveness and the trade deficit will come back to zero." I didn’t buy it at all!
WW: Wasn't anyone arguing for a stronger trade policy instead?
KD: In Washington, those who favored a strong trade policy were very much limited to the Commerce Department. Maurice Stans was pretty strong on that but he couldn’t battle with the White House, he'd been one of Nixon's stalwarts during the campaign, he became the Commerce Secretary afterwards.
WW: What were American companies saying about all this?
KD: Well let's go back to my IBM background, IBM had considerable international business run by a separate subsidiary, the IBM World Trade Corporation, which was also headquartered in New York. Thomas Watson Jr. was the Chairman of IBM and his younger brother Arthur Watson was the Chairman of IBM World Trade Corporation. And Arthur became very active with these free trade groups. IBM already was doing good business abroad, they didn't have any great problems, they were very well established globally, but when other people wanted to do more to grow globally, Arthur was very supportive of them. But I went on doing my job as CFO.
WW: Were these kinds of opinion differences within a company making their way into the public discussion?
KD: IBM was split into domestic and international operations, and any differences In attitudes on trade and foreign investment policies were closely coordinated as in most multinational companies. Today IBM functions much more as a fully-integrated global company, and it doesn’t worry much about how US domestic industries are doing.
WW: But look now at the results!
KD: The problem was, and we still have this problem today, the multinational companies are doing well the way things are. As a CEO of a very large corporation told me just last year, when I asked "Why are you still backing all the free trade deals?" He said "Because we're global, Ken." I said "Yes, but its killing our domestic industry, what are you going to do when there is no domestic industry left, aren't these your customers too?" He answered "We'll make it up abroad. We have no more responsibility to the US than to any country where we do business." I've told other people that story, quietly naming the company, and they say "that's not unusual, we hear the same thing from GE, Apple and many others."
WW: Through your 20 years with IBM, and decades more of interacting with so many other big companies, would you say there has been a change in attitude? Were corporations that way when you started your career, saying they were international and had no responsibility to the country, were they always that way?
KD: No. I think there's been a big change, not just about trade, but rather a changed attitude that their obligation is to their shareholders, not the country. So it affects all of their dealings. Like in taxes, how many of these big companies don't pay any income taxes, by clever management of their taxes?
WW: That wasn't always true?
KD: When I left Washington in 1970, I became the CFO of Syntex Corporation, an international pharmaceutical company. They were incorporated in Panama, they had all kinds of tax advantages. The Chairman said to me "We've got to pay some taxes every year, I don't want anybody to look at us and say 'they're not paying their share.' So you be sure we pay our taxes." But I don't think that attitude exists today, its quite different. Shareholders first. And it also gets into the status of the top executives of these companies and their compensation, they get a lot more pay than they used to get.
WW: Its somewhat of an American phenomenon, from what I read, for example in a lot of European countries the ratio is a lot lower between highest and lowest pay in a company.
KD: I don't know where it comes from. I've had these conversations even at church. Why are so many people so aggressive about their compensation? And about how they share it with others? Now its often "me first, every man for himself, the almighty market will take care of things." This attitude is now rampant, it is a whole broader issue.
WW: So is this a broader change, like a decline in civic spirit, a decline in patriotism, how would you summarize it?
KD: The only way I can put it is the opportunities for a few people to make a lot more money are there. One way it shows up is when young people graduate business school these days. Where are they going to work? When my class finished, some of us were going to take a job in the Macy's training program, I took a job as a sales trainee at IBM, but today they want to go into Wall Street or hedge funds, they want to get rich by the time they're 25, and they see possibilities of doing it. I even remember getting that question when interviewing for IBM, they asked "how much money do you think you should make when you're 40?" I said "Maybe thirty or forty thousand dollars." [laughs] That seemed like a lot of money then, but it is no comparison to today.
WW: When I read a copy of the letter of resignation you submitted to President Nixon, I saw this: "Decision after decision has been made which is against the interests of our domestic industry and labor, supposedly for foreign relations gain." Would you say that is still true today?
KD: Very much. The Korean trade agreement wasn't drafted under Obama, it was drafted under Bush, but it was kicked around for several years. After Obama went to Asia last year, and visited South Korea, two weeks later he suddenly was interested in the Korean Trade Agreement. We know perfectly well what had happened, he promised it to the President of South Korea on that trip, he promised he was going to get that done.
WW: In your letter of resignation you were prescient on how our new trade policies would turn out. You were right.
KD: You know I wasn't all alone on that, I had a very strong ally down there at the time. He was I.W. Abel, who was President of the AFL/CIO Industrial Unions. He was a really brilliant man. When I was in Washington, he and I would talk on the phone often.
WW: What kinds of things would Mr. Abel say to you?
KD: Here's an example, the best letter I got when I resigned was from Mr. Abel. [Produces it from his scrapbook] Look at what he said, particularly on limiting imports.
[Reads aloud from Mr. Abel's letter]:
"There is a too easy assumption in many quarters that the imposition of some restraints on imports is a retreat to the world of the early 1900’s. This is a misreading of reality. The plain hard fact is that world trade has, since the revival of Western Europe and Japan, moved away from the concept of "free trade" (whatever the term means). The current world of international trade includes country after country with every conceivable hedge set up to give preference to their own products and to prejudice foreign imports. It just doesn't make common sense for us to countenance those arrangements while we do little or nothing to protect the viability of our own economy."
It was true then and it has become even more true now. That is why we need a Growth Plan and Balanced Trade trade legislation to save our country from disaster!
Ken Davis Jr. was born in 1928. He earned his B.S. from the Massachusetts Institute of Technology and his MBA from Stanford University. He had a 20-year career with IBM Corporation, serving as Vice President and Chief Financial Officer for five years until 1969. He then was US Assistant Secretary of Commerce, serving on trade policy and negotiations during the Nixon administration. Then he joined Syntex Corporation, a multinational pharmaceutical firm, as Senior Vice President and Chief Financial Officer. Mr. Davis first became an investment banker with White, Weld & Co. in 1975. Later, he managed merger and acquisition departments at Tucker Anthony and at Advest, and also had his own firm, Corporate Development Associates, for five years. In 1988 he joined Bentley Associates at its founding and was a Managing Director until 2008. Currently Mr. Davis is founder and President of Economic Strategy Associates, Inc., in Stamford CT. As an investment banker, he has specialized in working with high technology growth companies, both in raising capital and in mergers, acquisitions, and strategic partnering assignments.
Will Wilkin is a free-lance journalist and solar electrician who lives in Oxford CT.