Sunday, August 3, 2008


If you liked the news on the Ikea factory being set up in Virginia (see my May 31 post “Good News, Better News”), here’s some more. In a front-page story this morning (“Shipping Costs Start to Crimp Globalization”), the New York Times reports that Tesla, which aims to produce a luxury electric car for the American market, is setting up a battery factory in California.

That wasn’t the company’s original idea. Plan A was to produce the heavy batteries (a half ton per pack) in Thailand, ship them to the UK where they would be partly installed, and then ship them again to the US for final assembly. Plan A is a victim of high petroleum prices, which among other things are shooting ocean shipping costs through the roof. As the Times notes, the cost of shipping a 40-foor container from Shanghai to the West Coast has jumped to $8,000 compared to $3,000 just a few years ago.

The article goes on to recount how high transportation costs are beginning to force a rationalization of extensive global supply chains premised on perpetually cheap energy costs and a lack of concern about their environmental impact. While the carbon emissions-intensive supply chain may not yet be headed for history’s scrap heap, there is a serious move to make major revisions in them. One consequence is likely to be shorter, more fuel efficient supply chains wherever possible -- greater regionalization instead of globalization.

All this got me to thinking about John McCain’s excellent little idea a while back to offer a $300 million prize to someone who could come up with the best electric car battery. Let’s say, lighter, more efficient, and longer lasting than Tesla’s. Finding that kind of money in the federal budget wouldn’t be hard, and we could always borrow a little more from our oil-exporting trading partners for such a worthy cause.

But after the check was handed over in the Rose Garden, where would the budding entrepreneur decide to manufacture those (still heavy) batteries? I’d be not one bit surprised if the decision were to take the money and run, placing the new plant in a more investment-friendly place, say, Canada.

Tariffs, of course, are not the issue. We’ve enjoyed free trade with Canada in automotive products since the mid-1960s. More to the point, Canada provides several perfectly legal and powerfully attractive inducements to American investors. Canadians depreciate new investments aggressively – one-third of the remaining balance each year, starting from the date of expenditure rather than operation. That lowers the cost of capital. They rebate their consumption tax – the federal and the provincial goods and services tax – when a product is exported from Canada. Most countries offset that rebate with a tax of their own. Almost uniquely, the U.S. chooses not to tax imports. And they fund health care out of general tax revenues, reducing the burden on individual manufacturing enterprises.

I have no doubt that the American worker is as good -- and usually far, far more productive -- than his foreign competitors. Ditto for American entrepreneurs. But American public policy is a disservice to those workers and entrepreneurs, punishing them with policies better suited for the 1950s than for the 21st Century. Whether globalization cedes ground to regionalization or not, these policies will continue to be one of driving forces of America’s economic decline until we find the political will to change them.

Charles Blum

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