Obama’s Immelt problem

Obama’s Immelt problem

As President Obama writes the "jobs" speech he has promised to deliver after the summer holiday, he must confront a fundamental question posed for him by none other than the Chairman of his own Council on Jobs and Competitiveness, General Electric CEO Jeffrey Immelt.

GE is, of course, one of America’s and the world’s greatest companies, a leader in innovation, technology, and industrial and financial know how that has traditionally been a mainstay of U.S. investment and job creation. When the president consults with Immelt, he is undoubtedly hoping and expecting that GE  will take the lead in developing new, cutting edge products and making new U.S. investments to produce them that will create some of the good new jobs the country so desperately needs. Yet, GE’s current dealings in China make the company exhibit A for how globalization is presently operating to transfer this development and job creation from the United States (and other countries) to off-shore locations.

For example, in recent public statements, GE has said it is transferring its Synthetic Vision system (enables aircraft landings in extremely low visibility situations) and other leading edge technologies (often developed in part with U.S. government funding) to its joint venture with China’s state owned AVIC for production  and sale to the state owned aircraft maker now developing the new Chinese commercial airliner that will compete with Boeing in international markets in the future. Of course, most of the associated jobs will also go to China.

But these are precisely the kinds of advanced technologies, products, and jobs that virtually all economists and business leaders, including especially Immelt, say are essential to maintaining America’s (and other developed countries’) competitiveness and standard of living. This is the "higher ground" to which, as the manufacture of more commoditized products has been moved off-shore, economists and business leaders have endlessly said U.S. based production and employment would move. In fact, it seems that rather than U.S. production and jobs moving to higher ground, the higher ground is being moved to China. The obvious question Obama must ask Immelt is why?

Hopefully Immelt will not make the usual knee jerk argument about labor and production costs being lower in China or about quality and productivity being better. If he does, Obama should immediately ask for his resignation as Chairman of the Council on Jobs and Competitiveness. This argument is complete nonsense in the case of things like avionics. They are not labor intensive. The operating costs of production will not be lower in China than in the United States. Indeed, they may well be higher. Moreover, the quality and productivity will not, at least in the beginning, be as good. On a strictly cost-quality basis under true conditions of free trade these products should be made in the United States and exported abroad in exchange the things which other countries produce more competitively.

The real reason for the AVIC deal is that China has told GE that if it wants to sell to China’s state owned aircraft makers it must transfer its technology and production to China. Beijing has made access to the Chinese market conditional upon technology transfer and investment and production in China. Nor is China alone in doing this. It is only imitating what worked for Japan, Korea, Taiwan, and many others. Indeed, GE executives have explained that the time of the "colonial model" of global companies producing in advanced countries for sale in the developing world is over. As GE Vice President John Rice recently told the Washington Post, "what China and many other countries figured out is that that is not a path to long term prosperity. The old days are not working anymore in any country."

That is a revolutionary statement because the rules of the World Trade Organization and of U.S. policy are based on the assumptions of the "old days" free trade model under which countries specialize in production of what they do best and trade for the rest. Since the United States does things like Synthetic Vision best while China excels in things like apparel, leaders like the President expect to trade Synthetic vision modules for shirts and try to create jobs by stimulating development of things like Synthetic Vision. Moreover, the rest of the world to play by these   

When Rice and GE say the old days aren’t working anymore, they’re telling the President to forget about his policies and expectations because GE can’t afford to play the game by the established rules when doing so may cause it to lose out under the new China rules.

While GE’s thinking is quite understandable, the problem is that when GE does well under China’s rules the United States loses out. Obama must get Immelt to tell him what might cause GE to stop playing by China’s rules. Should America forget about the "old days" free trade model and start taking the same road as China. Should it at least act to offset the negative impact of the China rules?

Those are the questions Obama must answer if he is to revitalize the U.S. economy and create new, good jobs.