Romney's Theory about Why Companies and Countries Decline

When Republican presidential candidate Gov. Mitt Romney was growing up, his father was rescuing American Motors Corporation by focusing upon a new type of car, the compact, putting the company's resources into the Rambler.  When his father became CEO, American Motors stock was selling for $5 per share.  After the success of the Rambler, it rose to $95.

How did American Motors succeed when it was competing with General Motors, which had all the advantages that experience, size, and wealth confer?  In his 2010 book No Apologies, Romney writes:

When I was about ten, I asked my dad how he thought the company's Rambler automobile could ever compete with General Motors; they were so far ahead that catching up appeared impossible. He said something that has since been widely attributed to him: "There is nothing as vulnerable as entrenched success." (p. 34)

Romney is a student of why companies and countries go into decline.  After graduate degrees at Harvard Law and Harvard Business School, he went to work for the Boston Consulting Group, where his boss did a study of the advantages of leadership:

His analysis demonstrated that a company with twice as much experience as another should enjoy a 20% to 30% cost advantage. That's why, he concluded at the time, IBM should be more profitable than Burroughs, GM more than Chrysler, Owens-Illinois more than Anchor Hocking. Sears more than JCPenney, Goodyear more than Firestone, and Xerox more than AB Dick. His predictions were borne out, at least for a time, But one by one, great leading companies, like leading nations, found that their potential for advantage was not a guarantee for success. (p. 36)

According to Romney, companies and businesses decline for the same reasons.  They ignore challenges and threats.  They squander their advantages.  Due to easy money, they stop doing the things which made them great in the first place.  According to Romney, the following made America great and should be part of our revival:

[T]he foundations of America's strength are the most robust of any nation in history. Our economy is based on a wide spectrum of industries. Our agricultural and natural resources are abundant. The American people are educated, inventive, creative, risk-taking, entrepreneurial, patriotic, family-oriented, willing to sacrifice, and committed to freedom. (p. 49-50)

America is currently losing to the challenge of Chinese industrial policy.  If current trends continue, within two decades, the Chinese economy will pass the U.S. economy.  Although Chinese leaders claim that they harbor no global ambitions, Romney is skeptical.  He thinks that they threaten not only democratic Taiwan, but also the rest of Asia and the Pacific.  President Obama must be reading confirming intelligence about Chinese ambitions, else why would he suddenly decide to station U.S. Marines in Australia?  And why else would China object?

Although the United States has a huge advantage in innovation, China is stealing our technology.  Romney notes that the foreign corporations that have built their factories in China are not pleased with this technological theft:

Foreign companies that have invested in China have certainly smiled as their sales and profits have grown, but their smiles aren't as wide as they once were, now that their Chinese "partners" are opening facilities of their own and appropriating foreign know-how and technology. All this has led to breathtaking growth for China's economy, now predicted to be larger than ours within the next twenty years. (p. 15)

The good news is that Romney is aware that the United States is not meeting the threat of China's industrial policy.  He is aware that complacency is not the answer.  He is a problem-solver.  As president, he would work to reverse the American decline.

The bad news is that he has not yet figured out how to do so.  His proposals, though better than what President Obama is currently doing, have been lame.  For example, here is his chief proposal at the October 11 debate on the economy in Hanover New Hampshire:

When people have pursued unfair trade practices, you have to have a president that will take action. And on day one, I have indicated, day one, I will issue an executive order identifying China as a currency manipulator. We'll bring an action against them in front of the WTO for manipulating their currency, and we will go after them. If you are not willing to stand up to China, you will get run over by China, and that's what's happened for 20 years.

The WTO is not likely to rule against China as a currency manipulator since there is no WTO rule against currency manipulation.  (There is an International Monetary Fund rule against currency manipulation, but it is never enforced.)  Moreover, China is only the most flagrant of the currency manipulators.  Almost all of the emerging market governments are currently manipulating currencies.  That's why they are growing economically, while their victims (the United States and European economies) are stagnating.

Romney doesn't yet have a Rambler that would reverse America's decline, because he doesn't yet understand China's industrial policy.  He rails against the possibility of the United States imposing tariffs because he thinks that tariffs protect inefficient import-competing industries while inviting counter-tariffs that hurt more efficient export-producing industries.  But his theory holds up only when trade is balanced.  When U.S. trade is kept out of balance by mercantilist countries, the United States loses jobs in import-competing sectors without gaining compensating jobs in exporting sectors.

The mercantilist countries, led by China, keep trade out of balance by restricting imports at the same time that they buy U.S. and European financial assets.  Following the theory developed by University of Chicago economist Jacob Viner and Central University of Beijing economist Heng-Fu Zou, they delay consumption in the present in order to get increased consumption and power in the future.  As a result, their trading partners get increased consumption for a short while, followed by a decline in economic and political power.

There is an action that a President Romney could take at the WTO which would work.  He could invoke the WTO rule, last invoked by the United States in 1971, when President Nixon applied an across-the-board 10% tariff upon imports.  Article XII of the WTO agreement gives countries that are experiencing chronic trade deficits the right to impose tariffs and other barriers to compel balanced trade.

This rule would authorize the United States to impose the scaled tariff, a single-country-variable-tariff which we invented, upon all of the imports from each country with which the United States has a large chronic trade deficit.  The tariff rate would be scaled to each country so as to take half of our ongoing trade deficit with that country as tariff revenue.  It would go up as our trade deficit with that country grows, down as the trade deficit diminishes, and disappear entirely when trade approaches balance.  It would force the mercantilist countries to choose between taking down their barriers to American products and losing market share in American markets.  (For more on this topic, see our article "The Scaled Tariff: A Mechanism for Combating Mercantilism and Producing Balanced Trade," published last month by the peer-reviewed Journal of International Law and Trade Policy.)

So far, only one Republican presidential candidate is advocating balanced trade.  When asked how he would achieve it, Gov. Buddy Roemer (who has an economics degree and MBA from Harvard) said:

So we've got to consider things like a serious tariff to end our trade deficit. Not something I'd rush into blindly, and maybe there's other ways to skin this cat, but I wouldn't flinch at putting a 30 percent tariff on Chinese goods, or a tariff on imports across the board, with the whole world or the countries running a surplus with us. And the interesting thing, of course, is that once the other side knows that, knows that we'd do a tariff, maybe they learn real fast to be a bit more reasonable? But you've got to have a credible threat that you'd do it if you want that "Speak softly and carry a big stick" stuff to work.

Balancing trade would quickly create more than five million new manufacturing jobs and would preserve America's industrial power.  But if the next president continues to let China and the other mercantilist countries run trade surpluses with us, it is only a matter of time -- one or two decades -- before China replaces the United States as the world's dominant power.  Although Romney wants to reverse America's economic decline, he has not yet discovered a solution.  Balancing trade would make a powerful contribution.

The authors maintain a blog at www.idealtaxes.com, and co-authored the 2008 book Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late, published by Ideal Taxes Association.