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Q2 2015 Earnings

July 28, 2015
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Manufacturing: Globalization and Trade


Scott Davis, chairman and CEO, participated in The National Summit, sponsored by the Detroit Economic Club, in Detroit. Davis spoke in the Manufacturing: Globalization and Trade Town Hall session, where he discussed the positive force of global trade and the imperative to resist anti-protectionist measures in the U.S. Davis was joined by fellow panelists Sandy Baruah, Senior Fellow, Council on Competitiveness; Jayson Myers, President, Canadian Manufacturers and Exporters Association; and Craig Giffi, Principal, Deloitte. The session was moderated by Eric Schurenberg, editor of CBS Moneywatch

Opening remarks

It's great to be in Detroit today and to be a part of this distinguished panel.

It was just about a year ago that we were all sitting around worrying about higher energy costs, global warming, healthcare costs, and the wars in Iraq and Afghanistan. And now we have a new term for those days. We call those the good old days. Because seriously about a year ago we fell into a financial crisis that's deeper than anything any of us have ever seen in our lifetimes. It really has disrupted lives. It's caused businesses to close. It's shattered economies. It's left all of us with an uncertain future. It's left a lot of us with questions as to how we get out of this crisis.

I'm here to talk about a couple of things we need to do to get out of this crisis and I'm going to start with increasing global trade. I think it's one of the greatest tools we have right now to get out of this crisis. Yet at the same time, we're seeing signs of protectionism. Now it's not uncommon during an economic crisis for countries to look inward and to put up barriers to protect jobs. There's a lot of pressure from the politicians to do that. A good example of this is the Buy American program we saw as part of the Stimulus Package. Fortunately the barriers got watered down quite a bit, yet they still sent a horrible symbol to the rest of the world. And it gives a lot of other countries cover for their own protectionist practices. So countries like China, Russia, France, you name it, we're giving them reasons to set up their own protectionist barriers, so not a good deal.

It risks decades of global transformation. We've seen tremendous prosperity in the last six decades due to the increase in global trade. We've actually seen a decrease in global trade over the last six months. Imports and exports out of the U.S. and into the U.S. have certainly dropped over the last six months. But even global trade in total is expected to be down eight or nine percent this year, which are numbers we've not seen in years and years and years. 

I don't think protectionism has done an awful lot of damage as of yet. But if we don't watch it, it will do a lot of damage and it'll change the trends we've seen in the past.

Since the global financial crisis has begun, 78 trade measures have been proposed or implemented by various countries. Some 66 of those are trade restrictions, so not a good trend. 

Let me give you a few facts as to why global trade will help lift us out of this crisis and why it's such a positive force. Fifty-seven million Americans work for companies engaged in global trade. One out of every five manufacturing jobs in the U.S. is linked to the expert of goods. An example close to home - at UPS, for every 40 packages that are imported or exported in and out of the U.S., it creates a new job at UPS. That is one example. Forty packages will create a new job at UPS.

Estimates say that growth in trade since World War II has added about $1 trillion a year, in 2003 dollars, to America's national income. And the estimates also say that if the world's remaining barriers are taken down, it'll add hundreds of billions of dollars to that total as we go forward. We've seen great success in global trade demonstrated by countries like China, India, Russia, Taiwan, Singapore, Chile and Korea. And even though China today is a single-party state, you now see freedom of information, freedom of movement - tremendous progress – and it's been brought about by trade and opening up China.

But we do have a big challenge in front of us in that we must create a system of trade that is fair, workable, rational, and compassionate. What could each of us do? We have to make the case in every way we can, in every possible forum that trade is a major force for good, for growth, and for jobs. We must argue from the head but also from the heart. And we're going to have to pay a lot more attention to those people who are displaced by trade. We have not done a very good job of that in prior years. A good first step was made with the return of the expired Trade Adjustment Assistance Act, which was part of the Stimulus Package. What was even better about that was the fact that beyond manufacturing we are also including service industries in that coverage. So that was a very important part of the stimulus bill.

While we help those displaced, we also can count on one of the most potent anti-trade arguments - that American jobs are being written off as a price of progress. You've got to remember though that the U.S. is still the leading manufacturer in the world and is the leading exporter of goods and services. The U.S. manufactures 25% of all goods right now. Regarding fair trade, it's critical the WTO must insist on fair trade between countries. 

A second point I'm going to talk briefly about, and it goes hand in hand with trade, is that our infrastructure must be improved to meet the demands of modern global commerce. Some countries have done a great job of embracing the future, and some are avoiding it. Unfortunately I think the U.S. is in the second group. Ports, waterways, rail capacities and highways are all pressing issues. The nation's infrastructure received a cumulative grade of D according to a 2009 report card by the American Society of Civil Engineers - a D. 

Here's another quick UPS example regarding congestion. At UPS, if our trucks in the U.S. are delayed five minutes a day due to congestion, it costs us $100 million a year. So five minutes a day costs UPS $100 million a year. You extrapolate that to the other fleets in the country and those are extraordinary numbers - 75 or 80 billion dollars. Also think of what it does to the environment, so it's a big deal. So we need to invest in the infrastructure.

We're encouraged by what we saw in the Stimulus Package. There certainly was attention paid to infrastructure, with a lot of money going to roads and bridges. I would have liked to see more going to air traffic control and rail, but you can't get everything you want. But there is a lot of money going to roads and to bridges. 

The final topic I'll talk about is trade today crosses borders - approximately 20% of business crosses borders. Now one of the things we've got to do in this world is get rid of this burdensome customs process. It is a slow process. It takes days and days and it slows the supply chain down. We've got to do a better job there. There's a lot of room for improvement. And some of the things that'll come out of the Free Trade Agreements are less customs and easier movement of goods.

To wrap up my talk here Eric, I want to say the global economy depends on global trade. It demands cooperation between countries for trade to grow. Besides helping us recover quicker from this economic crisis, one of the other byproducts of trade is less global conflict because when trade crosses borders, armies generally do not. So with that, I'm going to hand it back to you Eric.

Moderated Panel

E. Schurenberg: Let me ask one question of the panel to start with. Post mortems on the bankruptcy of Chrysler and GM are a dime a dozen but usually not from such a distinguished panel. And after all that is the elephant in the room. So if I could ask you panelists what lesson, briefly, should we learn from what happened in just the past couple of weeks? Scott I'll ask you to start.
S. Davis: That's a difficult one Eric. I would say it comes back to being focused on the customer and looking at trends and where the customer is going in the next five to ten years. We didn't do a good enough job in the U.S. auto manufacturing industry of really getting behind what are the energy risks, what are the demands of the customers going to be looking forward? So I would think spending more time looking at where that customer was going to be in five to ten years was our biggest shortfall.
ES: We all have been very brave up here in our panel talking about how America needs to suck it up and improve its manufacturing and that its jobs will go away and outsourcing is a fact of life. Of course none of us have jobs that are in danger of being outsourced, so it's kind of easy for us to say. Is there any truth in the accusation that U.S. manufacturers or U.S. business in general has been heedless in its pursuit of outsourcing and its use of outsourcing? Are there things that we should of done differently that would have been more humane and cause less of the kind of pain that Sandy talked about? Scott, what should we have done differently? Were we as thoughtful as we could have been in this process?
SD: I think first of all that the world is going to go on sourcing and selling goods wherever it makes the most sense. So the U.S. has to play in that game and if we put up barriers and decide not to play in it, then we're out of the game and will suffer for it. Sandy threw out some great numbers here earlier, the true numbers. We did not do a good enough job with trade assistance as far as the retraining of people. I think we talked a good game but didn't play a good enough game and it's critical that we invest the funds in the training to get our people into other areas. I think in some areas of the country we did better than others but it's not just the government's mission. Business has to focus on getting people trained - investing the funds to get them retrained. We didn't do a good job with that.
ES: Should we renegotiate NAFTA as the President has suggested to take into account environmental considerations and labor safety? Scott let me put that question to you.
SD: I think NAFTA is a very comprehensive, complicated agreement and I wouldn't recommend the idea of opening it up again. At the last summit meeting held in Canada we had a pretty good agreement between the two leaders of the countries. But I think things could be done to solve boundary issues and whether it's Mexican trucking issues - those types of things – they can be done outside of NAFTA. So I would encourage us to not reopen NAFTA but we could tweak it.
ES: Let's go on then to some of those countries that are outside NAFTA and outside our free trade agreements - in particular, the big one. With a few notable exceptions like Buick, it seems like American manufacturers have a hard time making headway in China. What can policymakers do to help rectify that? Scott?
SD: Our airplanes clearly show the balance of trade right now. They're pretty full coming out of China and not very full going back into China, which causes some issues for us. Overall I think it's been said very well that demand in China is going to be enormous. They have a middle class that could be as much as 40% of the population in the next 25 years. There's going to be huge demand, so we have to find the right products to be successful. And I think we will. Protectionism and the policies we run into - some of that is in China but it's not that unique. We've fought the post office in the U.S. We fought the post office in Germany. We're fighting the post office in China where they've subsidized the monopoly business and they won't let us handle any kind of letters - such as delivering next-day letters in domestic China. But those are not new challenges. We've faced them over the years and we think we'll overcome them.
ES: There are many structural costs like taxes and regulations that impede U.S. competitiveness. How would you rate that in the U.S.? What needs to be done and how is the new administration doing in that regard? Scott you have a great perspective on this. What do you think?
SD: I think we have challenges. On the tax issue right now there's obviously a lot of emotion on this topic. The international tax deferral issue is going to impact a lot of companies. To change that and to not lower corporate tax rates is going to make it difficult for U.S. corporations to compete. We already have the second highest corporate tax rate in the world. We need to raise a lot of revenue in this country right now and it's going to be a big challenge for the administration and Congress going forward.
ES: Regardless of the effect on government spending that overseas conflicts involve us in, it has had an obvious effect on - for lack of a better word - Brand America and the opinion of the U.S. in the rest of the world. Does that brand value for this country have an effect on global trade that you have noticed; that is possibly even measurable?
SD: Kind of an interesting story - last fall I was in Europe at a symposium with customers and we had former President Gorbachev with us and I spent a lot of time with him. It was an interesting time because first of all I think the European businesspeople still had a lot of respect for the United States. But Mr. Gorbachev was having a great time with us because at the same time the banks were getting bailed out by the government he was kind of laughing saying, "now who's the capitalist and who's the socialist? The Chinese are the capitalists and the U.S. is not." So there's a lot of confusion out there. But it's kind of an interesting perspective.
ES: A question around intellectual property. What's your perspective - any particular issues as we look at it both from a domestic as well as a global perspective and in terms of any policy change? What's on the mind of the panel?
SD: Since we manage supply chains for a lot of different businesses, including health care, it's a big issue for them. You are seeing these companies set up distribution sites where they feel comfortable with intellectual property protection. We're seeing, for example in Asia, an awful lot in Singapore where they feel very comfortable with the government in protecting intellectual property. So it's a big part of the decision making where companies set up business today.
ES: The end of the recession will be, when?
SD: Eric, I think the biggest declines are behind us. I think certainly the precipitous declines we saw in fourth quarter and first quarter are over. But technically I agree with Sandy that the recession will end the end of this year - technically. You'll see positive growth - the stimulus will have to have some impact on the GDP numbers. I do expect 2010 to show growth but below trend; below the 3.2 - 3.3 percent numbers we normally see.

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