An Economic Contingency Plan

An Economic Contingency Plan

I was thinking about the government and private sector’s current preoccupation with the possible loss of immigration control and the imposition of the federal minimum wage and wondered what would be on the Commonwealth’s agenda if these vital issues were not of such immediate concern.

Certainly there are many other important matters to address none the least being education, health, infrastructure improvement and, from my perspective, economic diversification and growth. If the burning issues of the day were not of so much concern would attention be directed, and energy and resources expended, toward encouraging increased foreign and domestic investment? If so, in what areas should such an endeavor be aimed -increased tourism; the exploitation of marine resources; computer software development businesses; the creation of a long range, comprehensive master development plan designed to direct the island into the next century? Considering the future of manufacturing and the fact that the World Trade Organization and its signatory members will be eliminating trade barriers in the near future and, in particular, import quotas on most manufactured products in a move to embrace “free trade” among nations – the period remaining for the CNMI’s export manufacturing sector is limited.

Phase four within the agreement negotiated in the Uruguay Round of trade talks which covered multi-fibers takes effect on January 1, 2005. All the sensitive import items entering the United States market are within this phase including CNMI manufactured garments. The net effect being that the Commonwealth’s use of Headnote 3 (a) within the U. S. Customs Schedule which has permitted duty free entry of qualified manufactured products from the Northern Marianas, what ever they may be, garments, widgets or baby diapers, will no longer offer a manufacturer any advantage in doing business here. They will be able to manufacture products any where in the world except mainland China and Taiwan and ship them to the United States. Indeed, sometime within the next six and one half years manufacturers in China and Taiwan will probably be able to do the same. Recently on CNN there was a news -story about immigrant workers in Thailand, Malaysia and elsewhere that were being sent home as a result of the economic meltdown in the those nations. I have never given much thought to immigrant workers employed in other nations but realized that as long as these nations permit companies to pay their guest workers far less than the minimum wage earned in the United States, and offer few, if any, benefits, then American workers on the mainland will never be able to produce products that will compete in price with imports from Southeast Asia, Central America and elsewhere. In any case, the treatment of such workers in those foreign nations will not matter a bit as the United States will be unable to do anything about conditions in their workplace.

When the economies of southeast Asia get straightened out – and they will – their exports to the United States will increase and because their workers earn lower wages, their products will be landed in the United States at a lower cost than can be produced domestically. The higher paid American workers will lose jobs in various industries while the American consumer will benefit from the lower and more competitive prices of the imported items. That is, he or she will benefit as long as they have a job to earn the money to purchase the product. The government will have eliminated the CNMI’s garment industry and it will not have the slightest effect on the United States labor market within that domestic industry. American garment workers will be out of a job sooner or later. I saw a sport coat advertised in an American catalog that had been made in Russia, exported to the United States at retail price of $69. Imagine what the Russian worker was paid to produce this garment. Probably the equivalent of about one dollar an hour or less. The universal “game plan” is to keep manufacturing costs down to remain competitive and keep profits up.

Everyone can do it except the United States based garment manufacturer. His production costs are high because of higher wage rates and costly government regulations. Remember the North America Free Trade Agreement, (NAFTA), that was touted to increase jobs for American workers. A recent issue of the Economist Magazine carried a story which read, “the future of Paseo del Norte turns on the maquiladora (factory) assembly lines where Mexican workers use American equipment to make goods that get exported duty-free to the United States. General Motors established a plant in Juarez as early as 1971. Now, 330 manquiladoras in Juarez employ nearly 200,000 people, more than any other border city.” This is a direct result of the fact that “economics pulls labor intensive work to the Mexican side of the border. Work that needs a lot of capital or education tends to stay on the American side.” Again, the all consuming goal is to keep manufacturing costs down – move plants to locations where this is possible. There are no occupational health and safety laws in Mexico, Central America or Asia. No environmental regulations or historical preservation concerns. No requirement to provide employee medical and retirement benefits. Companies move to these locations to maximize profits, almost always because of low labor costs, few regulations and a large pool of available workers willing to work for low wages under austere conditions. Some readers may think I’m pro-garment industry – the fact is I’m not.

I could care less whether they stay or leave the Commonwealth. My interest is with the economy and its measurement. The industry happens to be a major player here. When the garment industry does leave the islands all that will have been accomplished is reduced tax revenues for the CNMI government and less money placed in circulation in the local economy. With no garment industry and thus no garment workers, CUC will have an excess of power generating capacity with no one to buy it’s full production potential and a fixed, debt service obligation to meet with reduced revenues. The Ports Authority may also be faced with a similar scenario – an obligation to service bond interest payments from a reduced revenue base as a result of reduced port activity. Sound complicated? It is, but that’s the world we live in. I suppose some areas will have more water available than now is the case and there will be less pressure on parks, police, fire and immigration. So, with the departure of the manufacturing sector that will leave tourism as the principal source of fuel for the Commonwealth’s economic engine. Tourism is a highly competitive industry. In my opinion, now is the time to develop an economic contingency plan to attempt the difficult task of diversifying the economy and take some of our “economic eggs” out of the tourism basket and work to replace those that fall from the garment basket. The primary goal in my judgment should be to: maintain current government revenues without a reduction in services and without a tax increase. If this is not done – then look forward an eventual reduction in government services along with the possibility of an increase in taxes. There are only two ways for a government or a business to make money: hold expenses and increase income. If that’s not possible – then maintain the income level and reduce expenses. So what might the scenario be when the garment industry relocates? There are those in the community that would welcome a reduction in the size of the economy along with fewer nonresident workers.

These people should also be willing to accept the “trade -offs” that accompany reduced economic activity and the distinct possibility that a smaller economy means diminished government revenues, less government services with fewer employment opportunities which seems to be the career choice for many. Less money in circulation and thus lower profits for many businesses; reduced demand for leased land and rental property; less disposable income; possibly reduced retirement benefits; lower salaries and, as a result of what economists refer to as unachieved or limited “economies of scale” resulting from a smaller market, possibly higher utility rates along with an increase in the cost of living primarily as a result of higher freight rates on imported commodities because surface carriers will have to contend with a one way revenue generating voyage by returning with empty cargo holds.

It other words, “deadheading.” It may be that we will soon have an economic tiger by the tail and we had better attempt to plan to ride it’s back rather than run the risk of winding up inside. There is nothing wrong in anticipating the worst and planning to mitigate the impact. If events don’t transpire as anticipated – no harm has been done. It’s only a contingency plan. I think it’s better to stay ahead of the game and “jump the gun” with a plan, than not to jump when the gun goes off. As one who remembers the Great Depression of the thirties, witnessed technological change that forced thousands of coal miners out of work forcing fathers to abandon their families in order to qualify for food stamps and experienced a number of severe economic recessions in the United States. I have those distant days as a perspective. Let me tell you that the time to close the barn door is before the horse escapes.