Table of Contents

While parts of Ohio’s economy are thriving and business confidence is soaring, many middle-income households still struggle to meet their household expenses, invest in their children’s future, and save for retirement. These households now feel more exposed to the cyclical ups and downs of the economy. And many smaller cities and towns are still trying to reinvent their economic bases following the departure of major local employers.

The challenges these households and communities face are not merely an Ohio phenomenon but, in many instances, indicative of national trends. There is room for strategic improvements and a strong case for change. Policymakers must expand their efforts and explore how U.S. foreign policy could advance—in hand with domestic policy—more Americans’ economic interests.

But there is no silver bullet; merely renegotiating previous trade deals or spending less abroad will not have the desired effect. Improving the economic livelihood of America’s middle class will require working through difficult trade-offs and devising a comprehensive strategy. Five sets of policy directions and questions emerged from the Ohio study and offer a good starting point:

  • Clarify the national economic interests: How should national economic interests (to be advanced through foreign policy) be defined? To what extent are those interests undercut when the benefits from economic growth concentrate more in upper-income brackets and specific geographic locations—and meanwhile, an increasing number of workers and places struggle to sustain a middle-class standard of living?
  • Link trade to a comprehensive national economic strategy: How can we ensure that the trade agenda is developed in tandem with a comprehensive economic strategy to enhance competitiveness and help workers and communities adapt to structural changes in the global economy?
  • Develop a national strategy for foreign direct investment: What more must be done at a national level, through public and private efforts, to make the United States even more competitive in the global market to attract and retain FDI while discouraging “a race to the bottom” between U.S. cities and states to win deals?
  • Highlight the economic trade-offs around defense spending: How can the debates on the defense budget more clearly acknowledge the livelihoods of working families and entire communities it sustains, the health of the global economy it promotes, and the resources for pressing domestic investment it depletes and diverts?
  • Define the U.S. global leadership role and its economic implications: As the need for domestic investments at home increases and the nature of international competition and cooperation evolve, especially with China, what should U.S. global leadership entail, what will it cost, and how will American working families benefit from it economically?

These five policy directions and questions are deliberately general and provocative. It would be premature, on the basis of a limited set of interviews in only one state, to offer more expansive and detailed recommendations. After receiving feedback on this case study, conducting additional ones in other states, and further exploring the emerging themes, it will possible to elaborate on and eventually provide answers to these questions.

Clarify the National Economic Interests

All U.S. presidents make clear that their foreign policies seek to advance America’s national economic interests, in addition to keeping the country safe and defending its way of life. But the definition of those interests is no longer obvious as the economic fortunes of Americans and their communities—both across and within states—have increasingly diverged. A common assumption is that the economic interests of states in the industrial Midwest may conflict with those on the coasts and elsewhere in the country. The situation is actually far more complicated than that.

Major differences persist across middle-income populations within Ohio itself. As is true for most U.S. states, there are many different “Ohios.” Some people and places are thriving and others are struggling. The economic future looks bright for those with a bachelor’s or advanced degree in Columbus, Ohio, but is far more precarious for those without one in Coshocton and other smaller cities and towns that lie outside of the state’s stronger metropolitan economies.

Communities that have lost major sources of employment due to outsourcing, offshoring, or foreign import competition have not been able to seamlessly or quickly reinvent their economic bases.

Ohio’s economy has grown, hundreds of thousands of new private sector jobs have been created, and business and consumer confidence has soared. Yet many of the state’s fastest-growing occupations do not pay enough to sustain a modest middle-class standard of living. Communities that have lost major sources of employment due to outsourcing, offshoring, or foreign import competition have not been able to seamlessly or quickly reinvent their economic bases. Manufacturing once provided a decent wage for workers without college degrees, but now it accounts for only 13 percent of Ohio’s workforce.1 Meanwhile, twice as many people now work at Walmart—the top employer in Ohio and twenty-one other U.S. states—than are directly employed in the steel and iron industries.2 There is an effort to preserve and grow the ranks of good-paying manufacturing jobs for blue-collar workers who remain—to the extent possible given increasing automation. But this does not address the concerns of the majority of Ohio’s workforce who do not hold a bachelor’s degree or possess other technical skills valued by the state’s private employers.

These realities raise real questions about the desirability of defining national economic interests in terms that rely solely on net aggregate benefits for the nation without adequately considering distributional aspects. However, the alternative—of prioritizing the revival of struggling workers, industries, and communities—runs the risk of underinvesting in or undermining the prospering parts of the economy. These realities and dilemmas require current and future administrations to clearly define the national economic interests that they intend to advance through U.S. foreign policy. Every relevant strategy document, including the National Security Strategy, should explicitly answer this question: Whose interests are being served, and who may lose out? It is time to directly acknowledge the specific trade-offs inherent in any course of action.

Link Trade to a Comprehensive National Economic Strategy

Virtually all of the study’s interviewees assumed that trade policy was the aspect of U.S. foreign policy having the most impact on the economic well-being of America’s middle class and their communities. None interviewed, including in areas strongly favoring Trump in the last presidential election, argued solely for protectionism. They stressed the importance of Ohio being fully engaged internationally and trading freely in an open, integrated global economy. This was seen as vital for creating jobs, attracting investment, and making goods and services more affordable for American consumers. Ohio’s exporters welcomed the emergence of new and prospering markets overseas, believing that they could not grow their businesses through supplying the U.S. market alone.

That said, while they strongly support free trade, they insist on a level playing field. They called for adjustments to how the United States approaches the negotiation and enforcement of trade agreements. Labor representatives, displaced workers, and others in struggling manufacturing towns pushed for higher labor standards in free trade agreements with low-wage countries, so that U.S. workers could more fairly compete.3 Many of those interviewed, in both big cities and small towns, also criticized previous administrations for not pushing back harder against unfair foreign trading practices, especially objectionable actions by China. Some specifically highlighted deep concerns about China’s subsidies to state-owned enterprises, theft of intellectual property, and prior currency manipulation.

At the same time, the term “trade” was often used liberally in interviews, suggesting it has become a proxy for anxieties confronting middle-income households that go well beyond trade. It speaks to a wider set of challenges arising from a changing, increasingly interconnected global economy. Those interviewed attributed the challenges families across Ohio’s small and mid-sized cities and towns face to many different factors that may intersect with trade policy but go well beyond it. These include:

  • Workforce transformations due to automation and other technological advances.
  • Fierce competition among U.S. states for domestic and foreign business investment.
  • Declining union participation that has diminished workers’ collective bargaining power, but also union inflexibility at key moments that inhibited business investment.
  • Transition toward a more services-oriented economy with lower wages for low- and semi-skilled work.
  • Increasing difficulty of sustaining a middle-class standard of living and saving for retirement on current wages, as the costs of healthcare, childcare, and education rise.
  • Anxieties surrounding perceptions that—even as business confidence and economic growth rates rise—the benefits of growth are disproportionately going to corporate shareholders and executives and that another harsh downturn in the business cycle is inevitable at some point.
  • Loss of local ownership and diminished local engagement as corporations buy out small and medium-sized businesses and move their headquarters elsewhere.
  • Capital flight out of the United States and from certain U.S. regions.
  • Prohibitive costs for cities and towns to clear or repurpose abandoned plants and associated buildings due to bankruptcy, buyouts, or offshoring.
  • Underinvestment in areas that could boost productivity growth for small businesses, workers, and communities—such as infrastructure, research and development, education, and transportation—in a time of skyrocketing national debt.
  • Breakdown in the de facto social contract among government, business, labor, and communities.

Clearly, these challenges cannot be addressed merely through the modernization, renegotiation, or tougher enforcement of trade agreements, even if such changes are needed in their own right. Overcoming these challenges requires making the domestic investments needed to help workers and places struggling to keep up in a changing global economy. It requires confronting aspects of international economic policy that influence global capital flows, such as international tax policy and tax havens. It requires accepting the linkage between international trade policy and the often sensitive and difficult debates on domestic, fiscal, and social policies. And, therefore, it necessitates breaking down bureaucratic barriers in government to ensure that those addressing domestic and foreign issues are working together.

Previous Democratic and Republican administrations, including those in which this study’s task force members have served, pursued trade-liberalizing agreements without adequately considering, foreseeing, and preparing for the domestic consequences. The current administration risks making the same mistake, as it pursues significant adjustments to existing trade arrangements. It further risks adopting policies that isolate the United States from the benefits of the global economy.

Develop a National Strategy for Foreign Domestic Investment

All those interviewed in Ohio appeared to agree that government, business, and local communities should work together to attract more FDI. Such foreign investment is seen as a necessary complement to domestic investment for creating good-paying jobs and generating critical revenue for the state. Ohio has forged strong public-private partnerships to globally market the state’s comparative advantages and targeted industries.

State officials and economic developers stress that Ohio’s private and public sector actors are best-placed to lead this effort. They welcome modest national-level programs, such as SelectUSA, to supplement or complement their efforts. But they do not depend on them. Nor are they looking for U.S. government officials at the U.S. Department of Commerce or embassies abroad to take charge. Federal-level workers cannot make the case for Ohio nearly as persuasively as Ohioans can. Nor should they, as it could mean prejudicing the efforts of some U.S. states over others competing for the same investment dollars. Moreover, state officials and economic developers in Ohio would not welcome anything that might be, or be perceived as, an added layer of bureaucracy from Washington, DC, that could impinge on their flexibility and autonomy.

There are ways for a wellresourced federal agency to support U.S. states in attracting FDI without playing favorites.

Yet there are ways for a well-resourced federal agency to support U.S. states in attracting FDI without playing favorites. For example, state officials are ill-equipped to help potential foreign investors navigate the maze of federal regulatory requirements, ranging from work visas to taxes. Government agencies could help states market themselves more broadly and work with investors to resolve challenges after an investment decision has been made.

Worldwide, the United States remains the largest recipient of direct investment, but other countries are steadily gaining ground, in part, because they have employed aggressive national strategies to compete with the United States to draw foreign investment.4 U.S. policymakers need to develop one as well.

There is some risk that the benefits to working families of FDI will steadily diminish as competing U.S. states undercut one another on local taxes, regulations, wages, and direct financial incentives. This, in some respects, is where modern trade policy and FDI intersect. By negotiating trade pacts that force both U.S. states and foreign trade partners to bind themselves to higher labor and environmental standards, for instance, the federal government can help avoid a race to the bottom.

More broadly, a national commitment to boosting FDI would create a new context for discussions on such issues as stability in trade policy, immigration, the regulatory environment, corporate tax rates, public and private investments in infrastructure, and transportation and workforce development.

Highlight the Economic Trade-Offs Around Defense Spending

The international affairs budget (the “150 account”)—which pays for U.S. diplomatic and development activities and covers U.S. contributions to international organizations—is often in the crosshairs when unfunded needs at home put pressure on cutting back abroad. But this budget accounts for less than 1 percent of the overall federal budget. It must, of course, be spent wisely and deliver a clear return for the American people. Yet it needs to be put in perspective. Defense spending, which topped $700 billion for fiscal year 2018, constitutes 17 percent of the federal budget, according to the Congressional Budget Office.5

Therefore, a serious discussion about cutting spending abroad to meet the needs at home must first and foremost concentrate on defense spending. The terms of that debate will need to be clarified, however. At least four different perspectives on defense spending came up during the study interviews. And views on defense spending vary, depending on the perspective. First, there is strong support for spending what is required to keep the country safe from numerous national security threats. However, few have a basis to know whether current amounts dedicated to that objective are adequate or inflated.

Second, there is general aversion to unwise and unfunded wars, with many now putting the decades-long military interventions in Afghanistan and Iraq in that category. Third, while the actual amount the United States spends on guaranteeing allies’ security is undefined—and it is potentially less than commonly perceived—there are mixed views about whether this arrangement is fair for Americans. The views appear to partly stem from various notions about the nature, costs, and benefits of U.S. global leadership in general, as discussed in the next section.

Finally, there is strong support for sustaining or increasing defense spending that provides an economic lifeline for working families and communities. For example, if the Wright-Patterson Air Force Base—Ohio’s largest single-site employer—were to close, the Dayton area would be devastated. Similarly, if tank production for the U.S. Army were substantially reduced or halted, Lima would suffer greatly. The big cities, too, could be affected by significant cuts to defense spending. The east side of Columbus is anchored by the Defense Supply Center, one of three such centers in the nation.6 The Defense Finance and Accounting Service employs 2,250 people in Cleveland and has a similar facility in Columbus.7 And across the state, a middle-class standard of living would be put out of reach for several thousand Ohioans if they could not count on the National Guard and Reserves as a way to contribute toward their educational expenses, acquire coveted training, earn a livable wage, provide healthcare, and add to their portfolio of retirement benefits.

Use of the defense budget for domestic economic benefits deserves to be the subject of a genuine national conversation, rather than treating it as an open secret and conflating it with debates on the substantive defense requirements.

Furthermore, many of Ohio’s local manufacturers that are suppliers to the prime defense contractors weathered the early 2000s and the China shock far better than many other small businesses. The defense industry is able to export its products abroad to countries that receive generous sums of U.S. aid to buy weapons systems. Meanwhile the industry is protected, on national security grounds, from any foreign import competition.

Thus, it is understandable why politicians on both sides of the aisle fight to preserve what amounts to the United States’ only national industrial base—at least those portions of the defense industry residing in their home states and districts—because of the economic benefits their constituents derive from it. Using that logic, one could even argue for expanding the defense budget to encompass more areas of direct relevance to the nation’s strength and competitiveness, such as STEM education and pre-commercial research and development. Arguably, defense spending enjoys more bipartisan political backing and potential for growth than any other source of federal funding to support national industries and middle-class livelihoods, education, training, healthcare, and retirement.

Use of the defense budget for domestic economic benefits deserves to be the subject of a genuine national conversation, rather than treating it as an open secret and conflating it with debates on the substantive defense requirements. Furthermore, it needs to be weighed against the alternatives. If some of the money now spent on defense were directed toward helping Dayton, Lima, and other communities build more diversified, stable local economies, then base closures and changes in military-support activities would likely face less resistance. Many economists argue, for example, that increasing funds for some public works projects to build infrastructure might create more jobs and deliver a greater economic yield in the long term.

To be clear, expenditures on these defense-related activities, in Ohio and elsewhere, serve important national security aims. Both the U.S. Department of Defense and members of Congress prepare and evaluate spending requests based on the substantive requirements to support the missions. But, for all states, the money and personnel involved are so large that it is not possible to ignore the economic implications for local communities. The Defense Department established the Office of Economic Adjustment in the 1960s precisely due to this recognition.

Ultimately, having a genuine national conversation on the trade-offs associated with preserving or increasing the defense budget due to local economic considerations could make it easier to discuss the substantive military requirements more exclusively on their merits.

Define the U.S. Global Leadership Role and Its Economic Implications

Interviewees repeatedly mentioned the localized labor effects of trade policy, measures to attract FDI, and defense spending as the most relevant aspects of U.S. foreign policy for Ohioans and their economic interests. However, very few interviewees, if any at all, mentioned the importance of sustaining U.S. primacy or global leadership toward the same ends. Only a small minority were in a position to articulate how U.S. global leadership benefits the broad center of American economic life. In a recent poll conducted by Politico and AARP, 46 percent of Ohioans supported the United States playing “a major role” in international affairs, but only 25 percent wanted it to play a “leading role.” That figure was only slightly higher, at 28 percent, for respondents over fifty years old.8

Eroding Domestic Support for U.S. Global Leadership

It appears that the strategic and economic rationale for U.S. global leadership is no longer obvious or uncontested, if such polls and the interviews conducted for this study are any indication. That suggests a widening gap between those in the foreign policy establishment, who continue to advocate for U.S. global leadership, and American working families who may no longer know what that means or how it benefits them.

Over the past few decades, policymakers have acted on the belief that a world led by the United States delivers far greater economic benefits for the American people than one led by another nation or none at all. The United States retains huge strategic advantages, even today, that set it apart from all other nations. It still boasts the world’s largest and most resilient economy, unrivalled military power, a network of European and Pacific alliances dependent on U.S. security guarantees, a leadership position in postwar international institutions it helped to build, and the U.S. dollar as the global reserve currency.

The United States leveraged these advantages to forge the global economic order in its image, which in some ways has, in essence, given American businesses the equivalent of a home-field advantage. It also relied on the global demand for the dollar—for good or for ill—to spend freely at home and abroad, without having to make hard trade-offs by issuing dollar-denominated debt to foreign partners.9 Many foreign policy experts are trying to figure out how the United States can sustain and build on these advantages in an increasingly competitive international environment.

Trump, however, is paying far more attention to what it costs the United States to perpetuate this arrangement than to the benefits the nation stands to lose if its leadership role ceases to exist. He contends that, in allowing access to U.S. markets without ensuring the same access to foreign markets, the United States has lost important negotiating leverage with both allies and adversaries. He, therefore, wields the threat of tariffs as a negotiating tactic and has demonstrated a willingness to follow through. On several occasions, he has questioned the value the United States derives from the formidable investments it makes in the security of NATO and Pacific allies. He has indicated that he may be willing to withdraw from the WTO. He has focused obsessively on the United States’ bilateral trade deficit (in goods—while ignoring services), not only with China but also with allies and trading partners such as Germany, Japan, Mexico, and South Korea. At times, he has raised concerns about the negative impacts on U.S. exports of a strong dollar, prompting fears that he or his administration is trying to talk down the value of the dollar.10 Although the Trump administration’s strategy documents stress that the America First policy does not represent a U.S. shift toward a zero-sum view of the world, Trump’s rhetoric fuels the impression that it does.

Based on the Politico and AARP polling and the interviews conducted in Ohio, it appears that many Americans may fall somewhere in between these two contrasting views of U.S. global leadership and foreign engagement. Those interviewed, in particular, seem keen for more effective burden-sharing from other nations and international organizations. Yet they do not appear to be looking at the world in zero-sum terms, where other nations’ gains necessarily come at the United States’ expense. They do not seem to favor withdrawing from international institutions or dismantling NATO. Rather, they express concern about alienating U.S. partners. They still deeply value U.S. alliances and close ties with like-minded partners who can help address common challenges, including China’s mercantilist trading practices. There are also risks that, if alienated, allies could hedge their bets, eventually relying less on U.S. security and weapons systems and reducing U.S. imports in general. This could negatively affect Ohio’s exporters and defense industry.

Achieving “Economic Peace Through Strength” With China

Any renewed case for U.S. global leadership will need to grapple squarely with what it means for U.S. economic relations with China. Americans are becoming increasingly concerned that China will overtake the United States as the world’s largest economy in the decades ahead. China is quickly moving up the value chain, poised to become a formidable competitor in next-generation technologies. Moreover, the country is surging ahead while relying on a model of state capitalism that is incompatible with the international trading system that U.S. leadership helped to build. Those interviewees who suffered directly or indirectly from the China shock in the early 2000s understood the reasoning behind the Trump administration’s threat or imposition of tariffs on imported Chinese goods. “At least he’s doing something” was the general sentiment among those who believe China’s model of state capitalism is fostering unfair trade.11

However, many of the economic developers interviewed expressed deep concern that a prolonged trade war with China could create considerable uncertainty and unpredictability in the marketplace. They worried this would have a chilling effect on Ohio’s ability to attract investment and therefore maintain a competitive economy. If a trade war led to a precipitous downturn in China’s economy, it would not serve Ohio’s interests either, given the adverse effects it could have on the global economy. Meanwhile, virtually all interviewed said they wanted more Chinese FDI in Ohio and hoped to boost exports to that country. In fact, as previously noted, Ohio’s exports to China have grown steadily in the past several years while its imports of Chinese goods have plateaued.

In sum, there seems to be a common desire to revive the clarity that Reagan’s “peace through strength” mantra brought to U.S. intentions toward the Soviet Union by, in effect, seeking to achieve an “economic peace through strength” with China. The challenge is to effectively define “peace” and “strength.” For those interviewed, peace may mean adherence to commonly agreed upon rules. Strength, at a minimum, entails the United States rallying its partners in Europe, Asia, and elsewhere to its side, rather than going it alone. But how else should “peace” and “strength” be defined in this context? The answer could help make the strategic and economic case for U.S. global leadership going forward.

Concluding Thoughts

U.S. foreign policy experts operate based on their assumptions about how the policies they advocate advance the nation’s interests. Policymakers in every administration should ideally be explicit about these assumptions and continually test their validity. It is especially important to do this now, in light of Americans’ increasingly divergent economic fortunes at home and rising geopolitical and economic competition abroad. This case study aims to contribute to a debate on some of the most prevailing assumptions, in the hopes of aiding policymakers to forge a foreign policy that works better for America’s middle class.

Notes

1 Ohio Development Services Agency, “Economic Overview,” May 2018, https://development.ohio.gov/files/research/E1000.pdf.

2 Ohio Development Services Agency, “Ohio Major Employers—Section 1,” May 2018, https://development.ohio.gov/files/research/B2001.pdf; Rachel Gillett, “The Largest Employers in Each U.S. State,” Business Insider, June 11, 2017, https://www.businessinsider.com/largest-employers-each-us-state-2017-6; Ohio Development Services Agency, “Advanced Manufacturing: Ohio Iron and Steel Industry,” December 2017, https://www.development.ohio.gov/files/research/B1001.pdf.

3 The study interviews took place before a new trade agreement was reached with Mexico and Canada. Therefore, much of their opinions reflect what they hoped or feared would happen with the renegotiation of NAFTA. The new labor standard provisions in the updated United States-Mexico-Canada trade deal (USMCA) require Mexico to extend protections for workers and allow sanctions to be imposed for any labor violations that impact trade.

4 SelectUSA, “Foreign Direct Investment in the United States,” accessed October 2, 2018, https://www.selectusa.gov/FDI-in-the-US.

5 Congressional Budget Office, “Defense and National Security,” accessed October 2, 2018, https://www.cbo.gov/topics/defense-and-national-security.

6 Defense Logistics Agency, “DLA Land and Maritime: DSCC,” accessed October 2, 2018, http://www.dla.mil/LandandMaritime/Locations/Columbus/.

7 Defense Finance and Accounting Service, “DFAS Cleveland,” accessed October 2, 2018, https://www.dfas.mil/careers/PDFs/ClevelandSiteSheet.html.

8 Steven Shepard and Tyler Fisher, “Trump Loses Altitude in Ohio Ahead of Midterms,” Politico, September 18, 2018, https://www.politico.com/magazine/story/2018/09/17/ohio-poll-senate-governor-brown-renacci-dewine-cordray-2018-219915.

9 Michael Mastanduno, “System Maker and Privilege Taker: U.S. Power and the International Political Economy,” World Politics 61, no. 1 (January 2009): 121–154.

10 Ian Talley, “Trump Comments Signal Shift in Approach to U.S. Dollar,” Wall Street Journal, January 17, 2017, https://www.wsj.com/articles/trump-comments-signal-shift-in-approach-to-u-s-dollar-1484690469.

11 As of the end of October, the United States had imposed tariffs on $250 billion worth of Chinese goods and services in 2018. Beijing retaliated to the initial $50 billion in tariffs but had yet to retaliate to the $200 billion.