The Elephant in the Living Room (2004)

How Addressing the Trade Deficit Can Re-Invigorate American Industry

By William McDonough & Michael Braungart


The swelling American trade deficit is an odd species of the elephant in the living room. It’s not that nobody’s talking about it—the record $55 billion gap for the month of October and last year’s record $489 billion deficit both got plenty of press—it’s that nobody is doing anything about it. In spite of all the worried talk, few people seem to understand the deficit’s colossal effects, and fewer still are trying to reverse a trend that strongly signals the decline of American economic strength.

Part of the problem is that economists disagree on the long-term effects of the trade deficit. Some believe that it’s actually a sign of economic strength. Remember Gregory Mankiw, the head of President Bush’s Council of Economic advisors? He re-ignited the debate last February when he said that outsourcing “is probably a plus for the economy in the long run.”

Mankiw’s comments infuriated unemployed American workers but many economists and business leaders agreed with him. As Jeff Madrick, a New York Times economics columnist wrote, “it’s hard to have taken even a couple of economics courses without essentially agreeing with Mankiw’s point.”

The point is this: “When a company contracts services or manufacturing to a lower-wage nation, it reduces costs and cuts the prices of its goods and services. This surplus amply benefits consumers, and in general allows the United States to make at home what it makes best.”

That’s the theory, and for an increasing number of American companies it has proven to be both compelling and profitable. But even the most ardent advocates of free trade are beginning to see that the theory in practice is proving to be unsustainable—economically, socially and ecologically. Millions of manufacturing jobs have vanished and with them the very foundation of American industry. Supply chains span the globe, making it hard for manufacturers to assure the environmental health and safety of their products. And, as Madrick notes, despite profitable growth “the gains from trade will not outweigh the losses due to job dislocation and lower wages.”

Moreover, the trade deficit has made the U.S. a debtor nation. In 2003 the U.S. borrowed $540 billion from overseas creditors and the debt load is expected to double in the next six or seven years. This is not a signal of economic strength. “A very wealthy nation can tolerate this negative toll for many years, but not forever,” writes economic journalist William Greider. “Unless the historic meaning of debt has been repealed, no nation can borrow endlessly from others without sooner or later forfeiting control of its destiny, and also losing the economic foundations of its general prosperity.”

Why not put business to work to restore the general prosperity, to rebuild the foundations of American industry, to create long-term wealth rather than short-term profits, to support the commons and the public good?

It’s true that much of this work will depend on enlightened policy and national leadership—incentives to keep factories open rather than move manufacturing jobs offshore, or trade pacts that bring some balance to the wage gap between rich and poor nations—but a great deal of the wealth creation that supports long-term economic health is driven by the synergistic activities of individual business leaders, companies and entrepreneurs. Indeed, addressing the trade deficit by rebuilding the industrial capacity of the U.S. through private enterprise could be seen as an emerging growth industry.

Our greatest hope lies in a fundamental re-design of industry, a transformational trend already visible on several fronts. One is the growing influence of cradle-to-cradle design. After a decade of germination and growth, the basic ideas of cradle-to-cradle design—the development of circular rather than linear material flows, a reliance on renewable energy, the scientific assessment of the environmental health and safety of product ingredients, and design based on the effectiveness of natural systems—are now being embraced by a critical mass of the business community. In key sectors one can see regenerative industry taking root and blossoming.

A dozen years ago, the presence of a single cradle-to-cradle product on the market was cause for celebration. Today entire businesses are re-orienting their design and production protocols around safe, healthful cradle-to-cradle standards. Some are tracking their entire supply chains to ensure the environmental safety of their products, while others are organizing take-back programs to close the loop on material flows. Meanwhile, manufacturing plants are being outfitted to run on renewable energy, naturally and cost-effectively filter stormwater, and heat and cool themselves through engagement with the local environment. And perhaps most significantly, we are seeing the emergence of business-to-business partnerships devoted to implementing circular material flows throughout entire industries. In these ways and more, cradle-to-cradle design is allowing businesses in many sectors—packaging, textiles, electronics, home and office furnishings, apparel—to optimize their products and services rather than simply minimize their negative effects.

These businesses are the vanguard of the re-industrialization of America. By moving from the lean production of degenerative technology to the clean production of regenerative technology they are showing how American industry at-large can regain its competitive advantage. With the huge wage gaps between rich and poor nations, there is no way that an American factory can compete with a Mexican or Malaysian factory making the same product—wage balancing just won’t happen fast enough. But by focusing on a cradle-to-cradle strategy, adding value and creating wealth by cleanly producing regenerative goods and services, American manufacturers can achieve a level of quality that will set their products apart.

Success in these ventures could be contagious. Politics typically trails the innovative energies of business, so one can imagine how national economic priorities might follow the growth of cradle-to-cradle enterprises. Indeed, a national strategy aimed at developing a circular economy—an economy driven by renewable energy in which naturally derived biological nutrients and synthetic technical nutrients flow in closed loop cycles—inherently supports national industry.

In the United States, creating a circular economy would re-focus the attention of American business on generating long-term national wealth. Public investments, as well as an influx of “patient capital” from increasingly potent institutional investors interested in expanding the social dimensions of business, could help fund the rebuilding of industries, infrastructure, transportation and energy systems—the foundation of economic strength. At the same time, making innovation, quality design, and environmental health the hallmarks of American industry would create new markets for American products. Perhaps most importantly, evidence of large-scale industrial renewal would provide additional incentives for companies to move their operations back to the U.S. An infrastructure for the recovery of industrial materials, for example, would allow companies to optimize the value of their technical nutrient cycles, which are most beneficial when materials are recovered and re-used with a minimum of transportation.

This kind of deeply considered, thorough, ecologically intelligent re-industrialization would make manufacturing a safe, beneficial addition to community life. Its focus on generating long-term national wealth would not mean an end to vigorous trade between regions or nations. On the contrary, it would simply confirm that, as in politics, all sustainability is local and that a nation of cradle-to-cradle economies would be an economically vibrant nation as well as a good trading partner.

Consider the relationship between China and the United States. Currently, America’s trade deficit with China is swelling faster than its gaping deficit with the rest of the world. In 2003 the deficit climbed to an all-time-high $124 billion and the last figures available in 2004 showed a record deficit of $16.8 billion in the month of October. Compounding the imbalance is the fact that the two nations suffer from the commercial exchange of toxic products that damage the economic, social and environmental health of both nations. While China becomes the world’s low-cost producer of toxic products, the U.S. brings those products to market with the world’s most “efficient” distribution system, moving goods in a rapid, one-way trip from retailer to consumer to landfill. In many cases, the U.S. sends the most toxic products back to China, where lead and copper are unsafely recycled from computers and televisions. This is trade as mutually assured destruction.

Yet it offers an unparalleled arena for partnership, innovation, and mutually beneficial regenerative growth. There is no doubt that China’s rapid economic expansion over the past two decades has produced serious environmental and social problems. But we need to remember, as the China scholar Elizabeth Economy has pointed out, that integrating environmental protection with economic development is an ongoing struggle for every nation, one which, “in many respects, China has just begun…”

The beginnings are promising. Stepping out ahead of the U.S., Chinese leaders have recognized that the cradle-to-cradle strategy can be applied on a large scale. In 2002 Madame Deng Nan, China’s Vice Minister of Science and Technology, declared that it had begun to develop industries and products based on cradle-to-cradle principles. Working with the China-US Center for Sustainable Development, China is already applying cradle-to-cradle thinking to urban and rural planning and developing a variety of solar and wind powered enterprises.

China is also integrating cradle-to-cradle thinking into policy making. In March 2004, Premier Wen Jiabao announced that China will increasingly pay attention to “the development of a circular economy.” And in May 2004, Deng Nan publicly presented China’s goal to increase the utilization of resources by a factor of eight to ten. “If we are to succeed,” she said, “it is very important to develop a circular economy based on Cradle to Cradle design principles.” These principles, she added, represent “what China’s central government wants to achieve.”

A serious, reciprocal American response could transform the relationship between China and the United States, and indeed the foundations of world trade. Imagine, for example, the powerful transformations that could emerge as the two nations, the world’s greatest producers and consumers of goods, engaged in developing regenerative enterprises and circular economies. Together, their share of global consumption is enormous: nearly 50 percent of the world’s cement; nearly 40 percent of its steel, aluminum and lead. If each of these commodities were seen as a technical nutrient, designed to be used, recovered and used again at a high level of quality, the world would begin to see new levels of achievement in the quest to integrate economic growth with environmental protection. Indeed, we would begin to see the synergistic benefits of regenerative industry as new growth brings wealth creation, social capital and ecological renewal.

As the cradle-to-cradle infrastructure grows in China, as it is growing in the United States, the two nations could become cradle-to-cradle industrial partners, developing products and enterprises that support the life and health of both. This cooperative relationship, at its best, will be a competitive one. Rather than competing to destroy each other, however, China and the U.S. could compete in the classic sense of the word, which in Latin means “to strive together.” Imagine, then, the two nations—or a coalition of nations—working vigorously toward a common goal: Not an end game in which one player wins but a field of endeavor in which China and the U.S. get fit together as each nation strives to create enterprises that generate commercial productivity and celebrate the common assets of each nation—their air, water, and soil as well as the social structures and institutions that support creativity, scholarship, health, and conviviality.

That will only be a beginning. The birth of truly regenerative industry and commerce calls for global action. It requires energy, genius, creativity and commitment from all sectors of society from all nations. It asks that communities, governments, NGOs, educators, and business leaders from Beijing to Buenos Aries apply cradle-to-cradle design and development to the pursuit of a prosperous, equitable future for all. We must, all of us, reach for nothing less. Clearly, the work begins at home, where the elephant sits in the living room waiting for our attention.


The Elephant in the Living Room © 2004 William McDonough & Michael Braungart

green@work Winter 2005