Readers, this actually a rare article to the extent that it criticizes Free Trade assumptions, which have rarely been criticized. It is an interesting concept to frame outsourcing of jobs as "synthetic immigration." In the past industrial capitalism generally encouraged immigration as a way to beat down rising expectations of unionized workers, much the same way that the plundering of Mexican lands from small scale farmers by US corporations has caused a massive migration of economic refugees into the US. The playing of this illegal immigration issue in the US does not address the actual casues of the flight of these refugees. The Currently pending Korea Free Trade Agreement is actually a payoff to the reactionary South Korean government for their hostile posturing toward China. The net effect of the KFTA will be negative for the US people, guaranteed. China knows this and will act to constrain Korea's behavior, much as it has contained Japanese posturings. This is all an end game gambit by the US Free Market imperialists, backed in large part by the US military which the US can no longer afford at the scale of its current extension and placment. China also knows this very well, and will allow the US to bleed itself for as long as it is willing to do so for negligible gains. stay tuned, Tadit Anderson
Focusing on currency isn’t going to cut it for America’s workers.
You have to have a sense of irony to watch the latest maneuvers on trade with China. Obama continues to turn his administration into “Clinton Mark III”. (Enter Gene Sperling and Jacob Lew, following the revolving door departures of Peter Orszag and Larry Summers). The president continues to turn to many of the very folks who paved the way for China’s eclipse of the US economy. Granting China normal trade status under the World Trade Organization, as President Clinton did during his presidency, facilitated the expansion of China’s external sector, which coincided with a big step-up in the ratio of fixed capital formation to GDP. The WTO entry is how China managed to increase its growth rate from 2002 to 2007, using an undervalued currency to cannibalize the tradeables sector of its main Asian competitors and increasingly hollowing out US manufacturing in the process. At this stage, however, despite the ongoing requests by Treasury Secretary Geithner that “China needs to do more” on its currency, a simple revaluation of the yuan won’t cut it.
Today, the global economy is characterized by huge trade imbalances. Everyone has focused on exchange rates. That is the wrong focus. China’s net business fixed investment now may be equal to two times the combined fixed investment of Europe, Japan, and the United States. That capacity has to go somewhere. Some of it has to go abroad. Some of it has to substitute imports China now buys elsewhere. This will cause even greater trade imbalances, which will be problematic given the political constraints on using fiscal policy to offset the likely deterioration in America’s external sector (and corresponding increased threats to employment).
We’re now seeing the consequences of our “malign neglect” of China’s economic policies: The Chinese are preparing to dominate the higher tech and capital goods areas — from new Stealth fighters, to high speed railways, to solar, to nuclear. So what happens to the US industrial base when Boeing can’t sell abroad because China has the same line of planes and they are cheaper? Oops! There go our military aircraft exports.
This points to the issue of import substitution, which everyone forgets. Exporting into a country with two billion people is a chimera because China doesn’t really want American exports; they want total self-sufficiency. Building your plants in the land of the two billion armpits is a chimera as well, because the locals will steal your know-how and then undercut you and carve up the domestic market, which they control against you. Look at what is happening to the Spanish wind turbine company, Gamesa, as a recent NYTimes article illustrated:
Gamesa has learned the hard way, as other foreign manufacturers have, that competing for China’s lucrative business means playing by strict house rules that are often stacked in Beijing’s favor.
Nearly all the components that Gamesa assembles into million-dollar turbines here, for example, are made by local suppliers — companies Gamesa trained to meet onerous local content requirements. And these same suppliers undermine Gamesa by selling parts to its Chinese competitors — wind turbine makers that barely existed in 2005, when Gamesa controlled more than a third of the Chinese market.
But in the five years since, the upstarts have grabbed more than 85 percent of the wind turbine market, aided by low-interest loans and cheap land from the government, as well as preferential contracts from the state-owned power companies that are the main buyers of the equipment. Gamesa’s market share now is only 3 percent.
China’s capital expenditure as a percentage of GDP has now reached a historically unprecedented 50% of GDP. Throughout economic history, countries with especially high investment to GDP ratios have embarked on inefficient investments. In the 1820s they built too many canals. In the railroad boom in the UK in the 1840s they built three lines between Leeds and Liverpool but the traffic could barely support one. Throughout the 19th century railroad boom after railroad boom led to busts. We saw a repeat of the same across a broad spectrum of industries during the 20th century, right up to the present day. The oil boom of the 1970s led to gluts of rigs and tankers that were idled for a decade. The bubble decade in Japan produced unneeded private investment that, in the two decades since, has been scrapped and replaced. In emerging Asia in the late 1980s and 1990s excesses of residential investment led to gluts that took a decade to work off. In the past decade the US did in residential construction what emerging Asian countries did a decade earlier.
History, then, is replete with examples of the adverse consequences of bubbles. The fact that China has a fixed investment to GDP ratio of 50% when no country in economic history has had this ratio above 42% — and then only for a brief moment — makes it likely that there will be more gluts and more white elephants in China than anywhere else in history.
But the problem for US industry is not just China. The country is now experiencing high wage inflation, and I think they are at the tipping point. Inflation erodes the real value of the currency, but this is not occurring with a sufficient degree of speed to reduce China’s massive trade surpluses, particularly with the US. It is possible, therefore, that Washington might ultimately contemplate the type of policy that they have hitherto not dared to consider — namely permanent taxes on corporations that produce abroad.
Outsourcing, after all, is the creeping source of unemployment and leads to the destruction of our industrial base. One policy response might be a substantial tariff on Chinese imports if Beijing refuses to contemplate a significant revaluation of the RMB. (The RMB has actually been weakening again in the past few months, probably due to inflation problems.) The other possibility is a permanent tax on corporations that produce abroad. Since unemployment is the cause of the extended pay benefits provided by the government, it might consider permanently taxing the source of the unemployment — US corporations producing abroad.
Huge technological advances have facilitated unprecedented outsourcing by US companies seeking to maximize profits by employing low cost foreign labor. The scale of this outsourcing is only recently possible because of advances in technology. Simply, and as we all recognize, US workers have been semi-permanently replaced by low cost foreign workers. Prior to these great advances, displacement of the current labor force could only have occurred through workers immigrating into the country. You have what Chris Dialynas of PIMCO has called “synthetic immigration.” As Chris noted to me in a recent correspondence,
Because of technological advances, today’s trade policies are effectively an immigration policy. There are differences to be sure. The US and its municipalities do not benefit from the taxes that would normally accrue to them if the workers were based in the US. Yet the US government, like in old world real immigration, must provide benefits for the displaced workers. Synthetic immigration leads to capital investment in the immigrant’s country (China and others) resulting in a greater capital stock there and increased competitiveness.
This process will continue until the US embraces a much more aggressive fiscal policy to promote employment growth (eg. a job guarantee program), highly unlikely given the current political configuration in the US or a political revolution of sorts.
Of course, the difference between normal immigration (which generally means new workers entering the domestic labor force, thereby displacing menial workers) and “synthetic immigration” is that the former focuses on employee displacement, whereas trade policy makers simply worry about consumers obtaining the lowest priced goods possible, regardless of the social consequences. Shouldn’t we consider adopting a trade policy that covers the domestic considerations, such as worker displacement and higher unemployment, much as immigration policy currently does?
Policy in the US has to deal with the problem from our end. Something is going to go very wrong geopolitically when the share of industry in the US is half of what it was a generation ago. Much as the “quantitative easing explained” video captured the public’s fantasy, this video speaks to many of the same issues in regard to China and its trade policies: