Jobs, Trade and Mercantilism: Facing Reality

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china-factory1.jpg
This is a guest note by Ralph Gomory, one of the nation’s leading thinkers about technology, innovation, and the productivity health of national economies. Gomory previously served as IBM’s Senior Vice President for Science and Technology and subsequently as the immediate past president of the Alfred P. Sloan Foundation.
This essay first ran on the Huffington Post, and is the first installation of a two-part series.

Our nation’s continuing massive trade deficits are destroying important sectors of American industry and eliminating desperately needed jobs; yet balancing trade is not even on our government’s agenda. This is happening because we are not facing reality, the reality that we are not living in a free trade world but that we are dealing with countries that practice mercantilism.
If we continue to turn a blind eye to this reality, we will become a poor nation.


Balanced Trade is about Jobs and Productivity
Balancing trade matters. Our massive trade deficits mean simply that we are consuming more than we produce. We are importing the difference between what we consume and what we produce and paying for that, not with American goods made by American jobs, but by giving our trading partners, in various forms, promises to pay later.
Today the Chinese government, which retains the dollars earned by the excess of Chinese exports over imports, has roughly $2 trillion in U.S. Treasury Bills and various other financial obligations. These holdings are all promises to pay later. And this amount is rapidly and steadily growing.
The jobs whose output could fill the widening gap between our production and our consumption are disappearing overseas, and as they vanish our productive capacity disappears with them. This is especially true in the vital area of manufacturing.
As Warren Buffett put it in an insightful article in Fortune in 2003, “America’s growing trade deficit is selling the nation out from under us.”
This cannot continue.
But it does. Trade figures show the trade deficit to be rapidly growing. Despite that, balancing trade is not a goal of our government; instead we have taken as our goal the doubling of exports. But for many years imports have grown faster than exports, so if anything even remotely like the present situation continues, by the time exports have doubled imports will have grown even more and the trade deficit will be more than twice as large.
If we achieve our present goal, far from balancing trade, we will have a sharply increased trade deficit with a corresponding increase in all its painful effects on jobs and productivity.
But there are policies that could balance trade and end this country’s painful downhill slide. To see what can be done we must first be willing to look at the situation we are actually in.
Mercantilism
What does a country do when a key trading partner chooses mercantilism and uses the full powers of its government to advance its industries? What does a country do when that trading partner continues to misprice its currency and subsidize its industries without regard for the impact on its trading partner and disregards repeated requests to stop? This situation is not discussed in basic economics textbooks but, in dealing with China, it is the situation that we are in.
Most of these textbooks do have a chapter on trade; a chapter that persuasively describes the benefits of free trade. In former presidential advisor Greg Mankiw’s economics textbook a farmer, who is better at growing potatoes than raising cattle, trades potatoes for meat with a rancher whose strength is raising cattle. Both come out ahead. But the farmer trades potatoes, not IOU’s for the rancher’s meat.
Today we are trading IOU’s for many of the things we no longer make and those promises to pay later are building up on the other side of the Pacific while the people who could have made those goods in the U.S. are looking for new jobs, having lost their old jobs to subsidized and underpriced imports.
If Mankiw’s farmer was doing what we are doing he would know he was on the way to losing his farm.

Refusing to See

When people fail to see the obvious it is natural to immediately accuse them of stupidity. But those who ignore the destruction of our industries and the ever-increasing outsourcing of jobs are in no way lacking in intelligence. They are much more accurately described by the old adage, “There are none so blind as those who do not wish to see.”
Unfortunately, today our country’s economic policies are deeply influenced by those who do not wish to see what is actually happening.

Global Corporations and Wall Street

Our global corporations do not wish to see the negative impact of their actions; they are profiting from the present situation, even if the country is not. They make their goods cheaply abroad aided by foreign subsidies, manipulated exchange rates, and cheap labor, and then import them very profitably into the U.S.
Wall Street is lined up with the global corporations because it too finds the present situation profitable.
It is easy to underestimate and hard to overestimate the influence of this combination on both Congress and the Administration. That influence has resulted in rescue packages for the major financial institutions that have enabled them to resume their high-flying pay packages while doing little lending, and as the auto companies revive, we have seen them intensifying their transfer of production and technology out of the country.
As long as profitability is the only goal of Wall Street and of our global corporations, and as long as our government accepts that point of view and refuses to see or act on the negative effects on the country, we can expect only more of what we have seen through both Republican and Democratic administrations, an ever increasing trade deficit with all that means to jobs and productivity.
Obstacles to Balancing Trade: The Divisions within the Country
The largest and most important obstacle to taking meaningful steps to balance trade is that there are deep divisions within the country about the effects of what is going on. As we have seen, powerful segments of our society, such as the global corporations, are doing well now and steadily oppose change. But there are also segments that do want change. The domestic manufacturers are suffering; they are often in favor of imposing tariffs. The labor unions too see the standard of living of their workers endangered by both the reality and the threat of outsourcing. But in any battle for influence these groups are far outgunned by the opponents of change.
But what about the American people as a whole? How are they doing? After all, consumers benefit from the low-priced imported goods sold by Wal-Mart and others. However the tradeoff to that benefit is that the American jobs that earn the money to buy those goods are also disappearing.
Balanced and Unbalanced Trade
If balanced trade is maintained when an industry is lost to foreign competition, it means that the displaced workers have found new jobs in the remaining industries; and their new jobs create exports that the trading partner buys. The output of these new jobs balance trade. Depending on the productivity and scale of the industries being lost relative to those being retained, this new balanced trade situation can be better or worse than the original one in terms of what goods the entire country ends up able to buy and consume.
But a mercantilist trading partner, such as China, does not need to wait and slowly develop its industries to enter the most productive sectors, and it is not obliged to limit the scale of its entry to what matches its imports. By mispricing its currency, using subsidies, and demanding technology transfer in exchange for access to their market, a mercantilist nation can enter the most productive sectors very quickly. They can then continue to export into these sectors even if they are not importing to match, so that the new American jobs to match the imports with exports never materialize.
Such a nation is willing to live with what is for them a huge favorable trade balance. They are willing to develop their industries while destroying ours, and are willing to decide later what they will do with the huge accumulated debt that we owe them. They will decide that later, when they are dominant and we are weak.
But for us this is a steady downward spiral.
This is the scenario that we are facing, or rather ignoring. That is why we need to act. And we need to act now, before it is too late.
Balancing Trade with a Mercantilist Nation
There are ways to balance trade, even with a mercantilist nation. If, despite our internal divisions, we finally do determine to balance trade, we should choose methods that will actually work. This means that:
1) The actions we choose should be under our control and not depend on our trading partner. Trying to persuade a mercantilist nation to do things differently when they see their approach is working for them is unlikely to succeed.
2) The actions we choose must be comprehensive enough to balance trade. . A sole focus on currency revaluation, even if successful, can be nullified by our trading partner through larger internal subsidies and other such practices.
Clearly our present approach to China meets neither of these criteria and that is why we discuss other possibilities in Part II.
Conclusion
The future of our country is endangered by massive trade deficits that are destroying industries and destroying jobs. Yet balancing trade is not on our government’s agenda. We must make clear to our government that it can no longer ignore the destruction of our jobs and our productivity that is caused by unbalanced trade. We must make balancing trade a national goal, and then act effectively to bring it about.
— Ralph Gomory

Comments

18 comments on “Jobs, Trade and Mercantilism: Facing Reality

  1. Johan says:

    This country is taking a wrong turn, and no one can do anything to stop it, because the political agenda is too implicated in increasing their wealth, power and influence across everything corrupt.
    The deficit is something to be concerned about, because they are continuously hammering the opportunities of jobs in relevant sectors of the U.S.
    On this economic issues, i’ve detailed them on http://www.pipeno.com, with relevant information and partial talks.
    Johan

    Reply

  2. Kathleen Grasso Andersen says:

    Sand…OT, tangentially, but this just in from Ralph Nader on “corporatism”.
    Ralph Nader
    Friend,
    Left.
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    Because the corporatists, in far too many areas of our lives, have taken over. Many know this. Still more feel it, even if they have not learned to name it.
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    The pundits focus on surface divisions, without seeing the deeper, shared anger at the corporations that pick our pockets and plunder our planet.
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    Ralph Nader
    P.S. It’s always nice to know that any contribution you make will be matched dollar-for-dollar. Please give what you can today. Thank you.
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    Reply

  3. JohnH says:

    Come on, Bacon! Don’t you recognize the warm up jerseys of the WNBA’s Fever and Mystics?

    Reply

  4. Don Bacon says:

    No, no, no. They’re in the pink means they’re obviously not Americans — they actually have a job. But must they rub it in like that? Makes me want to reach for the Pepto.

    Reply

  5. Dan Kervick says:

    “Anyhow, they’re in the pink.”
    They look delicious. Sort of like strawberry oompa-loompas.

    Reply

  6. Don Bacon says:

    I’m not sure about the Pepto, it could be goods for:
    http://www.pinksuperstore.com/
    Anyhow, they’re in the pink.

    Reply

  7. Don Bacon says:

    “Will U.S. policy makers let themselves be spooked by financial phantoms and bullied by business intimidation? “AC
    One would think that a Nobel Laureate wouldn’t need to ask that question, that he’d know the answer is “Hell yeah!” (Of course the spookin’ and the bullyin’ comes with a little kam-hsia to ease the pain.)

    Reply

  8. JohnH says:

    Global American companies are actually acting on behalf of Chinese policies, encouraging them not to revalue their currency.
    Paul Krugman says, “So here

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  9. Don Bacon says:

    Robert Reich has a post up at TPMCafe — “The Two Categories Of American Corporation.” edited excerpts follow.
    The first category has sales mostly in the US. The second category is American companies that are less dependent on American consumers. They get substantial revenues from their overseas operations and they have been showing the biggest profits.
    Wall Street gets this. Viewing the 30 giants that make up the Dow Jones Industrial Average, analysts are predicting that the 10 with the largest portion of sales inside the U.S. will show average revenue gains of just 1.6 percent over the next year, while the 10 with the largest portion of their sales abroad will grow by an average of 8.3 percent.
    Companies in the first group are more responsive to tax, spending, and monetary policies that cause unemployment to drop and wages to grow, and less obsessed by inflation and deficits, than are companies in the second group. The problem is, more and more big companies are moving into the second category because that’s where the markets and the money are.
    Large American corporations are going global as fast as they can. That’s good for their shareholders. But in a Washington ever more susceptible to their money and influence, that’s not necessarily good for most Americans.

    Reply

  10. JohnH says:

    jonst said that “I don’t see an overvalued dollar, never mind a “grossly overvalued” one.”
    But unless the dollar is devalued substantially, it is quite simply impossible to increase export demand and substitute domestic production for imports.
    Consumers cannot lead the way out of this mess. The housing market, the usual driver of growth, is still glutted and will not revive for a generation, because baby boomers have begun to downsize, instead of super sizing as they did in the past.
    As a result, exports and import substitution are the only way to emerge from the recession. And a dollar that discourages exports will stifle any economic expansion.
    Industrial policy must start with an appropriately priced dollar. It’s basic economics.
    However, this will increase the cost of foreign wars, so you can bet that advocates of perpetual war will resist this fiercely. Today, feeding the war machine is the only industrial policy this country has.

    Reply

  11. pj says:

    Pat Buchanan predicted this over 20 years ago. If I remember correctly, Robert Reich and Buchanan has multiple debates on this topic. Buchanan was smeared as an isolationist and that was the end of conversation.

    Reply

  12. John Waring says:

    This was Fritz Hollins’s signature issue. Fritz was right then and Mr. Gormory is right now. We have an industrial policy, by default.

    Reply

  13. drew says:

    One needs to distinguish between domestic manufacturing output,
    and domestic manufacturing employment.
    The former continues to grow aggressively; the latter is being
    reduced at all available speed.

    Reply

  14. Carroll says:

    Forget the dollar…the dollar is nothing but a seat on the cart that comes behind the horse. The US export and manufacturing industry is the missing horse.

    Reply

  15. Don Bacon says:

    “What does a country do when a key trading partner chooses mercantilism and uses the full powers of its government to advance its industries?”
    Unlike other countries which protect its workers, the US protects its corporate profits via “free trade” agreements and policies that increase job outsourcing and favor cheap imports.
    Corporate profits is Job One for the US government. As you said, “Our global corporations do not wish to see the negative impact of their actions; they are profiting from the present situation, even if the country is not.”
    Charles Wilson said years ago “What’s good for General Motors is good for the country”. (GM now sells more cars in China then it does in the US, and has 27 dealerships in Shanghai alone.)
    You’ve answered your own question about what does a country do.
    “As long as profitability is the only goal of Wall Street and of our global corporations, and as long as our government accepts that point of view and refuses to see or act on the negative effects on the country, we can expect only more of what we have seen through both Republican and Democratic administrations, an ever increasing trade deficit with all that means to jobs and productivity.”
    We can expect it and we will get it, and more wars, too — anything that would maximize corporate profits. For one thing, they have only just scratched the surface on job outsourcing to other countries.
    I recently saw a list of 75 outsourcing firms that are promising corporations the world (literally) by increasing their productivity and their profitability via job outsourcing. Accounting, legal work, manufacturing, you name it, it can be done in India or Philippines.
    Even Robert Reich, Clinton’s labor secretary — labor secretary! — during Clinton’s free trade administration has given keynote speeches at job outsourcing conferences while saying that nothing should be done about it.
    The Pentagon gets into the act too. Job outsourcing is a key part of foreign military sales agreements, when the US brokers a deal to create large numbers of jobs in foreign country if it will buy US military hardware. The commerce officers at US embassies also get into the act, even citing the Commerce Department’s manufacturing initiative to offshore US jobs!
    Again, US corporations are not chartered to do good, but to make money. That’s what they do. What do the people do? If they’re a well-disciplined polity they shut up and take their medicine.

    Reply

  16. jonst says:

    But that noted, correctly or not, about the dollar. God help the would be realist that makes the Utopian try to give up their cherished beliefs. This casino capitalism free market nonsense, and indeed, that privatization of all things is a good thing, indeed the best thing, at all times and all places for all people, IOW Utopians, has been with our society (see MSM) for a while now. Looking at reality will not be an easy thing. And if others look too long at reality, and ponder the consequences, they may have a beef.

    Reply

  17. jonst says:

    I don’t see an overvalued dollar, never mind a “grossly overvalued” one. Many things make up the value of a currency. Given the acute lack of transparency in equities world wide, especially in the financial sector; and the overall instability in the world, there is a high premium paid on the perceived stability of the US Treasuries.
    Further, given that Financial Institutions may, I repeat, may be ‘zombies’, desperately hoping, and holding on, for even a modest rebound of housing market, the plan right now of putting money borrowed at no cost, in the US Treasures looks pretty attractive as a place to park their money.
    The US may indeed by a shirking empire. But it is a huge and wealthy one…and it will take a long time to shrink, all things relative. Right now it may look very good over a 2-3 year time span. IOW…the Dollar is still king. For now.

    Reply

  18. JohnH says:

    Funny–I see no mention of the grossly over-valued dollar. A sure cure to trade deficits would be an official policy of letting the dollar slide to a level that would discourage imports and encourage exports. But at the cost of American pride, of course…

    Reply

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