US Pushing on a String With Regards to China Trade Policy

by John Lawrence

The US is running a trade deficit with China of $5 billion a week. China loans the US huge sums of money in order that the US can keep taxes low and borrow the money it needs to run its government. Instead of enacting tariffs on Chinese imports, it has been US policy to beg the Chinese to revalue their currency. This is like pushing on a string. If the US doesn't like Chinese policy regarding their exports to the US, the US has direct recourse: it can put tariffs selectively on Chinese imports. But instead, probably because the US doesn't want to offend its banker, the US has allowed itself to be put into the subservient position of begging the Chinese to revalue its currency.

A recent report details the fact that the US is running higher trade deficits with trading partners that it has Free Trade Agreements (FTAs) with. The report entitled "Lies, Damned Lies and Export Statistics" reached this conclusion after an exhaustive examination of the data.

President Obama’s goal to double U.S. exports over the next five years to create two million new American jobs is widely supported. How to accomplish it is a subject of considerable contention. Proponents of President Bush’s “Free Trade Agreements” (FTAs) with Korea, Colombia and Panama claim that passing these pacts is the best way to expand U.S. exports and create jobs. Obama administration officials have similarly argued that passing FTAs is a key component of the effort to double exports, especially in the context of the president’s recent announcement that he wants Congress to pass Bush’s FTA with Korea early next year.  Yet, analysis of the actual outcomes of past U.S. FTAs show that the growth of U.S. exports to countries that are not FTA partners is as much as double the growth of exports to U.S. FTA partners. Moreover, with respect to Obama’s job creation goal, the United States has suffered trade deficits with most of its major FTA partners and with the group of FTA nations as a whole. Even as trade flows declined because of the economic crisis, as of 2009, the United States had a $54 billion trade deficit in goods with its 17 FTA partners, even when oil is excluded. And, contrary to the frequent claims made by proponents of the North American Free Trade Agreement (NAFTA) that U.S. farmers have benefitted from this model, the United States’ agricultural trade deficit with the bloc of 17 FTA partners increased.   This highlights why, especially now, an honest, data-based discussion about the economic impact of FTAs based on the NAFTA model is critical. People are entitled to their own opinions about NAFTA-style FTAs, but they’re not entitled to their own facts. Among public concerns about job loss, the decimation of the U.S. manufacturing base, and the ballooning U.S. trade deficit, corporate lobbyists have unveiled a series of misleading and erroneous studies and talking points, alleging all sorts of benefits from NAFTA-style pacts. It is impossible to know whether these are deliberate attempts to distort the truth, or simply sloppy economics.

The fact is that US corporations and their lobbyists have used the 'free trade' pretext to export millions of jobs to China because labor there is cheaper than American labor. This practice is called 'labor arbitrage.' US corporations then import products from their Chinese subsidiaries back into the US market parking the profits offshore. This both denies the American people jobs and the government revenues. Not only is labor cheaper in Asia, but so is the cost of plants and equipment. The following is a prescient article written in 2005 that already foretells the asset bubble that burst in 2008.

The most obvious example of the effects of globalization in this country is our relationship with Asia. Over the past few years, we have not only outsourced our jobs, but have moved our manufacturing to the Asian countries, especially China and India. Corporate money has influenced our government to allow the transfer of practically any business into these new rising economies at the expense of American jobs. There are two major reasons for this interest. First, Asia is seen as the future of economic progress because of their tremendous population and potential buying power. Second, labor and manufacturing plant is so cheap that exorbitant profits can be made when Asian manufactures are sold here - at American prices of course. It is not difficult to understand that when the cost of plant and equipment is about half of the costs required in the United States, and labor costs are only 10% of the costs in the United States, corporations will naturally choose to manufacture in Asia. Our government officials are no longer concerned about the common good of its citizens; rather they are interested in their personal gain to be acquired through corporate influence. At home, our service industries can only exist as long as there is enough money circulating among the middle and lower classes to support the consumerism. Our Financial industry can only continue to exist as long as the asset bubble continues. Our only real source of income is our military weapons business. We supply most of the world's weapons. Where does the money come from to maintain our economy? It is the consistent growth of our national and personal debts that maintains the momentum of our economy. Our government needs to maintain that momentum for a while longer. As far as our corporations are concerned, the writing is on the wall. Real, or long-term investment will be made in Asia where a huge population with rising incomes will eventually dominate the economic world. The unemployed population in China alone is greater than the entire population of the United States. As the income of the average American citizen continues to erode, we are viewed by the corporate world as a mature market. The United States is no longer a prime market for investment. It is time to reap the profits of past investments and maintain the cash cow as long as possible, or at least until a prosperous Asian economy can be built. Unfortunately, it is obvious that our government supports this corporate view, regardless of what their lips tell us. A few years ago, these investments would not have happened. There were laws against unfair trade, concerning environmental issues, unfair labor practices, and a plethora of other rules and considerations for the public good. In the past few years many of these laws have been expunged or relaxed in the name of deregulation to allow for the international exploitation of labor. This is our government at work in behalf of their corporate constituencies. Lest they lose their corporate sponsors, our media is now blaming Asia and especially China for the loss of our jobs and their excessive use of "our" oil. It is our own government that encourages companies to invest in foreign countries, even to the point of awarding tax breaks for doing so. It is our own government that is encouraging the displacement of American workers with cheaper foreign workers. China is not the villain here. It is our own government encouraging and aiding international corporations to move their business overseas in search of that Holy Grail, profits.

The National Association of Manufacturers and other pro-free trade groups have used faulty data to champion NAFTA style free trade agreements. Contrary to recent corporate claims, however, the trade balance in non-oil manufactured goods with U.S. FTA partners over 2008-2009 was a deficit of $97 billion. The NAM reported that “over the past two years FTAs have resulted in a U.S. manufactured goods surplus of nearly $50 billion.” To achieve this outcome, the NAM used “total export,” data, a measure including billions of “re-exports” of foreign products transshipped through U.S. ports but not made by U.S. workers. They counted these as "exports." When the domestic export data employed by the U.S. International Trade Commission is used, the opposite result is produced. The US is running a trade deficit with almost every FTA partner while running trade surpluses with non-FTA partners.

Obama's pro-free trade stance will leave him barking up the wrong tree. Fortunately Congress recently passed some legislation that holds the promise of clamping down on the egregious practices brought about by free trade agreements. But even these tenuous efforts are focused and fixated on currency manipulation instead of taking the bull by the horns and ending FTAs and making it less profitable for US corporations to ship jobs and plants abroad and import cheap products back into the US market.

Thom Hartmann makes the case for protectionist tariffs. And what we should be protecting ourselves against is not imports of products locally made and produced by local companies in China and elsewhere that can't be made or produced here, but products produced abroad by American corporations that could be made here. What's really at stake here and deserving of protection is American jobs. As long as American corporations can relocate plants, equipment and workers abroad and import products back into the American market, their profit margins will be greater. So American workers must be protected from American corporations who import from abroad under the guise of free trade.