[NYTr] China Is Not the Problem

[All the News That Doesn't Fit]

Counterpunch - Aug 17, 2007
http://www.counterpunch.org/roberts08172007.html

Offshoring and Free Market Ideology:

China is not the Problem

By PAUL CRAIG ROBERTS

At a time when even the Wall Street Journal has disappeared into the
maw of a huge media conglomerate, the New York Times remains an
independent newspaper. But it doesn't show any independence in
reporting or in thought.

The Times issued a mea culpa for letting its reporter, Judith Miller,
misinform readers about Iraq, thus helping the neoconservatives set the
stage for their invasion. Now the Times' reporting on Iran seems to be
repeating the mistake. After the US commits another act of naked
aggression by bombing Iran, will the Times publish another mea culpa?

The Times editorials also serve as conduits for propaganda. On August
13, a Times editorial jumped on China for "irresponsible threats" that
threaten free trade. The Times' editorialists do not understand that
the offshoring of American jobs, which the Times mistakenly thinks is
free trade, is a far greater threat to America than a reminder from the
Chinese, who are tired of US bullying, that China is America's banker.

Let's briefly review the "China threat" and then turn to the real
problem.

Members of the US government believe, as do many Americans, that the
Chinese currency is undervalued relative to the US dollar and that this
is the reason for America's large trade deficit with China. Pressure
continues to be applied to China to revalue its currency in order to
reduce its trade advantage over goods made in the US.

The pressure put on China is misdirected. The exchange rate is not the
main cause of the US trade deficit with China. The costs of labor,
regulation and harassment are far lower in China, and US corporations
have offshored their production to China in order to benefit from these
lower costs. When a company shifts its production from the US to a
foreign country, it transforms US Fross Domestic Product (GDP) into
imports. Every time a US company offshores goods and services, it adds
to the US trade deficit.

Clearly, it is a mistake for the US government and economists to think
of the imbalance as if it were produced by Chinese companies
underselling goods produced by US companies in America. The imbalance
is the result of US companies producing their goods in China and
selling them in America. Many believe the solution is to force China to
revalue its currency, thereby driving up the prices of 70 per cent of
the goods on Wal-Mart shelves.

Mysteriously, members of the US government believe that it would help
US consumers, who are as dependent on imported manufactured goods as
they are on imported energy, to be charged higher prices.

China believes that the exchange rate is not the cause of US offshoring
and opposes any rapid change in its currency's value. In a message
issued in order to tell the US to ease off the public bullying, China
reminded Washington that the US doesn't hold all the cards.

The NYT editorial expresses the concern that China's "threat" will
cause protectionist US lawmakers to stick on tariffs and start a trade
war. "Free trade, free market" economists rush to tell us how bad this
would be for US consumers: A tariff would raise the price of consumer
goods.

The free market economists don't tell us that dollar depreciation would
have the same effect. Goods made in China would go up 30 per cent in
price if a 30 per cent tariff was placed on them, and the goods would
go up 30 percent in price if the value of the Chinese currency rises 30
per cent against the dollar.

So, why all the fuss about tariffs?

The fuss about tariffs makes even less sense once one realizes that the
purpose of tariffs is to protect domestically produced goods from
cheaper imports. However, US tariffs today would be imposed on the
offshored production of US firms. In the era of offshoring,
corporations are not a constituency for tariffs.

Tariffs would benefit American labor, something that the US Chamber of
Commerce, the National Association of Manufacturers, and the Republican
Party would strongly oppose. A wage equalization tariff would wipe out
much of the advantage of offshoring. Profits would come down, and with
lower profits would come lower CEO compensation and shareholder
returns. Obviously, the corporate interests and Wall Street do not want
any tariffs.

The NYT and "free trade" economists haven't caught on, because they
mistakenly think that offshoring is trade. In fact, offshoring is labor
arbitrage. US labor is simply removed from production functions that
produce goods and services for US markets and replaced with foreign
labor. No trade is involved. Instead of being produced in America, US
brand names sold in America are produced in China.

It is not China's fault that American corporations have so little
regard for their employees and fellow citizens that they destroy their
economic opportunities and give them to foreigners instead.

It is paradoxical that everyone is blaming China for the behavior of
American firms. What is China supposed to do, close its borders to
foreign capital?

When free market economists align, as they have done, with foreigners
against American citizens, they destroy their credibility and the
future of economic freedom. Recently the Independent Institute, with
which I am associated, stressed that free market associations "have
defended completely open immigration and free markets in labor,"
emphasizing that 500 economists signed the Independent Institute's Open
Letter on Immigration in behalf of open immigration.

Such a policy is satisfying to some in its ideological purity. But what
it means in practice is that the Americans, who are displaced in their
professional and manufacturing jobs by offshoring and work visas for
foreigners, also cannot find work in the unskilled and semi-skilled
jobs taken over by illegal immigrants. A free market policy that gives
the bird to American labor is not going to win acceptance by the
population. Such a policy serves only the owners of capital and its
senior managers.

Free market economists will dispute this conclusion. They claim that
offshoring and unrestricted immigration provide consumers with cheaper
prices in the market place. What the free market economists do not say
is that offshoring and unrestricted immigration also provide US
citizens with lower incomes, fewer job opportunities, and less
satisfying jobs. There is no evidence that consumer prices fall by more
than incomes so that US citizens can be said to benefit materially. The
psychological experience of a citizen losing his career to a foreigner
is alienating.

The free market economists ignore the fact that a country that
offshores its production also offshores its jobs. It becomes dependent
on goods and services made in foreign countries, but lacks sufficient
export earnings with which to pay for them. A country whose workforce
is being reallocated, under pressure of offshoring, to domestic
services has nothing to trade for its imports. That is why the US trade
deficit has exploded to over $800 billion annually.

Among all the countries of the world, only the US can get away with
exploding trade deficits. The reason is that the US inherited from
Great Britain, exhausted by two world wars, the reserve currency role.
To be the reserve currency country means that your currency is the
accepted means of payment to settle international accounts. Countries
pay their oil import bills in dollars and settle the deficits in their
trade accounts in dollars.

The enormous and continuing US deficits are wearing out the US dollar
as reserve currency. A time will come when the US cannot pay for the
imports, on which it has become ever more dependent, by flooding the
world with ever more dollars.

Offshoring and free market ideology are turning the US into a third
world country. According to the Bureau of Labor Statistics, one-quarter
of all new US jobs created between June 2006 and June 2007 were for
waitresses and bartenders. Almost all of the net new US jobs in the
21st century have been in domestic services.

Free market economists simply ignore the facts and proceed with their
ideological justifications of open borders, a policy that is rapidly
destroying the ladders of upward mobility for the US population.

[Paul Craig Roberts was Assistant Secretary of the Treasury in the
Reagan administration. He was Associate Editor of the Wall Street
Journal editorial page and Contributing Editor of National Review. He
is coauthor of The Tyranny of Good Intentions.He can be reached at:
PaulCraigRoberts at yahoo.com]