Mike Boyd’s column, “Imbalance, unfairness and free trade,” displays impeccable logic.
His dictum: “whoever can deliver the best-quality goods and services at the best prices should be rewarded for their efforts.” If they offshore to “produce better widgets than we can in the United States and American businesses or consumers want those widgets, why should anyone complain?”
Unfortunately for America, what’s individually logical can be collectively irrational. And the result can even come back around to bite the individuals. Before explaining how that happens for offshoring, look at a few flaws underlying the logic of what’s called “free trade.”
Flaw 1. The issue isn’t “trade.” “Trade” is the “exchange of one thing for another” where everyone does what they’re best at and “comparative advantage” applies. But offshoring transfers the “factors of production” so low-cost foreign labor and subsidized capital can provide “absolute advantage.”
Flaw 2. Nations don’t “trade.” Corporations do. As currently defined, their only truly relevant stakeholder is the shareholder. It’s not a corporations’ job to look out for the good of the nation. That’s government’s job.
Flaw 3. The U.S. actually subsidizes offshoring through “reverse protectionist” polices. Corporations may defer paying taxes on income from foreign subsidiaries … indefinitely.
Corporations are allowed to move headquarters to a tax haven to avoid taxes. And allowing R&D and other investment tax credits for companies that move manufacturing offshore means the U.S. doesn’t fully benefit from the investment.
Flawed transfer pricing schemes allow the avoidance of U.S. taxes. Not including labor and environmental standards in trade pacts is a subsidy because the costs of environmental degradation and injuries to workers are externalized onto the public at large; individuals don’t value and “purchase” clean environment and workplace safety, governments do and, if governments aren’t democratic, they don’t represent the interests of their population.
Flaw 4. It’s not about protectionism anyway. Ardent “free market” proponents believe in protectionism for private capital and intellectual property. What they’re against is protecting our standard of living (social capital). The ultimate in “free trade” would be to eliminate intellectual property protections.
The result is that the U.S. has an exponentially increasing trade deficit. In 2004 it was at 5 1/4 percent of GDP. Projecting a best fit to the trend, it will be at 10 percent of GDP by 2007. Two questions: What’s causing this? And what’s wrong with that?
So what’s causing the exponentially increasing trade deficit?
First, examine the economic environment. The world economy has a global glut of economic capacity, creating excess supply compared to demand. This puts corporations under extreme price competition and depresses profits. Also, there’s excess offshore labor supply compared to demand and very low offshore pay.
Second, it’s logical for corporations to cut costs by transferring the labor factor of production offshore. As each corporation does this, it adds to total offshoring, exerts downward pressure on wages, reduces U.S. purchasing power and increases price competition.
Hence pressure for even more offshoring to maintain profits. This reinforcing feedback to cut costs and increase profits powers offshoring.
It works; corporate profits are excellent. A side effect is that more product purchases from offshore increase the U.S. trade deficit.
So what’s wrong with that?
When one corporation offshores, it’s more competitive than the others. But when all do, none has lower costs and is more competitive than the others. Some say this will raise offshore incomes, but low offshore wages means they’ll buy from China, too, not from us. And given the excess labor in China, it will take decades, if not a century, to reach equilibrium and the equilibrium wage will be a lot closer to current Chinese wages than current U.S. wages (pay your mortgage on that).
Already U.S. wages are being significantly undermined. Employees’ share of the value added in the U.S. economy has fallen to its lowest point since records were first kept in 1947 and the rate of decline is accelerating … that’s why corporate profits remain strong.
This will continue as long as there’s a global glut of capacity, low offshore pay and other countries are willing to accept dollars. But exponential increases are unsustainable.
So it’s not about whether this will end, but when. It will end when the rest of the world stops taking U.S. dollars for their goods; the dollar will fall (it is already) and the Federal Reserve will raise interest rates to maintain borrowing to finance our large and growing fiscal and trade deficits.
High interest rates (as in the ’80s) will put the U.S. economy in recession, if not depression.
Mr. Boyd believes in the divine right of capital to maintain investment returns even though it undermines the very purchasing power on which those returns depend. The “beauty of capitalism” drives companies to maintain profits by offshoring even though it undermines the U.S. economy.
In the end, killing the goose that lays golden eggs isn’t beautiful at all. It’s indeed a “take no prisoners, last person standing death match” that’s individually logical, but collectively insane.