Smug in a no-think existence

From a superpower to a Third World country, the United States is in rapid decline. It is a change of which the population -- especially the "experts" -- is unaware. Because of past success, Americans live in a smug no-think world.

Wake up! This is the first in a series of columns about Americans' no-think smugness in an effort to alert Americans to their true prospects.

Today, the United States has the export profile of a 19th century Third World colony. Columnist Bruce Bartlett takes exception to this characterization, citing official Commerce Department data that capital goods account for 44.7 percent of U.S. exports and agricultural goods account for only 6.2 percent.

Bartlett is offering an Enron-Arthur Andersen view of trade. A country's trade profile resides in its net exports, not in the gross figures Bartlett cites.

The gross numbers make the United States look like a manufacturing powerhouse. The latest numbers reporting the first two months of this year show America exported $82.6 billion in manufactured goods and only $9.3 in agricultural goods.

However, exports are only half of the story. During the same period, the United States imported $135.7 billion in manufactured goods and $6.2 billion in agricultural goods.

The net result is a $53 billion trade deficit in manufactured goods and a $3 billion surplus in agricultural goods. A large trade deficit in manufactured goods and a surplus in agricultural goods is the profile of a Third World colony.

Looking at net exports, it is obvious that the United States does not have trade surpluses in areas associated with high tech industrialized economies. The United States' largest trade surplus is in soybeans. Except for small and apparently diminishing surpluses in airplanes and airplane parts, scientific instruments, specialized industrial machinery and spacecraft, U.S. trade surpluses reside in hides and skins, cigarettes, scrap metal, cotton, animal feeds, wheat, coal, rice, corn and meat.

Not all U.S. exports actually are exports. Last year, U.S. firms sent $45.6 billion in goods "in bond" to their Mexican facilities. Such goods are counted as "exports" because they cross national borders. However, such goods are not sold to Mexicans. It is illegal for "in bond" goods to enter the Mexican economy.

U.S. facilities in Mexico used Mexican labor to add $30 billion in value to these goods before they were returned to the United States as $75 billion in imports. In truth, there was no $45.6 billion in exports -- just $30 billion in imports.

Another misconception is that China's economy is a gigantic sweatshop -- cheap labor but low tech. According to the April 19 Financial Times, this comforting view is out of date. The rapid shift of manufacturing to China by multinational firms has taken research and development with it.

Intel, IBM, Motorola, Lucent Technologies, G.E. and Microsoft were among the first to set up R&D labs in China, where skilled researchers can be hired at one-third the U.S. wage. The United States has trained enough Chinese scientists and engineers to support a massive shift in R&D from America (and Japan) to China.

The R&D trickle has become a flood. This month, Emerson Electric announced that it is moving at least half of its engineering work to China and India by the end of this year. Emerson CEO David Farr said, "When we finish this calendar year 2002, 70 percent of our manufacturing will be in low-cost countries."

Black & Decker, battery maker Evercel and auto parts maker Lear Corp. have recently announced closure of U.S. operations and moves to China.

The Japanese are headed there, as well. Matsushita has opened an R&D lab in China that will employ 1,750 Chinese engineers within a few years. Nomura is shifting software projects to China and will soon be employing 1,000 Chinese engineers. For its new chip development center, Toshiba is hiring 1,000 Chinese engineers. Hitachi, Sony, Pioneer, Fujitsu, NEC, Honda and Yamaha have announced plans for R&D operations in China.

When these facts are mentioned, free-traders have a knee-jerk reaction and rush to the defense of free trade, while excoriating the messenger. However, we are not confronted with phenomena that fit the free trade vs. protection framework. We are confronted with massive desertion of industrial and high-tech production and R&D to China, and a consequent decline in middle-class jobs and incomes in the United States.

America is not trading with China in the normal sense. The Chinese have access to U.S. markets for products made with Chinese labor. In exchange, U.S. firms have access to Chinese markets and U.S. markets with products made by Chinese labor. In this "exchange," where lies the advantage for the U.S. economy?

Free-traders, forgetting that consumers have to work in order to consume, think everything is fine as long as consumers are paying lower prices.

But U.S. consumers are also earning lower wages. The lost manufacturing and high tech jobs are being replaced with low productivity retailing jobs. Wal-Mart is now the largest U.S. corporation -- with larger revenues than Exxon-Mobil and Microsoft, combined.

The old free-trade argument that high American productivity underwrites high American incomes is undercut when U.S. capital, technology and education move abroad and make Chinese equally productive.

Eventually, Chinese labor will be bid up as wages and salaries in the United States fall. But before a new equilibrium is established, the American middle class, the American dream, U.S. political stability and the mighty dollar will take a beating.

Dr. Roberts, whom I admire greatly, has felt the tail of the elephant and said, "Truly the elephant is very like a rope." This is not a criticism of his main point, but rather a wish that he address the whole of the matter, not merely a part.

Yes, we're losing high-tech commerce to other countries, China one among them. Would we be losing it if our marketplace were not so heavily regulated? Especially our labor market? The answer might still be yes, but it is a critical point to consider, and requires us to be honest about what trade barriers and tariffs can and cannot do. (They can't, for example, improve the quality of education an American receives in a government school.) The markets of many of the countries to which we're losing business are effectively unregulated, especially if you can buy the favor of the right persons in power.

Free trade, other things being equal, is a good thing; it really does result in the progressive enrichment of all parties, a rising tide that lifts all boats. Other things being not so equal, one must consider the differentiating factors carefully, not merely observe that our trade balance has shifted unfavorably, therefore it's time to raise the drawbridge and lower the portcullis.

Freedom, Wealth, and Peace,
Francis W. Porretto
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