Chapter 2: America, the Third World’s Gravy Train
Uncle Sam’s hitting the booze again
The first step to recovering is admitting you have a problem. Having read this far, you have done just that. In fact, you probably wish our politicians had been drunk for the last 40 years—at least we could understand how we got here.
This chapter explains how the trade deficit is causing all of the problems outlined in Chapter 1.
Sacramentum Gladiatorium: The Offshoring Vicious Cycle
we here who are about to die…
First, some definitions.
When I say outsourcing, I mean that a company hires another domestic company to perform a specified process (ie. Bingo Inc. contracts Bozo Ltd. to clean the factory floor, rather than hiring a janitor to do it). This is often positive, depending upon the industry and the number of (sub)contracted operations, since labor and capital are allocated more efficiently within the country. Basically, it frees up workers and money to do better things.
Offshoring is when a domestic (US) company creates a wholly-owned, but foreign-based, subsidiary company (in China, India etc.) to do something for them in the foreign country. This is a double-edged sword: often labor and capital are allocated more efficiently globally, but this does not necessarily mean it benefits either country. For example, when McDonald’s opens up a franchise in Shanghai, this unquestionably benefits the US, since money flows to the US while the US loses no jobs, capital, or technical know-how. However, when a US company opens a subsidiary R&D laboratory abroad, this may benefit the company, but it hurts the US in the long run, because it leads to brain drain (or at least detracts from the US’s intellectual magnetism), hollows out our specialized supply chains, and denies the US the spinoff benefits that research brings.
Lastly, offshore outsourcing is a combination of the two, essentially: a domestic company hires a foreign company to do something for them in the foreign country (ie. Acme Inc. offshore outsources their car factory to China123 Ltd. who then builds cars in China for Acme, who imports the cars back into the US). This is usually a bad thing, for reasons that will become abundantly clear.
That being said, from now on when I say offshoring, I actually mean offshore outsourcing.
in machina
This is how offshoring works.
(i) Assume there are 10 companies that make widgets in the US, each employ 10 people. They all make equally good widgets, and all sell their widgets for $1 a piece.
(ii) One of the companies, Shillcorp, discovers that it can save money by building widgets in Japan and importing them to the US. It builds a factory in Japan and does so, selling its widgets for $0.80. In doing so it retains 1 designer in the US, and lays off 9 factory workers. This benefits Shillcorp, who gains market share and becomes more profitable (people love cheap widgets).
The overall impact on the economy is relatively benign: together, the companies still employ 91 people in the US (9 people are now unemployed) who continue buying the cheap(er) widgets.
(iii) In order to compete with Shillcorp, the other companies, one by one, must move their production to Japan. After all, who would buy a widget for $1 when they can get an equally good widget for $0.80? This results in cheaper widgets, but also fewer jobs, and therefore fewer people who can afford the widgets.
Logically this results in only 2 scenarios: either (a) all of the production moves to Japan, and the US consumers buy the widgets by selling assets or debts for as long as possible, before they can no longer afford even the cheapest widgets; or (b), an equilibrium point is found where the widgets are built in Japan, but are designed in the US.
In (a) the US economy will inevitably collapse, in (b) inequality in the US grows until the equilibrium point is found, whereby this increased inequality becomes the new baseline (a few designers replaced many factory workers).
Neither of these outcomes is good for the average American.
Now, we both know that the economy is not contained to a single industry (widget-making), so let us expand our example to include the condition that US widget-makers are able to pursue alternative employment in doohickey building.
(iv) Assume that doohickey building employs 100 people: the first 9 widget-makers have just been laid off. What happens?
Those unemployed workers now have to compete with the doohickey-builders for jobs, which means that there is more competition for doohickey-building jobs, and wages will decrease in doohickey-building. Now if the industry cannot absorb more labor, then the average wage will still decrease due to competition, but 9 people will still be unemployed.
Either way, wages are lower.
(v) Now assume that those 9 unemployed people are able to find service jobs which are supported by the 1 designer. In this case the designer would have to make an order of magnitude more money than any of the displaced 9 workers in order to support them. First, he probably does not; second, if he does, all this system has done is create inequality. Even if it generates a wealth surplus, this accrues wholly at the top and trickles downwards, rather than the wealth being more evenly dispersed among the average worker.
Moving on.
(vi) Since wages are depressed, and more people are unemployed, Shillcorp realizes that it must make the widgets even cheaper, so it moves its factories to Taiwan. This process is repeated and the others follow. Shillcorp then moves to China; the process is repeated and the others follow.
This occurs until there is nowhere cheaper to make widgets. This means that when widgets are made artificially cheaper due to trade, the process is necessarily finite (it ends when you run out of cheap labor). The only way to make widgets cheaper over the long term is to increase productivity (ie. ensure that it takes fewer people to make the widgets).
However, by relocating widget factories to cheaper locations, Shillcorp and friends have removed the natural incentive (high labor costs) to innovate and increase productivity—why invest in productivity-boosting technology when you can employ the same technology abroad for much cheaper? As a result, real economic growth (making more widgets with less labor) is retarded by artificially cheap labor (There is a reason why the Industrial Revolution happened in tiny England, as opposed to big France or China).
(vii) In the end, the US widget-making industry is hollowed out, inequality has increased, and the cost of labor has decreased in tandem with the cost of widgets (widgets are cheaper, but workers are poorer too, so no one is better off). Worse still: Japan, Taiwan, and China now build their own widgets rather than importing ours.
In a final ironic twist, the foreign widget-making companies eventually expand into the weakened US widget market, since their widgets are cheaper than US-designed widgets (it is cheaper to design and make them abroad), and they are of comparable, if not higher quality (they learned how to build good widgets from us).
Of course, this process is not limited to the making of widgets: doohickeys are also being offshored, so are gizmos, and whatchamacallits. Anything that can be done abroad for cheaper is subject to this logic (which as it turns out, is a sizeable portion of America’s key industries—widgets being the first among equals, naturally).
In the end, any short term gain is swamped by long term pain. [1]
ex machina
If you do not trust me, trust the computer.
Computer simulations corroborate my logic. One simulation ran as follows: there are 2 model nations, A and B; A has a short term consumption preference (they want cheap goods now) and B does not; A is rich and B is poor (B makes goods cheaper). If there are no trade barriers between the two nations, A will buy as many goods as possible from B (selling assets and debts to do so), and for a time, both nations are happy (A gets cheap goods, B gains wealth). However, after a number of cycles A runs out of assets and debts to sell, and A’s economy contracts (there is a consumption boom, then a massive bust).
If we run this against a baseline simulation, we find that the baseline outperforms the free trade simulation in the long term. In fact, it is a mathematical certainty that consumption (a proxy for the standard of living) is worse in the long run when nation A adopts a free trade positon. It is also true that there is less volatility in this baseline model (there is no cataclysmic boom or bust fueled by the conspicuous consumption).[2]
It is inevitable, too much offshoring (and giant trade deficits) leads to economic ruin in the long term. Trade does not always equal to growth, the benefits are smoke and mirrors.
Mine’s Bigger: Measuring Offshoring Job Loss
size matters
Offshoring is a problem, but how big is it?
A good place to start is the trade deficit, because everything we import replaces something we would otherwise make. For example, if American needs 10 million spoons, we can either make them, import them, or make some and import some. So, if we import 8 million spoons, we only need to make 2 million spoons—imports replace our production, not our consumption of spoons. This is how the trade deficit works: imports replace our production, not our consumption of stuff. Therefore, the deficit is roughly the value of America’s offshored production.[3]
How many jobs does the deficit offshore?
In 2015 America’s trade deficit was $736 billion, or ~4% of our GDP.[4] Since GDP is simply the total output made by America’s working population, and since 4% of America’s GDP is imported, then it follows that 4% of America’s 149 million workers are displaced by these imports. This means roughly 6 million workers are replaced. [5] As bad as that sounds, this method probably lowballs the actual numbers, because labor-intensive jobs are more likely to be offshored, since labor costs are why most companies offshore in the first place (this is why clothing manufacturers offshored faster than aerospace companies).
Looking specifically at manufacturing paints a grimmer picture. American manufacturing contributes $2.2 trillion dollars to our economy,[6] and since 77.8% of our trade deficit is in manufactured goods, this means that we offshored $573 billion worth of production. That is one-third of our manufacturing industry. [7] Finally, since manufacturing employs 12.3 million Americans, then we know that roughly 4 million more are displaced by imports. [8] Interestingly, if there were no deficit, this means that 16.4 million Americans would work in manufacturing—this matches manufacturing employment rates from the 1990s, before the trade deficit widened dramatically. [9] This is not a coincidence.
This estimate is also low for two reasons. First, labor-intensive industries are the most heavily offshored. Second, manufacturing brings wealth into a region, and therefore supports local services and supply chains. This creates spin-off employment. For example, a car factory supports hairdressers and accountants, but not the other way around. Manufacturing’s “job multiplier” impact has been studied extensively. As it turns out, each manufacturing job usually supports 1.58 other service jobs. [10] This means that since 4 million manufacturing jobs are displaced by imports, then about 6 million service jobs were also lost.
According to this method, the trade deficit costs America at least 10 million jobs. [11]
So there you have it: the trade deficit displaces at least 6 million American jobs, and probably more.
Charlotte’s Web: how the deficit connects to everything else
Aesop was right, and I guarantee he would have loved tomatoes
Everyone knows the fable of the tortoise and the hare, if not, then they know the moral: “slow and steady wins the race”. This is true even when it comes to economics. The trade deficit is basically our attempt to have everything now, but this comes at the expense of our long-term wellbeing. Here is how the trade deficit slows our economic growth.
The trade deficit is money which was invested abroad, as opposed to at home. Everyone intuitively understands this, even if they cannot articulate it. For example: say you live in a small town, called Freetown. Everyone there buys local. Everyone has a job. Everyone is happy.
One day, a guy named George S decides that he wants to buy a ridiculous quantity of tomatoes, many more than the town currently grows. He has has two options: either he can invest money into the town’s tomato farm, so that it grows more tomatoes (either by making it larger, or by making it more productive), or he can buy tomatoes from the next town over, called Mercantiville. George S goes with option two, and buys tomatoes from Mercantiville with his money (as opposed to growing more cucumbers and trading for them).
George S gets his tomatoes, but two things happened. First, although Freetown’s overall tomato consumption grew, tomato production did not (Freetown’s economy did not grow). Instead, George’s money flowed to Mercantiville, where they wisely used it to grow extra tomatoes (their economy grew). All told, Freetown lost the investment which would have led to real economic growth. Losing this money also stymied compound growth: not only did the tomato farmer lose the investment, but he cannot use that money to buy cucumbers in the future (which would have caused investment in the cucumber farm). Money is only valuable when it circulates.
Second, this consumption increase is temporary. Since George S is not trading any production for the tomatoes, he can only buy them for as long as he has money saved (assets), or room left on his credit cards (debt). When he runs out of assets and debt to sell, he will then need to trade something for the tomatoes, or he has to grow more tomatoes locally—selling all his furniture and maxing out his credit cards only delays the inevitable.
Everyone who has ever lived or worked in a small town or city knows that money invested locally eventually returns to you—they buy local and pay it forward. The only people who do not understand this are globalist elites and their brainwashed academic and political puppets.
shit, water, money, who cares? they all flow downhill
Is this a slippery slope? Does this mean that we should all become self-sufficient survivalists? Obviously not.
The logical stopping point is at the national level. If a nation’s purpose is to benefit the citizens of the nation, then it follows that we should allocate resources as efficiently as possible within the nation, but also seek to keep investment within the nation. The nation is the small town. The nation is the preferred economic unit. What does this mean in practice? It means there should be free trade within the nation (to ensure efficiency), but capital outflow should be restricted (to keep investment within the nation). Otherwise, the greedy George S’s of the world will slowly undermine the nation’s economy for their own gain.
Think of it this way. Wealth is like water: it flows to the lowest possible point, and continues to until the level is equal. This is why consumers chase cheaper goods, why investors look for undervalued companies, and why multinationals offshore to cheaper markets. This is not necessarily a bad thing: in the aggregate it promotes equality and efficiency. However, there are clearly winners and losers. If you have the high ground, retaining water is a problem, and if proper measures are not taken (building a dam or a cistern), you will inevitably be left high and dry. America has the high ground, and our capital is flowing out of the country to the lowest points (China, Mexico).
Time to build a dam.
playing make-believe
How much money is flowing out of America, and how does the outflow impact our economic growth?
The best place to start is the trade deficit. In the last twenty years, the deficit cost us $11 trillion. This wealth was then used by our suppliers to build their countries from scratch. Just look at how China transformed itself into a relatively modern country in just over 30 years—they got that money from us. We paid for their roads, railways, canals, bridges, tunnels, harbors, airports, even their cities, by buying their stuff.
Here are a few counterfactuals that look at the deficit’s impact on America’s GDP growth since 2000.[12]
If the trade deficit was reinvested domestically, America would be almost $4 trillion richer than it currently is, even if annual GDP growth was only half of what it actually was. If the deficit was reinvested, and the economy grew as fast as it actually did (I think it would grow faster), then America’s GDP in 2015 would be over $26 trillion—$7.6 trillion larger than it is right now. Note how this number is eerily similar to the calculation which assumes GDP growth remained as it was between 1950 and 1969 (before the deficit), which yielded a current GDP of just over $25 trillion. Finally, if the deficit and our foreign direct investment outflows were reinvested, our GDP would be just shy of $30 trillion (more on FDI later).
Yes, these calculations are overly simplistic. No, they are not terribly convincing by themselves. But, when considered in the context of all the other evidence I have shown you, they are not unrealistic. We need to dream of a better world before we can build it.[13]
Carter, Clinton, & FDI kissed the girls and made them cry
Academics and the mainstream media claim that it is China’s destiny to surpass America’s economy. We are told there is nothing we can do, that we should just accept the inevitable. Some economists have even gone so far as to minimize America’s role in China’s rise. [14] That is garbage.
America’s indirect investment (buying Chinese stuff) provided China with the capital, technology, and consumer base they needed to build a modern economy. This process began in June 1971, when President Nixon lifted America’s embargo on China (which was imposed because of Mao’s communist takeover). Trade remained fairly insignificant until 1980, when President Carter conferred “most favored nation” status on China, thereby exempting Chinese products from the Smoot-Hawley Tariff, which imposed higher tariff rates on hostile states. Trade grew, slowly.
It was not until China’s policy pivot in the mid-1980s that trade began to pick up. In 1985, China reoriented its market to cater to Western (especially American) consumers, by investing in export-oriented industries in the coastal cities of Dalian, Guangzhou, Shanghai, and Tianjin. This was a winning strategy, especially since President Reagan had recently reclassified China as an American ally, which loosened American prohibitions on technology exports. This allowed China to buy updated American equipment. China modernized.
In the end, America’s insatiable appetite for cheap goods fueled China’s industrialization, and provided them with the capital and technology they needed to upgrade China’s infrastructure (they build a web of highways, railways, canals, harbors, airports etc.). This made China’s economy more efficient, and cheaper. Indirectly, America provided over $5.2 trillion to China since 1985 (via imports). In reality, the value is infinitely higher, since you cannot put a price on technology. Remember, 30 years ago China was transporting goods around in wagons and rickshaws, now they are planning missions to the Moon and Mars.
America also invested directly in China, through something called foreign direct investment (FDI). FDI is money which flows from one country to another, for the purposes of building economic projects directly (in this case, from America to China). For example, if Apple funded and built a factory in Shanghai, this would count as FDI, and if China used the profits from selling iPads to build a new harbor, this would count as indirect investment. Between 2001 and 2012, America invested $29 billion in China directly. [15] If that seems too small, it is.
Much of America’s investment in China actually flows through other countries first. The biggest “hidden” investment conduit is the British Virgin Islands (BVI). Between 2001 and 2012, the BVI received $349 billion USD worth of FDI, which was matched by FDI outflows (meaning that the BVI was nothing more than a middleman). Of this, $93 billion was from America. Given that this money was not invested domestically in the BVI, and given that 70.8% of BVI’s FDI went to China or Hong Kong (HK), it is a safe bet to guess that the same proportion of America’s investments went to the same places. Therefore, we can estimate that Americans invested $66 billion in China and HK via the BVI during the period.
I include HK in my calculation because HK is in China (it is tabulated separately because it used to be a British colony). However, I think it is statistical slight-of-hand to exclude HK from China, because it lowballs investment into China. HK is part of China, just like Miami is in America. Once FDI in HK ($21 billion) and the BVI is accounted for, American investment in China increases to $116 billion between 2001 and 2012 (underreported by 400%).[16] This is a huge difference. Why are the elites, and the government hiding it?
The same thing happened when Mexico joined NAFTA under President Clinton in 1994. Between 1985 and 1994, America had even trade with Mexico (some small surpluses, some small deficits). Since NAFTA, America has run an average deficit of $42 billion per year, and it has grown by double-digits annually. Talk about an indirect investment boom. Not only that, but America’s FDI in Mexico has skyrocketed. In the decade before NAFTA, after American investment in Mexico averaged $3 billion per year. After NAFTA, it has averaged $21 billion per year—7 times as much. [17] There is no doubt about it: increased trade with China and Mexico has drained America of its wealth, and freer trade (lifting tariffs on China, NAFTA with Mexico) has made the problem worse.
Now for the coup de grâce. Between 2000 and 2015, America’s FDI outflows (money we invested abroad) totaled just under $4 trillion—an average of $250 billion per year.[18] Imagine if this money were invested here at home. If we add this to the cumulative deficit since 2000, we find that America sent abroad nearly $15 trillion. This is as big as America’s total GDP in 2010. America is bleeding out.
our tired, our poor, our huddled masses
America is growing more unequal, mostly because of the trade deficit. [19]
The trade deficit replaces demand for domestic output with demand for imports (rather than make it, we buy it). In turn, this replaces demand for domestic labor with demand for foreign labor (we hire foreigners, not Americans). This increases income inequality because it lowers American wages. How? When a business is offshored, people lose their jobs. Some of these people cannot find new work, and drop out of the labor force; the rest find other work, but usually earn less (since manufacturing jobs pay so well). In fact, the average wage cut for a worker who lost his job in an exporting industry (America’s largest exports are manufactured goods) was 17.5% (you used to make $50,000 a year, now you make $40,000). [20] Additionally, people who are laid off compete with everyone else for (fewer) jobs. This shifts bargaining power from workers to employers, who can pay less to attract the same number and quality of employees.
How much are wages impacted? From 1950 to 1973 worker’s productivity gains were reflected in wage gains on a nearly 1:1 basis (the more work you did, the more you were paid). However, since then productivity increased by 72%, but average wages stagnated. [21] If wages had continued to rise with productivity, the current median wage would be $33.60 an hour, as opposed to $21.00. Most of this divergence is caused by the trade deficit, although immigration (especially illegal immigration), higher taxes, and superfluous regulation also helped murder the American dream.
The deficit also increases income inequality by boosting foreign demand for America’s assets. As I mentioned, foreigners are furiously buying US stocks and property, which inflates their prices. This is great, if you happen to be one of the 1%, but most Americans are being squeezed, particularly by increasing housing costs. In fact, the primary reason why the median household has less disposable income today than in 1985 is because the cost of housing has increased so dramatically (by a multiple of 3.5), while wages have not.[22]
If you take nothing else from this section, know that the trade deficit shifts wealth from the working and middle classes to the globalist elites. They do not care about you, and they do not care about America—they care about themselves, and their jet-setting lifestyle.
How to Get Away with Murder
the (invisible) elephant in the room
China & Friends are applying relentless economic pressure on America. They are fighting dirty. They want to suck the very marrow from our bloodless bones.
China has many tricks up their sleeve, but the biggest and baddest is currency devaluation. Our politicians know this is a problem, but never do anything about it. What is currency devaluation? Basically, it is a way a country lowers the value of its currency relative to another currency. This makes their stuff cheaper, which boosts exports and foreign investment. How does it work in practice? Consider China: American demand for Chinese goods (which must be bought in renminbi, China’s currency) increases demand for renminbi, which increases its value. This makes China’s stuff more expensive, which decreases American demand over time. In theory, everything balances out.
However, China knows that American investment grows its economy in the long term, by supplying technology, labor skills, and industrial equipment. Therefore, China buys tons of American dollars, which inflates the dollar (because of increased demand), and deflates the renminbi (because of selling pressure). This ensures that China remains attractive for American investment, and makes their goods relatively cheap for Americans to buy. Although it is impossible to pin down, it is estimated that up to 5 million American jobs have been lost due to currency manipulation. [23]
Some people think that currency manipulation is not a problem, because currency markets naturally find the most efficient price, by finding the equilibrium between demand for a country’s exports, and their currency’s value (higher demand for exports boosts the currency price, which eventually rises to the point that the country’s exports are no longer cheap). However, this theory is incomplete. Currency markets measure the total demand for a currency, and do not distinguish whether this demand is caused by exports, or by the sale of assets or debts. Because of this, currency prices can be kept artificially low by either selling or buying assets and debts. This allows a country to optimize its currency value for selling exports, and thereby stimulating economic growth. [24]
Currency manipulation can be a useful tool, provided that the economic benefits of a lower currency outweigh the downsides. China made a killing by devaluing its currency. They managed to boost demand for Chinese exports, and attract enormous amounts of investment, which brought trillions of dollars into the economy—not to mention massive technological, scientific, and industrial gains. To do this, China has bought over $1.3 trillion in US Treasury Bills,[25] and holds an estimated $2.6 trillion in US currency reserves (although the exact number is a Chinese state secret). [26]
China is also guilty of violating a multitude of GATT (General Agreement on Tariffs and Trade) and WTO (World Trade Organization) agreements by creating and maintaining entry barriers to the Chinese market. The long litany of their flagrant violations of international law include legal barriers to imports (like absurd or incomprehensible regulations), dumping goods in foreign markets (selling large quantities of a product below cost so as to drive out local competition, and then raising prices after they have a monopoly), [27] and suppressing labor rights for Chinese workers (which lowers labor costs by an estimated 47-86%, depending upon the industry). [28]
China also provides extensive subsidies for their exporters. Between 2000 and 2006, roughly 33% of Chinese exporters sold over 90% of their goods abroad. For context, only 0.7% of American exporters did the same. [29] Additionally, exporters are rewarded with preferential land-use policies, easier access to finance, or exemptions from various industrial or commercial taxes, in direct contravention to WTO rules. [30] This highlights just how dedicated the Chinese are to preying upon Western markets. They do not play fair: Chinese companies are free to compete in America, but American companies cannot compete in China.
“Free trade” with China is anything but free.
made the bed, time to lie in it
I have shown you, in grizzly detail, America’s blood and wounds; I have shown you the dagger, still wet with gore; and the hand that pierced it. We must make the economy an emotional issue: people need to get mad before things can change.
My advice to you: get angry.
The Dog’s Breakfast
So how do you get people fired up? Tell them the facts. Here are the best reasons why we must end the trade deficit.
- The trade deficit makes America poorer.
Since the 1970s our GDP growth per capita has fallen, from an average of 3.08% (1960-1969) to an average of 0.147% (2010-2015).[31] Not only has growth slowed, but it is concentrated at the top, and the bottom 90% of Americans’ earnings have actually stagnated; real earnings per hour peaked way back in 1973. In fact, if income inequality had not increased over the last 40 years, then the average middle class household income would be $90,943 as opposed to $74,434, while the median wage would be ~$33.60 an hour, as opposed to ~$21.00. This is huge.
To add insult to injury, the cost of housing has increased so rapidly that it has eaten away at most people’s purchasing power. Furthermore, this erosion has not been compensated for by the cheaper goods we were promised; according to the Consumer Price Index, they have increased at the same rate as the median income. People are just not better off in real terms.
The deficit is largely to blame because it relocates labor-intensive jobs from the US to the Third World, which causes unemployment, to the tune of 6 million people, and downward pressure on wages, meaning that people take an average 17.5% pay cut even if they do find another job. It also leads to large capital outflows. Essentially, American money is invested abroad rather than at home (foreigners get factories, we get the Rustbelt). At the end of the day, we pay the price for our stupidity. Even now our advanced industries are leaving, which will retard our economic growth and technological development. Why are we hiring other countries to think for us?
Soon we will be caught on the outside looking in.
But it gets worse: the deficit mortgages our future for the present, because we sell enormous sums of debt to pay for our bobble-heads and laptops today. This has turned the US from a lender into a debtor nation (as of 2006), and the payments will only increase. We now owe nearly 50% of our national public debt to foreigners, which means we will be paying for their lavish lifestyles for a long time to come.
- The trade deficit makes America weaker.
The deficit harms us and helps our trade partner. Just look at how fast China’s economy has grown, relative to ours.[32] Yet if you are one of those people who is not yet convinced (you will be soon), and you think that asymmetrical trade benefits America, you still must admit that it helps the other country more than it does us. In fact, multiple studies by the free trade brigade have confirmed this.
In 2003 the McKinsey Global Institute estimated that every $1 of American services offshored to India resulted in a global gain of $1.47: of this, America got $1.14 of benefit, while $0.33 went to India. In this case, India gained double what America gained. Yes, both benefited (in the short term), but India benefited twice as much. Clearly this is an asymmetrical trade relationship. Now, the million dollar question is whether this is a good thing? From a utilitarian perspective (that looks only at absolute gain), it is; but, when looking at it from a political perspective, it is less clear cut.
Economics is power, because he who has the gold makes the rules. Should we really be empowering countries like China by narrowing the economic differential between us and them? If a trade deal increases our GDP by 2%, but increases China, or Russia, or Iran’s by 4%, is it worth it? I think not. We should not be enriching our enemies, or those countries with values anathema to our own. We should protect our economic advantage over them, because economic might means political and military might. America must be both absolutely, and relatively, rich and powerful.
We are better off being the big fish in a small pond, than a shark in a shark tank.
- The trade deficit makes America less free.
The deficit hollows out American industries (we no longer make mobile phone, TVs, laptops, spoons etc.), and this makes us dependent upon foreign suppliers. In turn, this handicaps our ability to act independently on the world stage: we are forced to play softball with China over human rights abuses and their growing presence in the South China Sea because we need them to maintain our quality of life. The same is true of our dependence on Saudi Arabian oil: the Saudis wield enormous power in American foreign policy because they control the taps. America must be able to act unilaterally to best promote its self interest: we should not be beholden to Saudi Sheiks and Chinese Chairmen.
If we want America to be free, we must break the shackles of economic dependency.
- The trade deficit makes America less safe.
Our lack of autarky (economic independence) also makes us vulnerable in military conflicts. George Washington knew this, which is why he promoted American industry, even though it was more expensive than buying British goods. Thomas Jefferson knew this too, so did Abe Lincoln, Grant, and Teddy Roosevelt. It is a no-brainer. Examples of this vulnerability are a dime a dozen, but the best example is probably the American Revolution itself: our freedom was made possible because the French gave us weapons (80,000 firearms, swords, even uniforms), which we could not make ourselves because we lacked sufficient industrial development. [33] Progress was slow until the War of 1812 gave us a wakeup call, but after that, American policy was geared towards promoting economic independence.
The success of this policy was obvious in the Civil War: the North used the tariff to develop an industrial base, while the South still depended upon British imports (they imported guns, bullets, you name it). Because of this, the North defeated the South the moment it captured New Orleans, since this cut the supply of Southern cotton to Europe, which devalued the Confederacy’s cotton-backed bonds so badly that they could no longer afford supplies. The triumph of this policy was proven again in World War II, where America’s industrial might out-produced the Germans and Japanese: it was our industrial output, not our accumulation of equipment and wealth, that made us strong.
This is a long-standing truth in the history of warfare. During the Second Punic War, Rome lost battle after battle against Hannibal of Carthage, but they were always able to rebuild. Eventually, they wore him down; Hannibal could not afford a loss, and once he lost at Zama, Carthage was done. This has long been Russia’s national strategy: defeat your opponent through sheer force of numbers. For example, the USSR suffered enormous casualties during Operation Barbarossa, but they just kept building tanks and planes until the tides turned.
So what does this mean in today’s world? Basically, America’s relative economic decline is shifting the geopolitical paradigm from a hegemonic, to a competitive power structure—we are moving from a big fish, small pond scenario, to a shark tank situation. This makes the world less safe because there is no superpower that can preserve world peace, and more competing players means more political friction, and a greater likelihood of conflicts. Remember, the world is most peaceful when one power dominates, consider: Pax Romana, Pax Britannica, Pax Americana. Conversely, history is most violent when there is a multitude of relatively equal powers, consider: the Chinese Warring States Period, the Hellenistic Age, or Western history from Charlemagne’s death until Napoleon’s defeat, and again after Britain’s decline until America’s ascendency.
America is sleepwalking into a violent future. Do the elites care? No. They will not be fighting when the dogs of war come. They will be sitting back, as they always have, making money and getting fat while young men die. We need to fix this before it is too late, and it starts by rewriting our trade policy.
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[1] This is a fairly well-understood process which has been articulated by scholars much more distinguished than myself. I encourage you to explore this in more detail, here are some good places to start: Outsourcing and Industrial Decline by Richard A. Bettis, Stephen P. Bradley and Gary Hamel, & Free Trade Doesn’t Work: what should replace it and why, Ian Fletcher, & Three Billion New Capitalists: The Great Shift of Wealth and Power to the East Clyde V. Prestowitz
[2] Stiglitz “Factor Price Equalization in a Dynamic Economy.”466.
[3] Of course, this work both ways. If America had a trade surplus, this would mean that countries offshored production to the US. This is why we must look at the balance of trade, not the overall number of imports, since we also benefit from offshoring (to a lesser degree).
[4] Of course critics will argue that the imported goods were cheaper, and therefore it would cost more to produce them domestically, and therefore this would cause consumption to decline. However, wages would likewise increase because the demand for labor would increase. The argument is a speculative wash.
[5] Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey.”
[6] Federal Reserve Bank of St. Louis. “Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons (u6RATE).”
[7] Scott, “Manufacturing Job Loss Trade, Not Productivity, Is the Culprit.” 3.
[8] Ibid. 1.
[9] Ibid. 2.
[10] Nosbuch & Bernaden. “The Multiplier Effect,” 7. & Manufacturing Institute. “Manufacturing’s Multiplier Effect is Stronger than Other Sectors’.” which says it is 1.33.
[11] The rest of the deficit is comprised of resources like oil etc. which does not displace nearly as many jobs (if any). Therefore I have left it out.
[12] Authors analysis of: Angus Maddison, The World Economy: Historical Statistics. & United States Census Bureau, ” Trade in Goods, 1985-2016.” & the Bureau of Economic Analysis, “Direct Investment & MNEs.”
[13] Corollary evidence that strengthens this conclusion is the productivity data from Chapter 1: US productivity continued to increase at roughly the same rate through the 2000s as it did in the preceding period, what changed was a correspondingly large increase in output. Remember, increased output is what causes the economy to grow (growing more tomatoes), not just increased productivity (this is a means of increasing output) or increased consumption (if the tomatoes are imported, you are not necessarily growing more). See: Scott, “Manufacturing Job Loss Trade, Not Productivity, Is the Culprit,” 3.
[14] Although they are professional academics, their research was so incredibly shallow that it only took my about half an hour to debunk their ridiculous claims. Of course, they are not alone. It is increasingly clear the many, if not the majority of Western “academics”, or as another independent intellectual Nassim Nicholas Taleb calls them “intellectual but idiot”, need to be pilloried for their deluding the masses. Their paper: Branstetter & Foley, “Facts and Fallacies about US FDI in China.”
[15] Unless otherwise stated, all FDI data from: the Bureau of Economic Analysis, “Direct Investment & MNEs.” & United Nations Conference on Trade and Development, “World Investment Report 2016: Annex Tables.”
[16] It should also be noted that two-thirds of America’s trade deficit is the result of FDI investment projects, not domestic Chinese ventures. We are causing our own demise. See: Scott, “China, Trade, Outsourcing and Jobs,” 23.
[17] Scott, “Heading South,” 7.
[18] United Nations Conference on Trade and Development, “World Investment Report 2016: Annex Tables.”
[19] Graph data from: Bivens & Mishel, “Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay” 3.
[20] Scott, “China, Trade, Outsourcing and Jobs,” 18.
[21] Bivens & Mishel, “Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay” 3.
[22] See chapter 1
[23] Bergsten & Gagnon. “Currency Manipulation, the US Economy, and the Global Economic Order.” 2.
[24] Fletcher, Free Trade Doesn’t Work: What should replace it and why, 52.
[25] Bergsten & Gagnon. “Currency Manipulation, the US Economy, and the Global Economic Order.” 2.
[26] World Bank, “Total Reserves (includes gold, current US$).”
[27] Scott, “China, Trade, Outsourcing and Jobs,” 18.
[28] Ibid. 23.
[29] Defever & Riaño, “China’s Pure Exporter Subsidies,” 1.
[30] Ibid. 7.
[31] All figures were calculated by the author, and drawn from: Maddison, The World Economy: Historical Statistics.
[32] Marchant, “An Overview of U.S. Foreign Direct Investment and Outsourcing.”
[33] Fletcher, Free Trade Doesn’t Work: What should replace it and why, 132.