The time between Christmas and New Year's can be a quiet time for reflection and catching up on reading before the daily demands start up next week. I just finished reading Joe Bageant's Deer Hunting With Jesus.
I also am finishing a bathroom renovation and am amazed that not most but EVERY major item was made in China - from the sink, toilet and faucets to the pretty stuff from Restoration Hardware. Returning to Lowe's the other day to get compact flourescent bulbs, I now see that these are also made in China. WTF?
Economics
I understand the economic theory of comparative advantage as an underpinning of international trade. When country A can source a good cheaper from country B than produce it domestically, economic theory states that it makes sense to import the good in the faith that country A also specializes in a different good that is economically competitive globally and will export it to country B. Multiplied by the millions of items and hundreds of countries, economic inefficiencies are minimized and global prosperity increases. With freely floating currencies, currency values fluctuate in order to regulate the relative economics of importing versus domestic manufacture. If the balance of trade is negative for an extended period, country A's currency will devalue to the point where it is no longer economical to import the good or country A's goods will become relatively cheaper to foreign buyers and export will increase. A good system, in theory.
Those defending free trade will quickly point to the Smoot-Hawley Tariff as a contributor to the Great Depression by depressing global trade and effectively taxing goods by raising their prices at a recessionary time when taxes need to be reduced.
At the moment, we do not have that nice theoretical system in place vis-a-vis China because of the lack of floating currencies. China is gaming the system by pegging their currency to the US dollar. In order to do so, China plows back their US export earnings into US treasuries. This has made for a co-dependent relationship whereby the US government has not had to worry about funding its deficit spending by raising treasury rates significantly in order to attract foreign buyers. At the moment, more than 25% of our national debt has been purchased by foreign owners with the largest owner being the Chinese.
China is currently content to depress the value of their currency to artificially inflate exports. The US is currently content to have a cheap source of funding for deficit spending. This is unsustainable and the fact about unsustainable things is that they eventually end. This may end badly.
Human Costs
In any debate about global trade and the trade deficit, you don't too often hear about the human costs. I come from an area about 60 miles down I81 from Winchester, VA where Joe Bageant lives and writes. I know how dependent these areas are on light manufacturing. Here is an excerpt from Deer Hunting With Jesus to sum up the human costs of competing against foreign labor:
Back in 1994, Rubbermaid was voted the most-admired American company by Fortune magazine. The company paid a living wage, [snip] it was considered a better-than-average place to work by people of both races. Plenty of folks my age spent their entire working lives in the plant. Respectable working folks who bought homes retired on its programs and turned back months of sick leave when they departed.[snip]
Just a few years after being hailed as the most-admired company in America, North America's largest plastic products company was a foundering corporation, brought down by the boys from Bentonville, Arkansas. Wal-Mart sells by far the greatest volume of Rubbermaid products of any retail chain. Given such an advantage, in 2001 Wal-Mart's executive management team heavied up on Rubbermaid, demanding ridiculously low prices despite an 80 percent increase in the cost of raw materials. [snip] when Rubbermaid refused to go along with Wal-Mart's utterly unworkable price, Wal-Mart dropped the hammer. It pulled Rubbermaid's products off the shelves [snip] After seeing its sales drop 30 percent, Rubbermaid caved.
During those dark days, Newell, which has a slash-and-burn reputation for whipping companies into shape, took the Rubbermaid helm and began dancing to the tune coming out of Bentonville, Arkansas: Lose the U.S. plants. Right boss! Since January 2001, Rubbermaid has shut down sixty-nine of its four hundred facilities and fired eleven thousand workers, all to accommodate Wal-Mart.
This folks, in a microcosm is the reason for "jobless recoveries" as this scenario is repeated hundreds of times a year. While it's low hanging fruit, this is not to criticize Wal-Mart even though it can be argued that they do not have our national interests at heart in their business decisions. Wal-Mart is merely one of the many hogs at the trough of cheap Chinese labor. They would quickly and correctly argue that if they alone sourced more expensive manufactured goods domestically their competitors would not follow suit and they would lose market share.
As I watch the hollowing out of manufacturing in Virginia and driving through mountain towns in West Virginia, I can't help but think that this is taking place all around the country. When these manufacturing jobs leave an area, what is left are service jobs paying considerably less. Anyone who claims that these folks are going to retrain to comprise the bulk of our new "knowledge workers" or are going to build solar panels or windmills are either willfully stupid or woefully misinformed.
Commerce, by itself, lacks any means of attaching a value to things that cannot be priced. Commerce is also well known to avoid pricing in externalities unless forced to by regulations. We are beginning to wrestle today with how to price in carbon emissions for global warming and it's not going to be an easy task. Many other externalities are not priced into the cost of energy: environmental damage from mountaintop removal, coal ash toxic waste pollution, ground water destruction from hydraulic fracturing to get natural gas, oil purchases from despotic governments. These are all well known negative externalities that the market is currently unable to price into the decision process. Thus any remedies must currently come via governmental remedies such as incentives or regulations.
Has there ever been an economic value attached to healthy communities with well funded schools, decent roads and good health care? Currently, the local, state and federal tax revenues that are produced as the result of domestic manufacturing are not factored in when foreign goods are substituted and all this tax revenue to fund schools, roads and some health care is lost out the window. As a result, the current pricing of imported goods is essentially subsidized by the unpriced cost of lost tax revenues (and in the case of the Chinese subsidized again by their depressed currency). I posit that domestic employment and domestic manufacturing is a positive externality that is currently not correctly priced in the marginal benefit/marginal cost decisions in almost the same manner as the aforementioned negative externalities.
As our trade deficit spirals out of control most particularly due to China, we need to be mindful of the hollowing out of small manufacturing and the effects on employment. While I am all for foreign trade, I am for fair foreign trade with partners with free floating currencies. To those who claim that we can't rock the boat with China because they hold too much of our debt, I say: given the structure currently in place, how is the situation going to become anything but worse? We need to begin a conversation about pricing in the benefits of tax revenues resulting from domestic manufacturing and the costs when this disappears. More urgently, we need to factor in the artificially depressed Chinese goods as a result of currency manipulation owing to the damage that it is doing to our country's heartland where manufacturing is dying or under extreme pressure.
A country's global competitiveness can be measured by the health and education level of its population. If we allow our civic institutions to be hollowed out so that many of our fellow citizens have poor educations and health, then locating manufacturing in the US will be less and less a default choice. With the urban areas of the US excepted, we are losing the economic war as two Americas are emerging. We need to start making our own stuff again. The only way that this can be reliably done is to examine the cost structure of domestic manufacture versus imports to ensure pricing is fair and rational choice can be made that is beneficial to the country as a whole.