Home > Analysis > America at a Crossroad: Rethinking Trade, Geopolitics, and Economic Well-Being

America at a Crossroad: Rethinking Trade, Geopolitics, and Economic Well-Being

China U.S. Free Trade[An edited copy of this article under the title “America should not blame trade – or its trading partners – for its ills ” is initially published at the South China Morning Post (pdf archive here)]

Bernie Sanders and Donald Trump are leading a new American awakening on global trade.  According to the new emerging consensus, America has been the victim of bad trade deals – including the yet-to-be-ratified Trans-Pacific Partnership (TPP) – for decades.  These deals have shipped millions of good-paying American jobs abroad and in the process hollowed out the American middle class.

When Sanders and Trump recently began questioning the merits of trade with allies such as Japan as well, however, many believed them to have crossed a line. It is one thing to attack China for “stealing” jobs but quite another to sell short a close and faithful ally.

Americans have long harbored schizophrenic attitudes on trade, however.

In the recent Republican debate in Detroit, for example, the biggest applause went to Ted Cruz when he lamented how Detroit used to be “the Silicon Valley of America” – a city of “2 million” with “the highest per capita income in the country” – and vouched to bring Detroit and America back to their former glory.  Left politely unsaid, yet understood by every former auto worker in Detroit, is the fact that the adversaries that have so decimated Detroit hail not from low-wage countries such as China or India, but advanced economies such as Japan and Germany.

Americans’ tendency to blame so many of America’s ills on trade – especially with “low-wage” nations – is perplexing since such trade – if anything – is supposed to be complementary rather than competitive.

Consider the case of the iPhone and iPad.

While these devices are labelled “Made in China,” Chinese labor accounts only about 3% of their overall value. According to one estimate, some 60% of the proceeds of each iPhone or iPad sold go to Apple, with the bulk of the rest going to various component and part manufacturers from Japan (34%), Germany (17%), and S. Korea (13%).

If the point is to bring back “good-paying” jobs, why the fuss on the lowest-valued 3% that even China is trying to ditch?

Part of the reason for America’s populist fervor may be with anachronistic methods of accounting for trade.

As the “factory of the world,” China imports on average $.41 for every $1 of export, leading its deficit numbers to be overestimated by 70% on average.  America’s bilateral deficits with China is probably inflated even more given that America imports mostly consumer electronics, clothing and machinery – which generally require China to import more materials, parts and components on average.

China’s nominal deficit numbers hide other important metrics as well.

As part of China’s steady “opening up,” for example, American companies have become intimately involved in all aspects of China’s export business.  It is estimated that American-owned ventures in China today captures some 52 .6 % of the value of all Chinese exports!

Foreign companies have directly invested over $100 billion annually in China for the last decade. Each time investors exchanges their U.S. dollar reserves for Chinese Renminbi to invest, however, a current account deficit is recorded China’s favor. China’s “huge” dollar reserve turns out to be a result of trade liberalization than “unfair trade”!

It is popular in America today to lament how trade has hallowed out the American industry. Facts show however that American manufacturing productivity and capacity are at their highest in history; America’s manufacturing wages have remained strong as well.

Manufacturing jobs have decreased because the American economy has become more service-oriented. Even had America isolated itself from trade, the regions of the nation that focused on assembly jobs would have become disproportionately poor with respect to rest of the nation anyways.

Both American companies and American consumers are big winners of global trade. What America needs is a new social contract to ensure more of its workers participate and share in the fruits of the new economy.

One way is to enact universal healthcare.

The U.S. stands almost entirely alone among developed nations without universal health care. Offering universal healthcare would not only help to even the global playing field for American manufacturers, it also has the distributive effect of alleviating some of the economic inequality that has crept up over the years.

Another way is to encourage more investments in American workers.

Current U.S. tax system makes it difficult for American companies to bring profits abroad back home to invest.  Henry Ford – who had seen high wages and investment in local communities ultimately as an investment in future profits – would have been appalled by this state of affairs.

As the U.S. reforms its tax code, it should also contemplate making it easier for foreign companies – especially Chinese companies, which are too often viewed with undue suspicion – to invest. Had Chinese leaders displayed the same level of paranoia that American leaders display today, very few American companies would have been allowed to invest in China over the years – to the detriment of China.

Finally, America needs to prioritize to invest in itself again.

The U.S. has developed an account deficit with the world over the last three decades because it has allowed its household savings to plummet and its government deficits to soar.  It currently has a bilateral deficit with all the major economies: from Japan, S. Korea, ASEAN, Germany, France, Great Britain, the E.U., Mexico, Canada, and India to, finally, China.

Yet even as Japan, S. Korea, Germany and others have emerged to build businesses that can beat the best from America in industries as diverse as auto, aerospace, and high tech, America continues to play as if it were a uni-polar world.

When Obama boasts how that the U.S. spends more on defense than the next eight nations combined, it is both a testament to America’s success as well as ills.

When Defense Secretary Ash Carter proclaims the TPP to be “indispensable” to America’s so-called pivot to Asia, comparing its ratification to stationing another aircraft carrier, the U.S. proves just how difficult it is to re-prioritize in a changing world.

To revitalize America for the long haul, America must learn to think more about building hospitals, schools and roads at home rather than deploying aircraft carriers and military bases abroad. It needs to reach out to rising powers like China to forge new common grounds for sustained prosperity rather than to foment old alliances to preserve outdated status quo.

  1. April 12th, 2016 at 11:50 | #1

    An extremely well researched and written article. It pretty much sums up US world’s trade position. Allen points out a very glaring fact that politician like Trump etc ignore. When he is talking of bringing manufacturing job back to the US, is he talking about those $5-$10/hr job that is the bulk of manufacturing jobs in Mexico, China etc?

    I have written a specific on automobile manufacturing in the US. http://blog.hiddenharmonies.org/2013/07/27/who-stole-jobs-from-detroit/

    It seems that the number one target is China, where he threatened to put 45% tariff on China’s exports to the US. This is in addition to the fact that China is frequently labelled as a currency manipulator. However, the other side of the coin that nobody tries to mention is how this trade relationship benefit the US. As of now GM makes more money from it China operation than any where in the world. GM has been losing money for over a decade in its European and Japanese market. There are over a dozen US companies where China is now their largest market, to top it off many European and Japanese, Korean companies also count China as its most profitable market.

    China is not only a large consumer of MNC but also help them profit massively through OEM manufacturing for them. The famous iphone example where China’s profit is just typical, where the lion’s share of profit goes to Apple. Would Trump or other presidential candidates ever say how much these MNC benefits from China’s export to the rest of the world?

    All in all, no candidates are honest. China as of now is still on the middle stage of economic development. But somehow it is China’s low end manufacturing that is causing much grief to the average American. Nobody cares how the average Chinese work tirelessly to make a better lives for themselves, and China pay a huge price for progress as well. No countries, be it Germany, Japan , US, China etc has it easy. However, it is always easier to blame. Like how Hitler blame the Jewish people for Germany’s problem.

    Nokia and Eastman Kodak used to be a pillar in its respective industry. However, they eventually went under. Should the former blame Apple or the latter the digital age for their demise? Unless, any candidate dare to tackle the root cause of the problem, we will just see the same charade going through town. New president but old rhetoric.

  2. pug_ster
    April 12th, 2016 at 23:06 | #2

    Who knows, America is hardly a democracy anymore. Decent minded Americans protest against citizens united and corruption within the American Government, over 400 got arrested. This kind of crap don’t even happen in China.

    http://www.npr.org/sections/thetwo-way/2016/04/11/473874785/hundreds-protest-gerrymandering-campaign-finance-laws-on-capitols-steps

    Not to mention that the elections are rigged. The Republican elites are egging on leading Candidate, Trump. The Democratic primary is even more corrupt.

    http://dailycaller.com/2016/04/10/rigged-bernie-wins-wyoming-hillary-leaves-with-more-delegates/

    Bernie won Wyoming with 56% vs Clinton with 44% of the votes. Yet Clinton wins 11 out of 18 delegates thanks to its superdelegates.

    Finally, the CIA is going to fund the Syrian ‘rebels’ with more advanced weapons if the talks collapse, which probably will.

    http://www.marketwatch.com/story/cia-has-plan-to-more-heavily-arm-syrian-rebels-if-peace-talks-collapse-2016-04-12

  3. April 13th, 2016 at 08:50 | #3

    @pug_ster
    Just curious, in your opinion when exactly is the US a democracy?

    400 arrested for political activities is news? Try over 1,000 executed by police.

    http://www.theguardian.com/us-news/2015/jul/01/us-police-killings-this-year-black-americans

    I am not trying to challenge you but you surely don’t know how to demonize the US like MSM do to China.

  4. ltlee1
    April 16th, 2016 at 17:47 | #4

    @Ray
    Basically two kinds of democracy. If one follows the Madisonian liberal philiosophy, democracy is a matter of procedure. The elected could then do whatever they see fit. He or she would not be bothered by headline such as the following after the 2014 midterm election:

    “Congress has 11% approval ratings but 96% incumbent reelection rate”.

    That is, the people can hate their government for not doing their bidding all they want. The system is democratic as long as the people are given the political freedom to vote. It is their fault if they choose the wrong guide. In addition, one would emphasizes the balance of power as a way to curb the majority will. A good system would needs veto points to preclude the tyranny of the majority.

    On the other hand, if one follows Jean-Jacques Rousseau’s populist philosophy, then political freedom exists for the majority to express their will. The tyranny of the majority is nothing but a scare tactic.

  5. ltlee1
    April 16th, 2016 at 18:21 | #5

    Of course the US will blame trade with China for all its ills.

    1. Free trade reflects trust in the market per comparative advantages and the complementary distrust in government intervention and planning is in some sense the product of the Cold War. Free trade/free market is after all the hallmark of the free world. But the intellectual background of free trade is slowly chipping away by reality. Free trade does not necessarily bring propersity and it causes a lot of domestic problems.

    2. Western point of view: China is not a democracy. It is free riding and it cheats on free trade rule designed for the free world.

  6. May 21st, 2016 at 07:21 | #6

    So Japan and U.S. are arguing over the value of the Yen. See below. If this were China and Japan, presumptive headlines would be all over about “currency manipulation”, China playing unfair, China “raping” America, “screwing” American workers, trading “unfair”, etc…

    But with Japan, it’s just a ‘frank’ talk and ‘direct’ discussions of issues … but alas with no resolutions…

    WSJ article:

    U.S., Japan Clash Over Yen Policy at G-7 Meeting
    Finance ministers and central bank chiefs end two-day meeting without an agreement on a more balanced policy mix

    SENDAI, Japan—Differences between the U.S. and Japan over the yen surfaced again Saturday, underscoring the difficulty the world’s leading economies face as they try to coordinate efforts to stoke global growth.

    Group of Seven finance ministers and central bank chiefs ended a two-day meeting without an agreement on a more balanced policy mix, including additional, possibly coordinated fiscal stimulus, and aligning divergent monetary policies.

    Policy makers have stressed in recent months that, given risks to the global economy, fiscal stimulus and structural reforms should be used to supplement the extraordinary monetary easing being conducted by central banks in the U.S., Europe and Japan. They have also reiterated that countries should avoid resorting to competitive currency devaluations to generate growth at the expense of other nations.

    Tokyo and Washington clashed over whether Japan should be allowed to arrest the yen’s recent rise. A sharply weaker yen, catalyzed by the Bank of Japan ’s easing policies, had been a key element of Prime Minister Shinzo Abe’s growth program, but the currency has rebounded moderately since January.

    Japanese Finance Minister Taro Aso said Saturday that he expressed concern about what he termed excessive movements in the yen to his counterpart, U.S. Treasury Secretary Jack Lew, on the sidelines of the meeting. Mr. Aso said he told Mr. Lew that “one-sided, speculative trades” have been seen in the market, something that Tokyo considers undesirable.

    “The movement seen over the past several weeks can’t be described as ‘orderly,’” Mr. Aso said at a news conference, reflecting his position that intervention may be warranted.

    Japan will accept changes in the value of the yen as long as they are gradual, he added.

    U.S. officials have disagreed with Japan’s assessment of the market, saying the currency moves have been orderly.

    Mr. Lew, speaking at a news conference, stressed the importance of commitments among G-7 and Group of 20 nations not to intervene in currency markets.

    “The conversations we’ve had here were consistent with the value of having frank and direct discussions on difficult subjects,” he said. “That’s a good thing for us to continue to do.”

    A senior U.S. Treasury official said it would take the kind of surging strength seen in the yen around the time of a major earthquake and tsunami in northeastern Japan in 2011 for Washington to endorse intervention.

    “You have to distinguish between the kind of crisis that was present in those circumstances from the kinds of fluctuations in the market that just happened,” the official said.

    The U.S. joined Japan and the other G-7 nations in March 2011 to undertake joint intervention to drive the yen lower.

    Mr. Aso said the yen’s exchange rate versus the U.S. dollar had become politicized in the U.S. because of the presidential campaign there and debate over the ratification of the Trans-Pacific Partnership trade agreement.

    “It is important to continue dialogue and avoid getting emotional over the issue,” Mr. Aso said.

    The comments follow a series of verbal jabs between the two countries over the yen. Mr. Aso recently threatened intervention to blunt the yen’s rise, while the U.S. has repeatedly warned against it.

    ….

    “In terms of fiscal policy, improving the structure or quality of public spending is much more important for growth than just raising the amount of spending,” Mr. Weissgerber said in an email. “We have too much debt world-wide—both public and private—and thus need to bring down debt levels and deficits. This will help to improve the resilience of economies much more than any short-term fiscal stimulus financed by borrowing.”

    In a compromise, G-7 has left individual countries to devise their own policy programs to contribute to stronger global growth.

    In line with its recent practice, the group issued no joint written statement. Its discussion will feed into a final communiqué of the G-7 leaders when they hold a summit meeting scheduled to take place in Ise-Shima, Japan, next Thursday and Friday.

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