The Peterson Institute’s C. Fred Bergsten was granted a lot of column space in today’s Washington Post to make the case that exports are helping the American economy keep its head above water.  Fred’s entitled to his opinions, but not to his own facts.  Some selected nuggets:

“The export boom…is generating two million new jobs.”  It’s this type of accounting that gets companies like Enron and AIG into trouble.  If you are going to count exports, you must add up imports, as well.  The net result?  A massive trade deficit remains.  $62 billion in July alone; $25 billion of it with China.  That means lost jobs.  Our trade deficit with China cost the U.S. 366,000 jobs last year. 

“These jobs pay 15 to 20 percent more than the national average.”  Maybe so, but jobs displaced due to imports from China pay 4.4 percent more than any jobs gained through exports to China.  American workers lost over $19 billion in wages last year because of this.

Fred also trumpets a weaker dollar.  A weaker dollar is indeed making American exports more competitive in places like the EU, but China and Japan, which continue to undervalue their own currencies in a mercantlist fashion, still have sharply one-sided balances of trade with the U.S.

Finally, Fred thinks the way to build on this success is for Congress to pass FTAs with South Korea and Colombia.  We disagree.  We’d prefer it if Congress passed strong trade enforcement legislation to hold cheating countries like China accountable.

This “export boom is saving America” myth is a nice line, but when you look at the overall picture, it’s nothing more than a fantasy.

The front pages of all the major newspapers today are splashed with stories about the crisis on Wall Street. Two of the top five U.S. brokerage firms collapsed this weekend. Lehman Brothers filed for bankruptcy and Merrill Lynch was sold to the Bank of America. Both firms were heavily invested in bond securities that backed U.S. mortgages, many of which, as we now know, were insolvent. The companies suffered devastating losses as a result. Turns out “greed is good” is not the best philosophy for conducting business after all.

Apparently, the PRC’s Politburo is not worried about the rate of inflation as much as the rate of growth of China’s economy. Of course this is what happens to the economy that is built on cranking out cheap goods for export in the atmosphere of the global economic downturn. It’s hard to keep growing when the Europeans and the Americans are not buying. But what about the Chinese consumers? Hopefully, the easing of the bank lending restrictions and the cutting of the interest rates will lead to more domestic development. After all, the Chinese who are notorious savers should be encouraged to buy some of the stuff that they make, and some of out stuff, too.

Continuing to follow the tainted baby formula from China story: Mr. Zhang Zhenling, the vice president of Sanlu Group, a Chinese manufacturer of the milk powder contaminated with melamine, read a letter of apology at a news briefing, that said the company expresses “sincere apology” and feels “really sad” about 2 infant deaths and more than 1,200 babies getting sick after consuming the company product.

Apparently, there is no limit to how far some Chinese producers will go to squeeze out a profit. Who in their right
mind would think adding an industrial chemical to a product consumed by babies is a good idea? How about answering
that question rather than offering a luke-warm apology, Mr. Zhang?

The Chinese officials did arrest two people in connection with this wide-spread contamination. Apparently they are
brothers who have been selling about 3 tons of contaminated milk daily to various buyers, including the Sanlu Group,
China’s largest producer of powdered milk.

It seems that the wink-wink nudge-nudge culture of complacency, where even the largest companies stoop to buying from shady suppliers if the price is right, is pervasive in China. And the producers don’t care about the price the parents, whose children might get sick or die as a result of consuming poisoned products, have to pay.

From NPR’s website: “China is the largest purchaser of the debt of mortgage giants, Fannie Mae and Freddie Mac. Both the United States and China depend on these companies for economic survival.”

  Leave it to NPR’s Adam Davidson to spell this out in a very straightforward way.  In a lighthearted, humorous segment this morning, he analyzed how U.S. consumers buy a surplus of Chinese goods, providing China with an excess of dollar.  Beijing then loans that money back to the U.S. so that American consumers can buy more “stuff” from China.

Davidson’s segment is very much worth listening to as it travels from a recycling depot in Brooklyn all the way to Beijing and back in a mere four minutes.  Boiling things down to the basics, Davidson explains why the current scenario, of Beijing continually funding more U.S. debt, is proving unsustainable.

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McClatchy News Service’s Kevin Hall wrote an excellent piece on the latest jobs report that quotes AAM Executive Director Scott Paul.

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Brief statement on latest monthly jobs report from Alliance for American Manufacturing (AAM) Executive Director Scott Paul:

  “Manufacturing is in a deep crisis.  Another 61,000 manufacturing workers were laid off last month, the most in more than five years.  Over the past seven years, one of every five manufacturing jobs has vanished.  For those naïve forecasters and pundits who believe that higher international shipping costs, more exports, and a weaker dollar will inevitably lead to an American manufacturing renaissance, this is surely disappointing news. 

“The real path to revitalizing American manufacturing and creating good jobs is built by reducing our trade deficit through vigorous enforcement of trade laws and ending China’s currency manipulation and subsidies, crafting smarter health care and tax policies, and investing in our infrastructure to make America more competitive.  

“Judging by his acceptance speech last night, Senator John McCain has already written many of these manufacturing jobs off.  He clearly fails to grasp the fact that manufacturing is essential to America’s national and economic security.  Laid-off manufacturing workers don’t want to be retrained for lower-paying service sector jobs; they want an Administration that will fight hard to keep their jobs here and to grow new manufacturing jobs.  The Alliance for American Manufacturing will do everything it can in key states like Ohio, Pennsylvania, and Michigan to make sure the candidates and voters know just what’s at stake in this election.”

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  New York Times columnist Thomas Friedman’s recent bestseller, ‘The World is Flat,’ has cheered globalization in all its forms.  As an outspoken advocate of globalization, Friedman has celebrated the progress that results from opening markets and “leveling the playing field.”  Because his book praised the advent of the Internet and the information age as a means to interconnect global citizenry, he has frequently touted the need for improved education in the U.S.

Some would argue that Friedman’s faith in the Internet to transform and modernize countries like China and India has been misplaced.  In truth, China’s booming industrial and scientific progress has resulted in large part from the deliberate transfer of U.S.  research and technology to Beijing as companies have chosen to relocate their factories overseas.  Simply put, China’s rapid rise is not a coincidence of timing.

The comeuppance of this shift in hi-tech production is that China is quickly becoming one of the most wealthy and ambitious nations in the world. 

During the recent Olympics, Friedman was astounded to note the stunning modernization that has swept China.  Shanghai’s 220-mile-per-hour magnetic levitation train, for example, easily trumps a comparable commute into Manhattan from LaGuardia airport.  As Friedman admits, “the rich parts of China, the modern parts of Beijing or Shanghai or Dalian, are now more state of the art than rich America. The buildings are architecturally more interesting, the wireless networks more sophisticated, the roads and trains more efficient and nicer.”

What accounts for China’s boom, according to Friedman?  Like the recent spectacle of the Summer Olympics, China has focused on “national investment, planning, concentrated state power, national mobilization and hard work.”

By contrast, Friedman says that “much infrastructure has been postponed in America since 2001” and that “it’s clear that the next seven years need to be devoted to nation-building in America.”

Unfortunately, it’s hard for state and federal budgets to be applied to internal improvement when depleted tax bases are stretched to the breaking point.  America has lost 2.3 million jobs to China since 2001, at an estimated cost in lost wages of $19.4 billion just in 2007.  Unless this hemorrhaging is reversed, there won’t be the money and productive know-how to keep pace with fast-sprinting China.

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  As millions of Americans head for the beach this Labor Day weekend, ManufactureThis thought it important to revisit a recent Economic Policy Institute (EPI) study that found the U.S. losing 2.3 million jobs to China since 2001.

Losing jobs to China is an unfortunate consequence of our mammoth, ongoing trade deficit with Beijing.  Not everyone finds the situation troubling, though.  Ohio’s Chamber of Commerce tried to spin Ohio’s 102,700 jobs lost to China since 2001 as a mere drop in the bucket compared to an alleged 25 million jobs lost in China over the last decade or so.

EPI’s Rob Scott fired back with a brief paper that rebuts the Chamber’s in accurate assessment of his report.  ManufactureThis is happy to present Scott’s rebuttal, which is available here.  It should make for relaxing reading as everyone heads off for a long weekend.

A happy safe labor day.

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Profiteers and apologists:  EPI responds to flak from the U.S. Chamber of Commerce and others on The China Trade Toll (EPI, July 30, 2008). 

By Robert E. Scott
Economic Policy Institute
Washington, DC

Who speaks for Ohio’s workers and manufacturers? 

In a recent, widely reported study, I showed that growing trade deficits with China have cost the United States 2.3 million jobs over the past six years, including 102,700 jobs lost in Ohio (Columbus Dispatch Online, 7/30/08).  This study has been widely criticized by the U.S. and Ohio Chambers of Commerce and by other business groups (Columbus Dispatch Letters to the Editor, 8/16/08).   These PR attacks are full of inaccurate and erroneous information. 

For example, the Chamber claims that China lost 25 million manufacturing jobs between 1992 and 2004.  In fact, China created nearly 10 million manufacturing jobs between 2002 and 2005, when their burgeoning trade surplus was decimating U.S. manufacturing.  Judith Banister is the Conference Board expert on this issue (hired by the U.S. Bureau of Labor Statistics) and she reports that Chinese manufacturing employment has increased in this period. 

On this issue, the Chamber is using ancient history to hide the truth:  China’s illegal subsidies, cheap currency, and other unfair trade practices have beggared the U.S. and their other trading partners and are largely responsible for the growth of their own manufacturing industries.  These policies have also enriched many of the domestic and foreign companies on the Chamber’s board, firms such as Nike, IBM, CVS, Safeway, Toyota, and Siemens. 

The Chamber also claims that imports from China are “replacing imports from another foreign country”.  In fact, China’s primary competitors are other major exporting nations in Asia, including Japan and the newly industrializing countries; they have maintained large, stable trade surpluses with the United States, in excess of $100 billion in every year since 1998.  Furthermore, these countries have directly benefited from China’s growing world trade surplus.  China and its other Asian trading partners have created a regional trade and production system that is generating growing trade surpluses with the rest of the world, both in absolute dollars, and as a share of their GDP.

Ohio’s large, industrial base has been decimated by growing trade deficits in this decade.  The state has lost 223,000 manufacturing jobs since March, 2001 alone.  It is one of two states (the other is Michigan) where employment has declined since 1998.  My report estimates that the growing trade deficit with China has displaced 102,700 jobs in Ohio since 2001, including 75,600 jobs in manufacturing.  These losses have contributed to the decline of Ohio’s industrial base, and to the loss of high-wage jobs in service industries that support the manufacturing sector. 

Nearly 1,200 Ohio manufacturing establishments closed between 2001 and 2006 according to the Census Bureau. This figure includes 22 plants that employed over 1,000 workers that have closed or reduced employment, a quarter of the largest plants in the state.  The Chamber does not speak for businesses that no longer exist, nor for workers without jobs or the communities where they have lived.  My study was based on the most widely used economic models of the effects of changes in trade on U.S. labor demand.  These models have become the “industry standard” used by nearly all serious analysts in the trade debates. 

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  Well here’s a tricky one—China’s economy is showing real signs of slowing down.  According to a Bloomberg News article, China’s GDP dropped 0.5% in the second quarter of 2008, while consumer prices have simultaneously been rising at more than 7% for the last two months.  The emerging slowdown across the People’s Republic is the most significant since 2005.

China’s currency, the Yuan, also fell this morning, a surprising drop that suggests Beijing is concerned about maintaining its export-led economic orientation.  Because the Yuan is tightly managed by Beijing, it’s quite possible that government officials are trying to provide “breathing room for the export sector,” according to Jing Ulrich, JPMorgan’s chairwoman of China equities.  Bloomberg News quotes her as saying that “the performance of the export sector could influence the government’s approach to pacing the appreciation of the yuan.”

The tightrope that Beijing is now walking stems from their having pegged the Yuan to the dollar.  With the dollar now plummeting in world markets (breaking $1.60 per Euro, for example), China is on the receiving end of the same inflationary pressures as the U.S.  As Ulrich explains it, Beijing now faces “the cost of containing imported inflation from higher commodity prices.”

While an artificially low Yuan has helped China become the world’s fastest growing economy in recent years—and a manufacturing juggernaut—such a meteoric rise has also sewn the proverbial whirlwind.  Economic problems like rising energy costs, constraints on agricultural production, lagging rural incomes, and troubled global financial markets mean that, more than ever, China wants to keep its export engines running full tilt.  But maintaining a low Yuan is starting to bite hard, especially with higher oil prices.

It seems that Beijing is hitting a wall—damned if they do, damned if they don’t.  And so, while Congress frets and fractures over whether to take action on China’s undervalued currency, it’s quite possible that inside Beijing’s ruling regime, the same currency debate is taking place.

In the meantime, U.S. manufacturers continue to take a double beating, both from climbing energy prices and competition from China’s undervalued goods. 

It’s gonna get interesting…

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  David Lynch reports the straight facts today in a USA Today article entitled “Economic pain: ‘Payback’ for debt-fueled growth?”  He quotes Federal Reserve Chairman Ben Bernanke who observes that “The economy continues to face numerous difficulties.” 

Lynch does a good job of itemizing these woes: bank troubles, housing troubles, General Motors troubles…

One point that needs to be made, though, is that the U.S. trade deficit has contributed to much of the country’s mounting domestic debt.  Not only is $2 billion leaving the U.S. each day, but good-paying jobs are being eroded at a steady rate.  The resulting debt creates a drag on GDP.

Simply put: Either the money stays, or it leaves. 

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