Where the world gets its stuff

Click to enlarge.

Most countries of the world used to get more stuff from the United States than they did from China.  But now it’s the other way around.  Now most countries buy more stuff from China.

This map, which has been making the rounds of the Internet, appeared in the Financial Times—behind a paywall, unfortunately for me, because I don’t subscribe to the FT.

Many economists think the turning point was in 2001 when China joined the World Trade Organization, which included the world’s most advanced industrial nations.

China became entitled to “most favored nation” status, which means no trade barrier against a WTO member could be higher than a barrier against any other member.

I say China’s gains had to do with the effectiveness of China’s industrial policy, and the lack of any U.S. industrial policy.

China told foreign nations that if they wish to sell goods in China, they would have to locate manufacturing facilities in China.  Furthermore they would have to share their technological know-how with Chinese partners.  Then the Chinese would take their new knowledge, improve on it, and use it o compete with their former partners.

The U.S. government, under Bill Clinton, George W. Bush and Barack Obama, was content to let this happen.  American consumers benefitted from cheap imports, and stockholders in American companies shared the profits of offshoring.

Meanwhile the United States dissipated its wealth in waging pointless and inconclusive foreign wars, while China used its wealth to make itself stronger.

Unlike his predecessors, Donald Trump has correctly identified terms of trade with China as a problem.  He deserved credit for putting this issue on the table.

But his scattershot tariffs on Chinese goods do not solve the problem.  All they do is to create a market for goods from other low-wage countries.

The Chinese government successfully executed a long-range plan to build up its industrial strength, using subsidies but also building up the infrastructure and know-how of the nation as a whole.

The U.S. government has no plan.  It has been content to stand aside and allow financiers to hollow out U.S. manufacturing.  Tariffs aren’t an answer unless they are part of an overall strategy to rebuild.

The Chinese aren’t to blame for our problems.  Our leaders are to blame for our problems.  We are to blame for our leaders.

LINKS

The New China Syndrome: American business meets its new master by Barry C. Lynn for Harper’s magazine.

How Bill Clinton and American financiers armed China by Matt Stoller for BIG.

China Revolutionizes World Trade While Washington Dozes by Geoffrey Aronson for The American Conservative.

The anatomy of the U.S. balance of trade

Source: How Much

The U.S. Census Department reported that the United States exported more than $1.5 trillion worth of goods and services in 2015 and imported more than $2.2 trillion worth, leaving a trade deficit of $735 billion dollars.

The map above and the two below, produced by How Much, a cost information web site, shows the flow of trade into and outside the United States last year.

The red countries are countries with which the United States has a trade deficit.  They sell us Americans more than they buy from us.  The green countries are countries with which the United States has a trade surplus.  They buy more from us Americans than they sell to us.

A couple of things jump out at me as I look at the three maps.

The oil-exporting countries – Saudi Arabia, Algeria, Nigeria, Venezuela, even Canada – are not large on the map.  Our U.S. trade deficit is mainly in manufacturing, not energy.  Domestic production satisfies about 85 percent of U.S. energy needs.

The United States has trade deficits with many countries, such as Germany, France, Sweden and Canada, that have generous welfare states, strong labor unions and high wages.  I don’t think impoverishment of American workers is not the key to a favorable balance of trade.

The North American Free Trade Agreement has not improved the U.S. trade balance with Canada and Mexico, and I can’t think of any other trade agreement since then that has done so with any other country.

Afterthought [3/10/2016].  The United States does a free trade agreement and a positive trade balance with Colombia, but I’m not sure what the balance would be if the revenues of the cocaine trade were included.

German companies and labor representation

Germany, as I noted in an earlier post, shows that it is possible for a nation to maintain a high material standard of living while still competing successfully in the global arena.

Germany is the world’s second-largest exporting nation, behind China, and for many years was number one, and it has the world’s third-largest trade surplus, behind China and Japan. Be it noted that there are about 60 million Germans and more than 1 billion Chinese.  At the same time German workers get six-week vacations, generous old age pensions and guaranteed health insurance.

Thomas Geoghegan, a Chicago labor lawyer, has an excellent article about this in the March 2010 issue of Harper’s magazine.  He attributes Germany’s superior economic performance to its system of worker participation in corporate governance which, ironically, was imposed on Germany by the victorious allies after World War Two.

Workers have equal representation on the boards of directors of large corporations with shareholders, although the shareholders have the deciding vote in case of a tie.  The important thing from the workers’ perspective is that they know what’s going on.  They know the financial situation of the corporation, and they know its plans.  If a company is considering moving a manufacturing operation to Asia or eastern Europe, the union can make a counter-proposal to make it economically feasible to stay in Germany.

I don’t think that is the whole story, but I do think it is a great advantage to Germany to avoid the kind of class warfare we have in the United States.  Workers can suggest improvements in efficiency without fearing they will jeopardize their own jobs.

In the 1950s, Walter Reuther, the head of the United Auto Workers, reportedly urged General Motors, Ford and Chrysler to make a line of fuel-efficient cars; the companies reportedly reacted with outrage at this infringement of management prerogatives, and told Reuther to restrict himself for bargaining for pay and benefits.  (I don’t have a historical reference for this, but I find it believable.)

Even if you don’t think worker participation is the cause of Germany’s economic success, the facts show that it hasn’t prevented that success.

You may say that this is all very well for Germany, but its institutions can’t possibly be transplanted to the United States.  But the United States has a long history of adopting good ideas from Germany.  The Joint Chiefs of Staff of the U.S. armed forces are modeled on the Prussian General Staff.  U.S. corporate research laboratories and research universities were inspired by Germany models.  The U.S. interstate highway system is modeled on the German autobahn.  The secret of success is to take other people’s good ideas and improve upon them.

The loss of American independence

In 1956, the British and French governments defied the wishes of the U.S. government by invading Egypt and taking over the Suez Canal.  President Eisenhower forced them to stop by threatening to sell the U.S. government’s holdings of Pound Sterling bonds, which would have crashed the value of the British pound and brought about an economic depression.

Now the United States government will soon be in a position, and may already be in a position, where the Chinese government could order us out of Afghanistan, or tell us to keep hands off Taiwan, simply by threatening to sell their U.S. Treasury bonds, thereby crashing the dollar and the U.S. economy along with it.

The weak U.S. position is not so much due to the U.S. government budget deficit as to the overall U.S. trade deficit with the world.  It would not be so bad if we were borrowing from foreigners in order to build factories and create new businesses and industries, but our borrowing is to finance current consumption. What we need to be thinking about as a nation is how we can produce more for our own needs and to export.  We can’t downsize our way to prosperity.

Germany as an economic role model

The excuse we Americans give ourselves for the erosion of our manufacturing industries is that we can’t be expected to compete with the sweatshop industries of China and other low-wage countries.  But workers in Germany get higher wages than American workers, and yet Germany enjoys a trade surplus with the world and with China.  While the United States exports soybeans to China, Germany exports high-speed railroad technology.  Germany in fact was the world’s top exporting nation for years, until last year when it took second place to China. That’s amazing, when you consider that Germany has only 83 million people.

There is a good article about Germany’s achievements by a business writer named Eamonn Fingleton in the March issue of The American Prospect magazine. Click on this to read it.

The basic facts about Germany’s economic performance can be found here and here and here and here.  The counter-argument is that although Germany as a nation is more solvent and its workers better-off, the growth of its Gross Domestic Product has lagged behind the United States. But Gross Domestic Product is a poor indicator of national well-being, as has been known for some time.

The basic fact about Germany is that it is run for the benefit of producers rather than consumers.

Germany’s policy of fostering manufacturing industries goes back for more than a century. Unlike Americans and Britons, Germans historically have believed that the unit of economic competition is not the individual nor the firm, but the nation.

Germany never enacted anti-trust laws. When German companies have dominant positions in their industries, like Eastman Kodak Co., Xerox Corp. and IBM Corp. in the 1970s, the German government encourages them, not tries to break them up.  The structure of German industry is like what U.S. industry would be if, a century ago, industrialists and financiers such as John D. Rockefeller Sr. and J.P. Morgan had been given free rein.

As a result, German banks are closely allied to industry in a way that wouldn’t be considered proper in the United States.  Fingleton notes that German manufacturers have hausbanks that keep them going through recessions, and enable them to come back stronger than ever. We have had nothing like that in the United States since the Morgan era.  Big American banks  devote themselves to “financial engineering”; the German banks invest in companies that do actual engineering.

The Germans have more effective means of promoting savings and investment than cutting the top tax rates for millionaires and billionaires.  Fingleton points out that German industrialists early on saw the relationship between scientific research and industrial growth.  When George Eastman decided to establish Kodak Research Laboratories here in Rochester, he traveled to Germany to see how it was done.

The other major force in the German economy is the power of the German labor movement.  German trade unions resist outsourcing, but work with their employers to make their companies more efficient and competitive.  Unions have representation on the boards of directors of large corporations – an innovation introduced in the late 1940s by the British occupation authorities under the then Labor government.

The power of labor unions means German workers have greater job security, which may be a handicap to individual employers but benefits the German economy as a whole, Fingleton claims.  In downturns, German firms tend to cut hours of work rather than employees.  German employers have a greater incentive to increase the productivity of their workers, through training and technology, and as a rule German workers stay with their employers instead of taking new skills elsewhere.

When you look at these achievements, you have to consider that German industry was devastated during the Second World War and Germany had to rebuild their economic structure literally from the ground up, and then that for the past 20 years Germany has been struggling to integrate the dysfunctional East German economy into the larger economic structure.  It’s quite a success story, and if not one to copy in all aspects, one to learn from.