Yves here. This post oddly has a lack of agency as to why US manufacturing became so hollowed out as a result of China entering the WTO, a move the US pushed for despite China not meeting WTO criteria. First, the US embraced NAFTA, with the Clinton Administration falsely claiming it would create jobs when the Samuelson-Stolper theorem made clear it wouldn’t. And by the time China WTO entry would be under consideration, the impact on manufacturing employment would be incontrovertible.
Second, the author curiously makes China’s competitive advantage solely about labor cost, and ignores environmental arbitrage, as in Chinese manufactures were lower cost also by virtue of not having to observe Western pollution control standards.
Having said that, this piece usefully debunks the “Let them eat training” approach for dealing with workers whose type of employment has been pulled out from under them.
By Amitrajeet A. Batabyal, Arthur J. Gosnell Professor of Economics, Rochester Institute of Technology. Originally published at The Conversation
In December 1978, the Chinese leader Deng Xiaoping introduced economic reforms that dramatically altered China’s economy by strengthening trade and cultural ties with the West.
Beginning in the 1990s, these reforms set China on a trajectory to become what it is today: a nation with a dynamic and substantially market-driven economy that is also the world’s second-largest.
U.S. residents have enjoyed lower-priced goods exported from China since then, but many communities that produced goods that competed with Chinese manufacturing exports suffered job losses and economic downturns.
This negative effect on U.S. manufacturing jobs from Chinese exports is often called the “China Shock.” A recent study has found that even though this shock leveled off around 2010, its harmful aftereffects continued for many years beyond, particularly in certain industries such as furniture, games and toys, and children’s toy bicycles or cars.
I am an economics professor who has conducted research on China, and understanding when these trade effects ended allows me and other researchers to examine what long-term demographic aftershocks are occurring in U.S. communities and how best to deal with them. These policy prescriptions can be applied to other industries that are experiencing a rapid shift in employment because of macreconomic trends.
How China Gained So Much So Quickly
As a part of its increased openness to the world, China joined the World Trade Organization – the international body that sets global trade rules – in 2001. Believing that increasing economic liberalization would lead to political liberalization in China, the U.S. began to engage in robust trade with the country.
International trade theory teaches that free trade between nations makes them better off than not trading at all. And recent research underscores that the economic gains to the U.S. from trade in general have been positive but small, adding about 2% to 8% of gross domestic product.
Yet trade with China has given rise to a significant economic shock involving job losses and declines in human welfare in several U.S. regions, especially in the Deep South and in some Midwestern states.
The source of this shock is China’s comparative advantage in manufacturing, specifically in goods that are labor-intensive. Comparative advantage is a nation’s ability to produce a good or service at a lower cost than its trading partners. China has an abundant supply of labor relative to capital and natural resources.
As China began to liberalize its foreign trade, there was a dramatic surge in manufacturing exports and an accompanying economic shock to the U.S. economy. That’s because U.S.-produced goods could not compete with the inexpensive Chinese goods that were flooding the market.
The U.S. economy lost 1.5 million manufacturing jobs between 1980 and 2000, and 5 million more between 2000 and 2017.
This fall in manufacturing employment was not accompanied with the same number of job gains in other sectors of the U.S. economy.
The Impact Endures
Today, even with the China manufacturing surge ending, its effects in the U.S. have endured.
A decade after the conclusion of the China trade shock in 2010, the U.S. still has a large number of local economies in which studies show social structures, including the institution of marriage, are fraying because workers have lost their jobs and don’t have stable salaries they can live on.
This lack of wages has subsequently resulted in declines in the demand for local goods and services and in housing values and property tax revenues. There has also been an increase in the number of people on government assistance such as Medicaid.
How to Help Communities Still Suffering
Economists generally support “people-based” over “place-based” policies. People-based policies focus on distressed people, with a frequent focus on retraining, while place-based policies concentrate on investing in communities where workers live, such as revitalizing downtowns. Investment in the communities hit hard by Chinese imports have tended to focus on people-based policies because economists generally believe that investing in workers can help them move from distressed places with little job opportunity to new places with better job markets, schools and other amenities.
The best-known people-based U.S. government program that assists workers displaced by trade competition is the Trade Adjustment Assistance for Workers. It helps workers with job training, relocation assistance, subsidized health insurance and extended unemployment benefits.
Yet, relative to the magnitude of the job losses, the program is small, providing too little relief to most workers who lost their jobs because of import competition in the 1990s and 2000s.
The Nobel laureates Abhijit Banerjee and Esther Duflo have pointed out that the TAA program needs to be expanded significantly. Although the House of Representatives is taking steps to reauthorize and expand the TAA program, it is still too early to tell what the final legislation will look like.
Revisiting Place-Based Policies
Even though economists favor people-based policies, the evidence shows that those laid off as a result of import competition from China frequently don’t move because of unaffordable housing, child care costs and the uncertainties associated with finding a new job.
And left-behind places never completely die. Instead, in such places fewer people marry and have children. More children live in poverty, alcohol and drug abuse go up and young men are less likely to graduate from college.
Therefore, a rethinking of economic policy is likely now needed in the U.S. to focus on two key points: the need to provide adequate assistance to workers in mass layoff events and to recognize that this assistance, quite frequently, will need to be place-based.
Two Lessons for the Future
Like the China trade shock, the decline of the coal industry in the U.S. beginning in 1980 and the Great Recession, from 2007 to 2009, were also mass layoff events.
Although local economies exposed to the Great Recession recovered their pre-recession employment rates quickly, the decline of coal and the China trade shock both gave rise to long-lasting job losses, reduced incomes, and slow population declines.
Policymakers could apply the lessons learned from this trade shock to respond effectively to the next likely mass layoff event.
As economies transition out of fossil fuels, we will continue to see job losses in the coal mining and oil industries.
Although the increased use of renewable energy is likely to generate new jobs, there is no guarantee that they will be anywhere near where the localized job losses are occurring. Hence, the prospect of large-scale, localized job losses remains. And new policies are needed to enhance employment growth in regions hurt by prolonged joblessness.
The evidence in the U.S. and Europe shows that political support for populist nationalists tends to be greater in regions that have suffered large, trade-led job losses.
If policies that promote job growth in distressed regions are not implemented, we may see more populist nationalists in power in the U.S.
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This is all nonsense. Investment in manufacturing in the US peaked during the Carter years. The doctrine that business exist only for the stockholders is the root cause. After Carter we broke the unions and manufacturing investment began its steep decline. With every tax cut to stimulate investment you got less investment. We lost as many jobs before China entered the WTO as we lost since. Wall Street does not want to invest in America.
Look at chips. TSMC was started by an American working at Dell in Texas who could not get chips from Intel. No one in America would invest so he moved to Taiwan. The root cause is in the US. Not China.
when you have politicians that are captured by charlatans barking and braying complete economic nonsense, the results we see today are right before our eyes.
according to you, america should have collapsed when we let the transistor go, we did not.
carter unleashed a couple of dim wits on america who helped to start the strangling of our wealth, volker and kahn.
the only way to hang onto to our wealth, is not to free trade. something the two authors cannot fathom.
they think throw a few bucks at the deplorable will fix this, it will not.
you can invest all you want in manufacturing, but under free trade most of it will slip away.
You mean so-called “public servants” bribed and/or threatened by the monied “elites.” It’s been going on for centuries. Is there a peaceful solution?
The Square Deal- New Deal- Fair Deal evolution showed a partial solution effective enough that the enemies of social decency spent 50 years conspiring to dismantle the defenses in depth put in place against their return to Total Domination and Total Exploitation of society and people and creation.
Could there be another non-violent return to Newer Deal? Or to Renew The Deal? I don’t know. But precedent may be considered to exist.
i have my doubts that nafta billy clintons disastrous polices can be reversed, at least by conventional methods.
Don’t forget Bill Clinton changing the tax law for executive compensation greater than $1m.
Prior to this change, executive yearly compensation had to come from PRE-TAX income (meaning that shareholders would scream bloody murder for any dollar above $1m paid to C-suite executives).
After the change, executive compensation came from POST-TAX income (meaning that henceforth, the sky was the limit and taxpayers would make up the shortfall]). Any actions that reduced costs, e.g., NAFTA, offshoring, etc. would provide yet more upward income to the C-suites).
After 1992, upper echelon executives suddenly had neither incentive nor skin in the game to do anything such as keeping manufacturing facilities in place, looking out for employees and their communities, but only to maximize their own personal aggrandizement.
we can never recover till nafta billy clintons disastrous polices of historic proportions have been reversed.
“Believing that increasing economic liberalization would lead to political liberalization in China, the U.S. began to engage in robust trade with the country.”
That is what we have been told by our lying elites. I have no doubt that the democratization of China was about the furthest from the minds of the Western investor class and their political hirelings.
BINGO!
Exactly. It beggars belief that anybody ever believed such rubbish.
Believing that increasing economic liberalization would lead to
political liberalizationthe squillionaires inChinathe U.S. getting even ludicrously richer, the U.S. began to engage in robust trade with China.===================================
I mean, the author can’t really believe what he wrote as to the true rationale of the perpetrators…
I do think you are correct. Making it obvious that retraining and promoting the renewal of depression-devastated areas won’t accomplish much because they are never gonna outcompete China. Their wages will be spent in China. A jobs guarantee program is likely the only solution to the destruction of neoliberal global extraction. The silver lining is that putting the new infrastructure together to do a jobs guarantee program based on national projects is the perfect investment vehicle for direct social spending getting its money’s worth. And can be coordinated with a honeycomb of other jobs-enterprises to make the money circulate right here on goods and services. And on-the-job training will be more direct and meaningful than classes and “degrees”. We can eliminate lots of hucksters.
this will require protectionism. because if we do not protect, a large amount of the stimulus that is created, will simply be siphoned off by nafta billy clintons wall street and the chinese communist party.
and if production is not protected, than it will be under cut by the same creatures that will have siphoned off that wealth.
As I recall, with nafta and globalization we were told that offshoring manufacturing will increase incomes in places like Mexico and China, thereby allowing workers in those countries to buy more of our manufactured goods.
That logic qualifies as having been sold a bill of goods.
Comparative advantage is a bogus concept, as it assumes national differences in efficiency are static. Productivity and production are largely driven by capital investment in technology. China didn’t have higher productivity or production capabilities, they had cheap labor, it was just a massive exercise in redistribution of jobs from high wage nations to low wage nations. Further, America could be more competitive internationally if we got rid of our bloated and wasteful health care system in exchange for single payer, and if we stopped loading people up with college debt, making employers indirectly pay not only cost of living but for higher ed bloat as well. Its not “comparative advantage”, its called social democracy.
Second, the big lie is the difference between capital and capital goods. Capital is mobile, and it was, but what you were left with were decaying capital goods in areas that resembled bombing sites. If the right is worried about broken windows, why aren’t they worried about the socially destructive effect of post-industrial wastelands on public disorder? Does anyone look at the levels of opioid abuse in old mill towns versus pretty places?
How can you not look at one of these old industrial cities and not want to make America great again, with all those plants running full steam, with good wages and cheap houses again. Its exactly the nostalgia Trump exploited, and the talking classes are too sheltered to even notice it.
the reasons why? the GOP knows that the economics they spew are pure nonsense. the real danger is the nafta democrats, whom actually believe the pure economic nonsense.
we saw this with the empty suit hollow man obama and nafta hillary clintons pivot to asia. the dim wits had pure rage in their eyes when they realized that the chinese communist party simply took lenins advise.
the rage in nafta hillarys eyes when trump said you let us leave america and manufacture in other countries.
what trump was pointing out is dereliction of duty. nafta hillary was not enraged at what trump said, she is a free trader and has no idea how to govern. she was pissed at the results of her own crackpot beliefs, and is blaming china.
but how can the free traders blame china? after all, nafta billy clinton said we no longer govern, corporations do now.
and the stunned chinese communist party said YEEHAW!
Comparative advantage is a nation’s ability to produce a good or service at a lower cost than its trading partners.
What is weird is that this is how he defines comparative advantage, which he must know is wrong (i.e. not how economists define it). Being able to produce at lower cost is absolute advantage, which is what really matters. Comparative advantage is the argument that countries benefit by specializing in what they do “best,” even if that same production can be done at lower cost elsewhere. And, yes, it is complete economic mystification/bullsh1t that rests on several fundamental misconceptions, most prominently that countries, not corporations, are the agents of production. Since it is blinding obvious that corporations only care about absolute advantage, it requires the obfuscatory brilliance of the Krugmans of the world to explain to the rest of us why what we can all clearly see with our own eyes is mistaken.
Even so, I am broadly sympathetic to the idea that we should focus economic assistance on existing places that could use reinvestment help rather than on encouraging everyone to retrain as a coder and move to the Bay Area. Even if much of his argument is economistic mumbo-jumbo, open trade is not going away anytime soon (look how little things changed with Trump) and economists that are willing to challenge conventional wisdom on trade are potential allies.
free trade will stop itself. just as all economic rube goldberg nonsense does.
after 2008, trade never attained what it was before 2008, in 2021, it has never attained what it did after 2008.
so its slowly dying from its own absurdities and contradictions.
the trick will be to escape the inevitable meltdown of war.
and you can see this brewing as the rich and the dim wit nafta democrats are seething at china.
never mind that the dim wits did it to themselves, and should look into a mirror and slap themselves into reality.
instead china and the deplorable will take the brunt of this.
if only we all had learned how to code!
A re-protectionist party-movement could run for power on the concept of making Free Trade go away by force. Free Trade was imposed by legal force and can only be abolished by legal force. Of course it won’t go away “on its own” in a Corporate Globalonial landscape designed to preserve it.
If a re-protectionist movement could get the phrase . . . . Free Trade is the new Slavery and Protectionism is the New Abolition . . . then the brainwar phase of the battle would be joined and even be possible to win.
And if the brainwar phase can be won, then the law-war phase can be won after that. And America can be withdrawn from the Iron Spiderweb of Free Trade.
they have finally fixed the lincolns tariff page, and added a whole lot more. i need to reread it all.
remember, lincoln only got in because of the electoral college. today the fake left seethes at the electoral college, but like anything else, its a double edged sword, and can be good at times.
http://www.abrahamlincolnsclassroom.org/abraham-lincoln-in-depth/abraham-lincoln-and-the-tariff/
Perfectly said.
i forgot to add yesterday when i posted this, and thanks yves for pointing this out, comparative advantage is pure rubbish. the only advantage that matters to the amoral markets is, human and environmental degradation.
to let creatures that their sole purpose in life is to aquire as much as they can, at the expense of everything else dictate policy is surely treason.
nafta billy clinton committed treason.
“International trade theory teaches that free trade between nations makes them better off than not trading at all.”
Ah, I see. And what does international trade practice tell us? I’d like to think that this theory is based on practice, but I fear that the practice is actually based on theory.
a theory also has to be backed up with actual empirical evidence, free trade is not backed up with anything more than a wishful feverish belief.
if you have to give up your technology and standard of living, which we have, then there are no gains from trade.
the two authors even admit to it, yet will not give up their feverish beliefs.
As someone who has a graduate degree in economics, I don’t believe such a statement is accurate. I believe the following to be correct, through:
Simple one-period models that assume independent production of each good indicate that free trade will unambiguously improve consumers’ utility. However, this result won’t necessarily hold if production processes are linked (experience in producing one good makes you better at producing other goods), or, more importantly, if a country is willing to subsidize an industry with high barriers to entry (capital investment or technical expertise) to increase future unsubsidized production within its borders (effectively turning international trade into a multiperiod game).
ross perot said it best. you can train anyone, anyone to run machines. so anything spewing out of the mouths of a pro free trade economists, is pure economic nonsense.
so there is no comparative advantage, except human and environmental degradation.
everyone can make almost everything. all it requires is some training. we see that today all over the world.
I might add that puffing up the cost of living by bidding up the cost of housing, health, education etc… that wages buy – does not help in “global competitiveness” nor does the huge tax driven mal-investments in the non-real economy.
The institutional economists and the Republican or Democratic politicians ever to burnish their reputations and always incapable to admit error in policy or ideology, or to learn history’s lessons will continue to act as carnival barkers…barking away to see the circus they have created while the rest of the world withers and rots at their effluent.
It does not need to go that route – a good look at the tax structures and economies set up by these barkers needs a good review with an eye to rid the place of the rentiers, the cons, the barbarians at the gates –
the author says “This lack of wages has subsequently resulted in declines in the demand for local goods and services and in housing values and property tax revenues.”
Despite housing values that go up and up beyond the reach of people to pay or the municipalities ever looking to leverage their revenues through the ever increasing overhead of financial services businesses – — its the increases in the housing prices and taxes on the real economy that creates a lack of wages and, it’s not the latest chicken and egg question either.
I have forgot what Michael Hudson says -the finance sector has become a parasite feeding off the productive parts of the economy and we are in debt deflation or debt inflation
Did not see Michael Hudson comment below – go see it
You can see the influence of trade theory in the practice of most successful countries. They pretty much ignore it, unless trade will benefit particular sections of society. The South Koreans famously invited lots of US economists to give them advice in the 1960’s. They listened carefully, and did the exact opposite of what they were advised. South Korea is actually a wonderful example of a country that succeeded enormously by systematically ignoring everything that a developing economy was supposed to do. The Japanese too, had a post war policy called the Yoshida Doctrine, which was essentially a declaration of economic war on the US. It was just that the US took about 3 decades to realise this.
There is mountains of research showing what open trade does to regions and nations. It is undoubtedly beneficial economically to economically ‘equal’ societies as it increases the scale of operations and opens up both markets and supplies of goods. But when unequal economies open up to each other, it has the effect of locking in existing efficiencies. Regions that are primarily the producers of primary products find it almost impossible to expand manufacturing. This happens internally as well as externally. For example, in China its been found that linking similar cities by high speed rail is beneficial, while linking a core city to a weaker, more peripheral one tends only to benefit the already dominant city. The weaker city becomes the supplier of cheap labour to the more advanced city.
You could see this in 19th Century Ireland. In theory, Ireland was right next to the heart of the biggest free trade union in the world at the time, the British Empire. It should have thrived according to trade theory. It didn’t, it shrank and remained in deep poverty. One primary reason was that the early expansion of railways into the heart of the country, rather than developing the country actually just meant that cheap manufactures from Manchester wiped out the nascent industrial sectors of the Irish midlands. Economic logic meant that Ireland simply exported live cattle ‘on the hoof’ (not even providing slaughterhouse jobs) in exchange for manufactured products, which turned the country into little more than an impoverished ranch which also supplied lots of cheap migrant labour. Even bricks used to build the few houses under construction came from England.
It also has sectoral impacts. In general, if an advanced economy has free trade with a poorer economy, capital benefits in the former (a bigger market, more arbitrage of costs), while labour benefits in the latter (more jobs providing cheap goods to the stronger economy). As one Chinese academic put it a few years ago, opening up to China was good for western capitalist and terrible for western workers, and terrible for Chinese capitalists* but great for Chinese workers.
*by which he meant local businesses dependent on a captive market.
It might be better put to say that it took three decades before the effects of the Yoshida doctrine could be mentioned by the US establishment. The US need for Japan as a base of military operations in east Asia governed the response: political stability in Japan was required, and produced by raising incomes via export-led growth and political clientelism under the LDP. In the 1970s, when the US auto sector began to feel the impact of Japanese imports, the trade policy response was strangely ineffectual because defense policy concerns trumped domestic political problems. Chalmers Johnson noted that military and trade policy were always considered in isolation by Cold War analysts: “Because if they were considered together, then they would be understood.”
Your observations are supported in further detail in Judith Stein’s “Pivotal Decade.”
Your first two paragraphs are central to Ha Joon Chang’s “Bad Samaritans.”
The hegemon always preaches “free trade” (which is more a slogan than an actual thing that ever really exists) — developing nations should decline to take such advice as Friedrich List knew well.
We need to acknowledge the existence of reverse development. America is a reverse-developing nation. America has been reverse-developed ever since President Carter by a series of Free Trade Treason Presidents.
Carter began the age of Free Trade Treason. Reagan and Bush conceptualized the Free Trade Treason Agreements and bequeathed them to the first Free Trade Treason President who could get them passed.
And just as ” only Nixon could go to China”, only a Democrat could pass Free Trade. And Clinton was the Free Trade Treason Democrat who got comprehensive Free Trade Treason passed.
And the Democrats are the more effective Free Trade Treason party ever since Clinton.
I won’t vote for Trump any more, or ever again. But if Trump is once again nominated, I expect Trump to win by a Nixon in ’72 landslide. Even if Trump is in prison. After all, there is precedent for running while in prison. Eugene Debs ran while in prison.
wilson broke the back of protectionism, socialism and civil rights all at once. he was americas prototype fascist.
read the lincoln tariffs page. you will see the democrats have a long history of selling the country out for a tiny few that benefit from free trade.
only from FDR till LBJ did the democrats not sell out.
Wilson was 20th Century America’s most evil President.
David
January 7, 2022 at 11:58 am
I’d like to think that this theory is based on practice, but I fear that the practice is actually based on theory.
I feel compelled to quote Yogi Berra: “In theory there is no difference between theory and practice – in practice there is”
If only they would practice, and go through spring training and pre-season games instead of deciding to foist off their ill-conceived World Series of bad ideas on an unwilling populace.
David,
Actually, I think the argument can be made that current practice is based on an unsustainable interpretation of theory, Ricardo’s theory of comparative advantage to be precise.
The key point (though there is much more to be said on this in the article to which I will refer people) is that Ricardo wrote his theory when it was quite clear to one and all that capital was anything but mobile.
To read further on the points I’m making here, please check out “Reassessing Comparative Advantage: The Impact of Capital Flows on the Argument for Laissez-Faire” by Robert E. Prasch in the Journal of Economic Issues, Vol. XXIX, Number 2, June 1995. [DISCLAIMER: I studied under [the late] Professor Prasch in my graduate program in Economics.]
Yes, capital mobility and the possibility of changes over time (in terms of circumstances underpinning comparative advantage) both invalidate Ricardo’s theory.
Wasn’t Ricardo always nothing but a hasbarist for British Colonial exploitation under the cover of Free Trade and concocted “doctrines” like “comparative advantage”?
i think so. when columbus sailed to the new world he did it in ships that could carry many many tons of supplies.
so did ricardo pay attention to that, nope. he knew that factories could be moved. the british did their best to keep those factories from moving to their colonies.
comparative advantage was pure rubbish from day one.
My two cents…
First, in the past 2000 years certain countries have had a history of producing great, long-lasting civilizations . China, Japan, Nothern Italy, and Northwest Europe are examples. Before 2000 years ago the great civilizations were based on the control and distribution of water by an elite. Since then there have been great civilizations elsewhere (the Americas, India and the Middle East) but they don’t seem to last- an invader smashes them and the populations are diverse enough in language, religion, custom and ethnicity that the sense of “Us-ness” among the conquered is not sufficient to keep them united during the period of oppression.
China and Japan have proven to be the exception. Under great repression and government collapse the populations still remained “Us” and when the opportunity to emerge arrived, they did. What this means for the East Asian “Us” overseas (Singapore, Indonesia and the trading enclaves everywhere from the Solomon Islands to Africa), only time will tell but Europe from 1600-1945 gives us an interesting model.
That sense of “Us” has been one of the great competitive advantages of Japan, Korea and China.
Second, the “Us” of Germany didn’t collapse under the events of 1914-1945. And the German government has takes a merchantilist, high-savings approach to industrial policy along with a belief that training and incentives designed to keep industry, culture and education distributed will reduce the displacement of industrial change. They have both a person-based and a location-based industrial policy, and curiously enough Austria, Switzerland, the Netherlands and the Nordic countries have taken the same route. The national capital does not grow at the expense of the small regional cities. Thus the desire for cheap labor to serve the big city elites needs to be satisfied by poor immigrants and the tolerance for such immigration is going down and causing great political stress in many of these countries. Note that none of the Asian tigers have imported foreign labor and created unassimilated minority enclaves, even Japan which is chronically short of labor.
Are you pointing a bit at the differences in Citizenship by blood rather than land? And where that leads economically? Why some people cans say “Us” while others cannot?
So apparently wrecking America’s industrial base and middle class was worth it if it created a middle class in China? Which would create democracy? Really? This sounds so crazy how could anybody begin to believe that as an explanation.
Nobody believed it. Every time I told people that I refused to shop at Walmart because they were wrecking American jobs the response always was but we get to buy cheap $hit. Everybody knew what was happening – have always known.
i even question that china has a real large sustainable middle class. trade as a component of GDP in the u.s. in the 1950’s-60’s was under 10%. that meant that over 90% of what we made, we consumed.
this was under trumans Gatt. so we created the large middle class under fair trade, and it was self sustainable.
however china has been different. its hard to get the stats, but i watched carefully since nafta billy clinton sold us out, and it seems china is only able to consume under 50% of what they make.
i have seen it as low as in the 30% range. so in reality, chinas middle class has to rely on the middle classes of other countries.
but the catch 22 is that chinas production has under mined the same middle classes that they rely on, hardly self sustaining, more like self liquidating.
this is basically what the china shock is,
“this is the situation today: The domestic markets of these foreign producers have neither the size nor the wealth to support their own industries. As they undercut U.S. production, however, they will gradually weaken the American economic base that they have come to depend on. Rather than a self-sustaining, self-reinforcing process, this new relationship becomes self-liquidating.”
Yves is quite right to emphasize China’s great infrastructure advantage. American economists are unwilling to acknowledge this because of their commitment to privatization, which builds financial and profit costs into the pricing of basic services instead of providing them on a subsidized basis as used to be the case in the US.
Also, the REASON why wages are low is low costs of housing, health care and transportation compared to privatized US overhead and rent-seeking.
Not to mention the cumulative debt burden. The incidence of costs diffuse, (The incidence of taxation being but one example.) so the cost distribution (distribution of expenditures over the population, is flatter than the income distribution, so the poorer, (more essential) working classes bear a disproportionate, and now unsustainable, share of the burden of supporting civilization. Yeah.
So debt service increases the costs of everything you buy. Everyone else’s debt, you also have to pay on.
The FIRE sector is literally burning down the economy. Burning up the economy. Wait until private equity gets deep enough into the housing market. And more people with too much money are buying second homes, too. And most development is taking part in the exurbs, which are more expensive to service than denser population regions and economically unsustainable.
A perfect storm, speaking of which, houses made of sticks may not survive the wolf of climate change. Depending on how big and bad he turns out to be.
Meanwhile, that bestest and most efficientest of economic systems, capitalism, is bringing us the twin blessings of increasing homelessness and mostly idle and unoccupied luxury housing. Not to mention all the idle and empty commercial space. In my town, there are numerous commercial buildings with ‘see through’ empty and idle second and third floors. Cheaper to convert to housing, I would think, than new building.
No, that is false. Debt issuance at the Federal level is a political holdover from the gold standard era. The US can simply net spend. But investors also like holding a risk-free asset, so there are other reasons for Treasury issuance.
my question to you sir is that we know the wealthy despise unions, labor law and regulation, environmental law and regulation, and taxes of course.
so even if we become more competitive, what is to stop the wealthy from finding friendly nations that are more than willing to debase their own people, environment and taxes, and are willing to subsidize and manipulate to under mine our competitiveness.
and they will. in reality they will be exporting their unemployment, poverty and deflation onto us, thus under minding us again.
and the beauty of it for the wealthy is that they get to do this totally tax free, completely free of a civil society . i view tariffs as a tax on the rich.
if we can make it here competitively, then if you are rich enough to buy a foreign good, then you can pay the tax.
The manufacturing news is part of the story. Ask your friends in the academic STEM world what they are seeing and hearing. That should shock you.
Domestic front – relatively fewer qualified or even interested American grad students, so fewer post-docs, hollowing-out of networks, a downward arc.
Foreign front – gigabucks from all that trade surplus put into bleeding edge projects that looks to surpass western technology. Pick a topic and see what is happening in China, for example. Their 1.4B people produce orders of magnitude more students leading to more researchers and engineers.
Need a next-gen super-collider, some new application of former US tech, or just some mundane maglev or other high speed train tech that goes from idea to drawing board to done in short order? Not all beneficial as that Wuhan funding or as ongoing environmental impacts showed.
Perfect example of why if you want to learn about the economy avoid the economics department and go to the business department. So many wrong statements in this piece it is not worthwhile to go through them.
Just one; China manufacturing surge is over? Really? On what planet?
Ok another: particularly labor intensive…. Really? Which country has the highest automation now?
Certainly a fascinating post, much improved by both Yves’ caveat on missing facts before sharing it as well as the NC commentariat’s takes. I particularly appreciate “Dave in Austin”s take on the role of social cohesion in certain more successful societies, which makes a great deal of sense. So, very ON topic, Ian Welsh just had a nice piece on the US’s ongoing collapse under Covid contrasted with China’s successful response. . . I’ve hated the Empire my entire adult life (I was in high school during Nixon, and saw my friends’ older brothers coming back from Vietnam through the mid-70s and after) & had hoped I’d live long enough to see its collapse. Guess I have made it . . . the US is now where Britain was in 1946, about to be sidelined from history’s center stage, I assume . . . anyway, link to Ian Welsh piece at
https://www.ianwelsh.net/covid-and-chinas-victory/
If America ” has ” an Empire, then America can still save itself by surrendering the Empire and by deleting from physical existence the people within America who support the Empire.
But if America “is” an Empire, then the only way to end the Empire is to divide America down into various constituent countries too small and weak to reconstitute any sort of successor Empire.
So the question is . . . . does America “has” an Empire? Or is America “is” an Empire?
Just more proof that the discipline that calls itself “economics” is nothing but a steaming pile of horse$h1t shoveled in order to justify the brutalization of working people and the poor.
Those pieces of $h1t Bill and Hill and their PMC acolytes wanted to export industrial production so that they wouldn’t have to see or smell all the mess that it creates. “Cheap labor” really has nothing to do with it. It was regulatory arbitrage that drove NAFTA and opening the WTO. Unregulated exploitation of workers, the environment, and finance in backward lands like China, Mexico, and India were the goals to be achieved.
The U.S. PMC seems to have actually believed that by exporting industrial production elsewhere on our planet that they could ride their Teslas out to sniff the daisies and chardonnay while the Deplorables were too whacked-out on fentanyl, meth, legal weed, and video games to rouse themselves.
Good luck with that…
That is not true for the economics developed by Charles Walters, Frederick Soddy, Carl Wilken and other such.
But that is why the horse$h1t economics establishment has worked so hard to avoid and ignore economists like the ones just named.
Actually China ran their country like any aspiring monopolist. The sold below cost (costs to their environment, worker’s health and safety, worker’s consumption) until they had driven their competitors out of business. Now they can raise their prices without competition.
And this is part of the inflation we now see.
i think so also. and that is whats enraged the dim wit wealthy and the nafta democrats. the dopes just found out they own nothing, and are no longer the tail that wags the dog, communist china is now the tail that wags the whole world.
its fun, yet pitiful and embarrassing watching nafta democrat dim wits like the clintons and empty suit hollowman obamas outrage at china, and their rage filled china is going to pay a price.
i see north korea has hyper sonic missiles now. because we threw all of our advantages away so that nafta billy clintons wall street could impoverish america to benefit the few, we cannot make them.
we lack the know how and manufacturing.
” How to Help Communities Still Suffering ” . . .
really? really?
The way to do that is to take America out of the Free Trade System and all its agreements and treaties and organizations. Then institute militant belligerent rigid protectionism against imports from countries with any costs or standards lower than American costs or standards. And forbid the sale of any foreign production at prices less than charged for the equivalent American production.
And in agriculture, forbid the import of anything that America can grow. And forbid the export of America raw materials to overseas for processing into “value added” items to be re-imported for sale here. Let all the “value adding” be done right here to begin with.
Behind a Big Beautiful Wall of protection we could spend the next few decades restoring a shadow of our former industrial and agricultural ecosocial system. We could also spend the next few decades de-fossilizing our energy-economy because we would rigidly exclude carbon-dumping production from our carbon-dumping trading enemies such as China.
Trade is war by other means.
we can have a civil society under tariffs, or we can have barbarism under starve the poor nafta billy clintons free trade
“The US government needs to be courageous and step up and, at the very least, institute the necessary tariffs to punish those who use slaves who produce counterfeit items, including medical gloves, and allow American competitors, like ourselves, to compete on a level playing field,”
https://edition.cnn.com/2021/12/30/us/medical-gloves-ppe-chicago-factory/index.html
Nothing about currency manipulation by the PBoC to get the ball rolling, printing yuan to buy dollars to keep a peg. And then the private sector / SOEs taking over from there in buying treasuries (and other US dollar denominated assets) to keep the balance of payments and therefore keeping the peg.
Without that, competitive advantage goes out the window.
Obviously you didn’t read the byline written by Yves. Say a worker costs the same in both the US and China, the later still does not need to observe the same environmental standards as the West.
But then again, what explains the presence of Cancer Alley in the US? Lax enforcements?
If trade in goods and services is balanced, then environmental standards and labor rates don’t matter.
when has that fairy tale ever existed?
How do you compare labor rates when countries are on different currencies? What China does is buy the US currency by selling us goods. And then doesn’t buy US goods with that currency.
But imagine US had a policy of balanced trade. You know, like when we were on the gold-international exchange standard. Say every dollary sold by the US for foreign goods has to be recycled to the US for US goods. If China has no demand for US goods, guess what happens, the dollar gets cheap compared to the Yuan. And suddenly US labor rates look cheap compared to China labor rates.
More broadly, if US had a policy of balanced trade, we wouldn’t need articles like this and we wouldn’t be trying to break the code on how to mitigate the issues of unbalanced trade (i.e. mercantilism).
i ask you again, where and when has this ever happened? it never has, never will.
free trade is double sided, one makes a trade to enrich themselves, and one is a dupe that does not have the same information as the other trader. good luck with that.
and who is going to enforce this?
The gold international exchange standard enforced this. Until Charles DeGaulle wanted to redeem dollars France hoovered up in Vietnam for gold and Nixon closed the gold window.
Until then we had balanced trade. And nobody talked about the price of labor overseas.
We can do something comparable with tarrifs. We just choose not to.
Free trade to enrich one side is the very definition of mercantilism.
no it did not. to stop the flow of gold out of the u.s.a., we instituted tariffs.
http://www.abrahamlincolnsclassroom.org/abraham-lincoln-in-depth/abraham-lincoln-and-the-tariff/
no we were also under Gatt, which allowed protectionism, and we used it if we had to.
TRUMANS GATT was trade, but without the exploitation, free trade is exploitation
this is GATT: Compensatory tariffs might be added to products from countries that do not maintain international standards of environmental protection, wages, health and safety standards, and social safety nets, thus encouraging higher standards for all people everywhere
truman was a populist: Of course I believe in free enterprise but in my system of free enterprise, the democratic principle is that there never was, never has been, never will be, room for the ruthless exploitation of the many for the benefit of the few
“Rather than acknowledging that free trade, privatization, and the rest of their policies are ahistorical, self-serving economic nonsense, apologists for neoliberalism have also revived an old 19th century and neo-Nazi explanation for developmental failure — namely, culture.’
http://www.business-superstar.com/words-of-wisdom/adam-smith-and-tariffs/
Adam Smith And Tariffs
JEFFREY PETERS | 03.17.2016 | WORDS OF WISDOM
the only way to stop the gold flow, or the dollar flow is through tariffs.
it does not matter if its gold or dollars, the same happens. adam smith understood this very well, as did lincoln, FDR and truman.
so when was trade ever balanced?
Free Trade isn’t Balanced, and Balanced Trade isn’t Free.
The only way to Balance trade is by Force. And we don’t have the legal self-permission to apply Forcible Trade Balance until we defect from the Forcey Free Trade system.
Unless and until then, the only thing the concerned individual can do is to buy his/her own personal things from the highest wages and standards countries those things are still available from.
” Buy America if you can find it” would be a clever bumper sticker.
When we were on the gold. Interexchange system, that was considered free trade. It was self re-enforcing as nobody wanted to have imbalance of payments settled by doing swaps of gold for currency.
And merchants didn’t want gold anyways. It’s only when foreign banks got involved, settling debts in the US dollar that settlement in gold was exercised. And that was by central banks.
but the whigs used tariffs to stop the unsustainable drain on gold that was being caused by free trade.
its a matter of public record.
we did the same thing in 1930.
gold standards have never stopped anything, except gold standards cause deflation and depressions.
it matters not if its gold or dollars, the drain becomes unsustainable.
nice quote.
The Federal Job Guarantee is BOTH people-based and place-based simultaneously, while also being countercyclical, putting a floor under wages and providing an anchor for price stability.
The gov’t sets the floor! <3
… and kills the “gig economy” as a treat! ;-)
what if another country targets those wages, and gets almost free access to our market? i can tell you what will happen even under your scenario, “THE CHINA SHOCK!”
unless of course we protect against that.
https://www.reuters.com/breakingviews/apples-ugly-china-deal-mostly-bought-time-2021-12-08/
At the end of the day Tim Cook’s secret deal with the government of China has backfired, on us. What was the objective? Is Tim a billionaire yet?
Some days, justice looks like a five pound jagged rock smashed into the face of the elites.
they are so stupid, they just figured out they own nothing, and are now stuck in this mess. communist china owns the technology, and the know how to make it.
the tim cooks of the world should not have been allowed to make policy for our nation and the world. in reality, its called fascism.
nafta billy clinton should be charged with dereliction of duty, and dopes like that should pay a steep price for not governing.
the milton freidman dopes sitting in jail in iceland, still think they did nothing wrong. nafta billy and many other so called politicians in america, need to join the dopes in iceland.
How do you turn a uni-polar world into a multi-polar world?
Let’s ask the Americans, they know how to do it.
Western policymakers were thinking about things at the individual level, as they were immersed in an individualistic ideology.
They just thought about individuals competing against each other in an open, globalised world, so it was all about individual productivity.
They weren’t thinking about the advantages one nation might have over another.
All the cards were stacked in China’s favour in an open, globalised world, which the Americans created with the Washington Consensus.
Remember the good old days?
Thirty years ago.
The West was triumphant, and western liberalism had won the day, it was the end of history.
The Berlin Wall had fallen and a uni-polar world was born.
The US reigned supreme.
China was insignificant and Russia was moving towards the West with Gorbachev.
We never did ask the obvious question.
Why did our own business leaders, financiers and investors prefer China to the West?
Productivity was a factor, but there were a lot of other factors involved as well.
Maximising profit is all about reducing costs.
China had coal fired power stations to provide cheap energy.
China had lax regulations reducing environmental and health and safety costs.
China had low taxes and a minimal welfare state.
China had a low cost of living so employers could pay low wages.
China had all the advantages in an open globalised world.
Western companies couldn’t wait to off-shore to low cost China, where they could make higher profits.
Western businesses tried cutting costs here, but could never get down to Chinese levels and they needed to off-shore to maximise profit.
They gave away decades of Western design and development knowledge in technology transfer agreements.
China was a new, fast growing economy compared to the mature, slow growing economies of the West.
Investors would be able to achieve better returns in the new, fast growing Chinese economy and this is where the money headed.
US investors love China and know it’s the best place to make real money.
https://www.youtube.com/watch?v=CaELQS5kTso&t=727s
George Soros, Bill Gates, Warren Buffett, Elon Musk, Jeff Bezos …..
Eventually the Americans realised China would soon overtake the US.
PANIC.
only dopes who were driven by greed would have created the economy we have, where corporations make all of the rules. its called fascism.
communist china and russia know what fascism is, and took the dopes to the cleansers.
the dopes are the ones that are driven by a feverish idiotology, and have no business at all being in government.
the dopes in business still think they will win in the end.
what does china need with the parasites you just named, they are eliminating those parasites now as we speak. and those parasites will stick with china till the end. then they will blame us.
all free trade has done is to force innovative hard working americans into go no where part time jobs, driving them deep into debt, to borrow back the money that used to be ours, to buy the goods and services we used to make.
free traders and libertarians(one in the same)are the only people i know that are constantly outraged at the results of their own policies, then they blame government, and under free trade, they also blame the deplorable.
IF THEY HAD JUST LEARNED HOW TO CODE!
What’s the good news?
Chinese policymakers are just as susceptible to a half-baked ideology as their Western counterparts.
The attractive, new ideology of neoliberalsm, was the Trojan Horse that delivered the payload of dodgy old, 1920’s neoclassical economics to global policymakers.
Under the bright, shiny, new wrapper of neoliberalism is dodgy, old, 1920’s neoclassical economics, and it’s still got its old problems.
The Chinese have been making all the classic mistakes of neoclassical economics.
Then they have been doing something we haven’t seen before.
Working out where they went wrong.
They have been making the same mistakes after 2008, we made before 2008.
Neoclassical economics is the economics of the Roaring Twenties, the Wall Street Crash and the Great Depression.
Policymakers adopt the economic growth model of the Roaring Twenties, oblivious to where this is leading.
The Roaring Twenties economic growth model
You use the money creation of unproductive bank lending to drive the economy.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
They wasted this on pumping up real estate valuations and building empty cities after 2008.
They worked out what was going wrong just before the financial crisis.
Davos 2018 – The Chinese know financial crises come from the private debt-to-GDP ratio and inflated asset prices
https://www.youtube.com/watch?v=1WOs6S0VrlA
The black swan flies in under our policymakers’ radar.
They are looking at public debt and consumer price inflation, while the problems are developing in private debt and asset price inflation.
The PBoC knew how to spot a Minsky Moment coming, unlike the FED, BoE, ECB and BoJ.
Let’s have a look at the US private debt-to-GDP ratio.
https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
At 18 mins.
1929 and 2008 stick out like sore thumbs.
What about inflated asset prices?
“It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world” All the Presidents Bankers, Nomi Prins.
When this ponzi scheme of inflated asset prices collapsed it took out the financial systems of the US, UK and Euro-zone.
A year later, and they had made further progress.
Davos 2019 – The Chinese know bank lending needs to be directed into areas that grow the economy and that their earlier stimulus went into the wrong places.
https://www.youtube.com/watch?v=MNBcIFu-_V0
They had pumped bank credit into areas that don’t grow GDP, and the private debt-to-GDP had risen to a level they were on the verge of a financial crisis.
Everyone does that with neoclassical economics, but they don’t usually see the financial crisis coming, like the US in 1929, Japan 1991 and US, UK and Euro-zone in 2008.
Davos 2019 – The Chinese have now realised high housing costs eat into consumer spending and they wanted to increase internal consumption.
https://www.youtube.com/watch?v=MNBcIFu-_V0
They let real estate rip and have now realised why that wasn’t a good idea.
The equation makes it so easy.
Disposable income = wages – (taxes + the cost of living)
The cost of living term goes up with increased housing costs.
The disposable income term goes down.
They didn’t have the equation, they used neoclassical economics.
The Chinese had to learn the hard way and it took years, but they got there in the end.
They have let the cost of living rise, and they want to increase internal consumption.
Disposable income = wages – (taxes + the cost of living)
It’s a double whammy on wages.
China isn’t as competitive as it used to be.
China has become more expensive and developed Eastern economies are off-shoring to places like Vietnam, Bangladesh and the Philippines.
i question the size and sustainability of china’s so called middle class.
The China shock hit the US but not Germany. American economists don’t seem to be curious about this difference.
its hitting germany now.
The early neoclassical economists took the rentiers out of economics.
What could possibly go wrong?
The interests of the rentiers and capitalists are opposed with free trade.
No one told the Americans.
“Income inequality is not killing capitalism in the United States, but rent-seekers like the banking and the health-care sectors just might” Angus Deaton, Nobel prize winner.
No wonder all their forms off-shore and import back into the US leading to a massive trade deficit.
The UK knew how free trade worked in the 19th century, before neoclassical economics.
How did the UK prepare to compete in a free trade world in the 19th century?
They had an Empire to get in cheap raw materials; there were no regulations and no taxes on employees.
It was all about the cost of living, and they needed to get that down so they could pay internationally competitive wages.
UK labour would cost the same as labour anywhere else in the world.
Disposable income = wages – (taxes + the cost of living)
Employees get their money from wages and the employers pay the cost of living through wages, reducing profit.
Ricardo supported the Repeal of the Corn Laws to get the price of bread down.
They housed workers in slums to get housing costs down.
Employers could then pay internationally competitive wages and were ready to compete in a free trade world.
That’s the idea.
You level the playing field first; then you engage in free trade.
The interests of the capitalists and rentiers are opposed with free trade.
This nearly split the Tory Party in the 19th century over the Repeal of the Corn Laws.
The rentiers gains push up the cost of living.
The landowners wanted to get a high price for their crops, so they could make more money.
The capitalists want a low cost of living as they have to pay that in wages.
The capitalists wanted cheap bread, as that was the staple food of the working class, and they would be paying for it through wages.
Of course, that’s why it’s so expensive to get anything done in the US.
It’s your high cost of living.
Disposable income = wages – (taxes + the cost of living)
Employees get their money from wages and the employers pay the cost of living through wages, reducing profit.
High housing costs have to be paid in wages, reducing profit.
The playing field was tilted against the US with free trade due to your high cost of living
The early neoclassical economists had removed the rentiers from economics so you didn’t realise.
This is why all your firms have been off-shoring and importing back into the US.
“China and Mexico look good, don’t they?” the CEOs.
They can pay wages there that people couldn’t live on in the US.
Keeping labour costs down maximises profit.
There were three groups in the capitalist system in Ricardo’s world (and there still are).
Workers / Employees
Capitalists / Employers
Rentiers / Landowners / Landlords / other skimmers, who are just skimming out of the system, not contributing to its success
The unproductive group exists at the top of society, not the bottom.
Later on we did bolt on a benefit system to help others that were struggling lower down the scale.
Identifying the unproductive group at the top of society didn’t go down too well.
They needed a new economics to hide the discoveries of the classical economists, neoclassical economics.