Cato�s trade report: Blinded by ideology
By Paul Craig Roberts
Online Journal Guest Writer
Oct 9, 2007, 01:25
On August 28, the Cato Institute in Washington, DC,
published a report, "Thriving
in a Global Economy: The Truth about US Manufacturing and Trade."
The report confuses a company�s offshored products with its import competition
and wrongly concludes that US companies with the most import competition are
the companies that are thriving.
The Cato report never mentions the practice of US
corporations of offshoring their production for US markets. Consequently, the
report conflates offshored inputs and final goods of US corporations with
imports from competitive foreign firms. The report thus confuses corporations
or industries that offshore their manufacturing with those most exposed to
This extraordinary mistake results in an incorrect
conclusion. The Cato report finds that revenues, profits, and value added rose
most for industries most exposed to import competition and mistakenly
attributes this result to the beneficial workings of free trade.
In US trade statistics, offshored US production is counted
as imports. Offshored production comprises a substantial percentage of
manufacturing imports. Let�s rewrite Cato�s conclusion to take account of these
facts: �Revenues, profits, output, and value added rose the most for industries
that offshored manufacturing, and they rose the least for those industries that
produced their output domestically.�
Obviously, corporations that arbitrage labor and replace
their US employees with less expensive foreign labor are going to enjoy greater
growth in profits and value added.
The Cato report did not set out to prove the benefits to
corporations of offshoring. The goal of the report is to combat protectionist
sentiments in Congress that might result in trade restrictions. Thus, a report
that attributes the health of US manufacturing to import competition.
2004 in the New York Times and at a televised Brookings
Institution conference, Senator Charles Schumer and I attempted to create a new
discussion around a new and unrecognized problem. The problem is that the collapse of world socialism
and the rise of the
high speed Internet made it possible for domestic corporations to arbitrage
labor across national boundaries in pursuit of absolute advantage
In the years since, I have written extensively on this
issue. Labor arbitrage is not trade and does not meet the Ricardian conditions for
comparative advantage upon which the case for free trade is based.
Few economists have bothered to think about the issue of
offshoring, preferring to dismiss concerns about it as manifestations of the
old protectionist fallacy. They learned in graduate school that free trade is
always mutually beneficial and ceased to think when they passed their exams.
This is especially true of "free market economists"
who believe that economic freedom, which they identify with the freedom of
capital, is always good. Thus, most economists mistakenly believe that
offshoring is protected under the authority of free trade doctrine.
However, free trade doctrine is based on the assumption that
domestic capital seeks its comparative advantage in its home economy,
specializing where its comparative advantage is best and, thereby, increasing
the general welfare in the home economy. David Ricardo, who explicated the case
for free trade, rules out an economy�s capital seeking absolute advantage
abroad instead of comparative advantage at home.
Jobs offshoring is not only a problem for displaced US
manufacturing employees -- displacement that Princeton economist and former
Federal Reserve vice chairman Alan
Blinder says will also impact 30 to 40 million high-end US service sector
jobs as well -- but also a problem for economic theory.
Economic theory assumes that capitalists pursuing their
individual interests are led to benefit the general welfare of their society by
an invisible hand. But offshoring, or the pursuit of absolute advantage, breaks
the connection between the profit motive and the general welfare. The
beneficiaries of offshoring are the corporations� shareholders and top
executives and the foreign country, the GDP of which rises when its labor is
substituted for the corporations� home labor. Every time a corporation
offshores its production, it converts domestic GDP into imports. The home
economy loses GDP to the foreign country which gains it.
Gomory, co-author with William Baumol
Trade and Conflicting National Interests,
the most important work in trade theory in 200 years, pointed out that
traditional trade theory has broken down because companies are no longer bound
to the interests of their home countries. Offshoring has decoupled the link
between a company�s motivation for profit and a nation�s desire to improve the
wealth of its citizens. �Most economists,� Gomory observed, �have not acknowledged
this fundamental change and its implications for economic theory.�
The Cato report shows no awareness of the problem for
economic theory when the profit motive becomes disconnected from the general
welfare, and the report does not appreciate the restraint placed on traditional
protectionist legislation (tariffs and quotas) by manufacturers that offshore.
The traditional purpose of trade protection is to shield domestic producers
from foreign competition. Neither manufacturers that offshore production nor
their trade associations favor any tariffs or quotas that would reduce their
profits from offshoring by treating their offshored production as the products
of foreign competitors. The Cato report is worried about a protectionist policy
for which there is no organized constituency.
Congress and most economists are as confused about the
issues as the Cato report. Today the profit motive causes capitalists to create
job opportunities and GDP in low-wage foreign countries instead of their own.
Every job that does not require a �hands-on� presence can be offshored. Charles
McMillion and I have pointed out for years that the nonfarm payroll jobs data
from the Bureau of Labor Statistics show that the US economy can only create
net new jobs in domestic non-tradable services.
The Cato report does not acknowledge that the financial
prosperity of US capital is at the expense of US labor. The report does not
explain how an $800 billion trade deficit can be closed when domestic
corporations face powerful incentives to offshore, and it shows no awareness of
Susan Houseman�s findings that productivity gains and output growth that result
from offshoring, and which occur abroad, are mistakenly being counted as US GDP
and productivity growth. This phantom US output and productivity growth would
explain the disconnect between rapid productivity growth and US real median
family income, which is lagging far behind.
The financial prosperity that US corporations are enjoying
from offshoring increases the US trade deficit and makes American consumers
increasingly dependent on imports. In 2006 (the most recent annual data), the
US trade deficit in manufactured consumer durable and nondurable goods was 3.4
times greater than the US trade deficit with OPEC. The US �superpower� has a
massive trade deficit in consumer manufactured goods and even has a deficit in
capital goods, including machinery, electric generating machinery, machine
tools, computers, and telecommunications equipment.
In 2006, the US trade deficit with Europe was
$142,538,000,000. With Canada the deficit was $75,085,000,000. With Latin
America it was $112,579,000,000 (of which $67,303,000,000 was with Mexico). The
deficit with Asia and Pacific was $409,765,000,000 (of which $233,087,000,000
was with China and $90,966,000,000 was with Japan). With the Middle East the
deficit was $36,112,000,000, and with Africa the US trade deficit was
$62,192,000,000. The trade deficit with OPEC was $106,260,000,000.
The more US corporations prosper by offshoring, the greater
the US trade deficit will grow and the more unbearable the pressure will be on
the dollar�s role as reserve currency.
At some point, crisis will force Congress, economists and
think tanks to deal with the real issues.
Craig Roberts [email him] was Assistant Secretary of the Treasury in the
Reagan Administration. He is the author of Supply-Side
Revolution : An Insider's Account of Policymaking in Washington; Alienation
and the Soviet Economy and Meltdown:
Inside the Soviet Economy, and is the
co-author with Lawrence M. Stratton of The
Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the
Constitution in the Name of Justice. Click here for Peter
Brimelow�s Forbes Magazine interview with Roberts about the recent epidemic of
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