[NYTr] Cato’s Trade Report: Blinded by Ideology

[All the News That Doesn't Fit]

Info Clearing House - Oct 9, 2007
http://www.informationclearinghouse.info/article18532.htm


Cato’s Trade Report: Blinded by Ideology

By Paul Craig Roberts

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 import competition.

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.

In January 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
indivisible 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.

Recently, Ralph Gomory, co-author with William Baumol, of Global 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 de-coupled 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.

[Paul Craig Roberts has a Ph.D. in economics. He has held a number of
academic appointments and contributed to numerous scholar journals. He
is author or co-author of eight books and was Assistant Secretary of
the Treasury for Economic Policy.]