The late unlamented Senator Reed Smoot (R.-UT) was spiritually in full flow at the New America Foundation’s Forum on America’s Economic Future Wednesday, as Pennsylvania Governor Edward Rendell, ex-Senator Tom Daschle (D.-SD) and Senators Richard Durbin (D.-IL) and Byron Dorgan (D.-ND) competed as to who could say the nastiest things about China. Presumably trade policy is not covered by the “hate speech” laws these gentlemen favor, but any luckless Chinese exporter present must have felt like an African American from the old South who’d wandered into a Ku Klux Klan convention.
I have myself written about the failings of David Ricardo’s 1817 Doctrine of Comparative Advantage, which states that manufacturing of a product is best carried out in the country with the best relative cost position in that product. It does not cover the case where manufacturing a product allows you to gain control over the market for related products, nor does it cover the modern case where providing a service from a distance gives you the capability to expand that service into more complex and higher value added services. However, the fact that it isn’t valid in all circumstances does not make the Doctrine invalid altogether; if manufacturing is moved to a low-income country, the increased income in that country will itself increase demand for the goods made in the high income country.
To illustrate the reality of the U.S./China economic relationship, and the folly of starting a trade war with China, consider the automobile industry, a sector in which protectionists like rattling chains about China’s inevitable world dominance. In reality, the picture is quite different, a difference that is of great importance, since the Chinese automobile market already exceeds 4 million units per annum, and is projected to reach 20 million per annum by 2020. In the Chinese market, the great success story of the last few years has been a foreign import – Buick.
Of General Motors’ 473,000 units sold in China in 2004, up 27 percent over the previous year, 253,656 were Buicks, largely manufactured by GM’s Chinese joint venture, Shanghai Automotive. China is rapidly closing in on the United States, where 310,000 were sold, as the world’s largest market for Buicks. GM’s sales now exceed 10 percent of the Chinese market, and it is breathing down the neck of the market leader Volkswagen, very largely owing to the success of the Buick brand.
China is not buying Asian-style mini-cars with a Buick label; Chinese buyers want the traditional values associated with the Buick brand (in this it may be thought that they show better automotive taste than wealthy blue-state Democrat campaign donors, notoriously fans of Mercedes and Lexus.) The last Emperor of China, Pu Yi, owned a 1932 Buick Tudor DeLuxe limousine, and the brand has since that time, through 70 years of totalitarianism and war, epitomized big-car luxury and success to the Chinese people. Judging from the picture available on the web, the Chinese market’s top-of-the-line Buick Royaum is more luxuriously fitted out than Buicks sold in the United States, with 2 televisions for rear seat passengers, set into the front seat head rests.
However efficient Chinese manufacturing, most of the value added in this heart-warming automotive success derives from General Motors’ global intellectual capital, and profitability reflects this, with Asia being GM’s most profitable region and China representing the largest element in GM’s Asian success. In other words a major U.S. corporation, in trouble at home, has managed to stake out a strong and highly profitable position in the world’s fastest growing market for its products. Looked at in this light, the moans of the protectionists make no sense at all.
The protectionist case against China received a further boost Thursday with the announcement of the Chinese state-owned oil company CNOOC’s $18.5 billion bid for Unocal of California. From China’s point of view, this is perfectly rational; as discussed here a few weeks ago the country has an enormous need for secure sources of oil as its consumption is increasing rapidly and is expected to continue doing so. A bid for a U.S. oil corporation that is substantial but not one of the world’s largest helps them to secure supply while, in a free market, posing no problems of principle for the U.S. authorities. In practice, market chatter appears to be that CNOOC’s bid for Unocal will be blocked, not a helpful development in the light of China’s perfectly clear need for additional energy sources and the lack of significant antitrust implications in the bid. If the bid is blocked without good business reasons, U.S./Chinese relations will be seriously damaged, and the chances of an all-out trade war greatly increased.
Rather than worrying excessively about outsourcing to China, there is a more dangerous problem currently facing the U.S. economy, for which legislators of both parties bear a considerable share of the responsibility. A statistic in Wednesday’s Washington Post is telling: the number of registered lobbyists in Washington DC has more than doubled in the last 5 years, from 16,342 to 34,785. The absolute numbers may not sound like much, except that, since the “starting salaries” for Washington lobbyists have risen to more than $300,000 per annum, salary costs alone for these parasites represent an outlay of more than $10 billion a year. True costs, including office space, entertainment and lavish campaign donations to favored politicians, must be a large multiple of this.
Since companies employing lobbyists expect a return on their investments, the distortions of the market to be expected from the lobbying community must be greater than its total cost, thus possibly in excess of a trillion dollars. This is entirely economically destructive activity, and it is most disquieting that it has doubled in 5 years, presumably owing to the hopelessly compromised McCain-Feingold campaign finance “reform.”
If the lobby’s size had doubled under an anti-business party, one could hope for a new election to restore the rule of the market, as to a certain extent happened after the Republican takeover of Congress in 1994. However, with the Republicans almost completely in control of all three branches of government since 2000 it is clear that lobbyist driven crony capitalism is hugely increasing its importance in the U.S. economy. Combine this increase with the continuing growth of personal injury lawsuits, the inexorable rise in health care costs and the rapid aging of the baby boomers, and you have an economy whose dead-weight overhead costs are spiraling out of control. It is this, not competition from China that should be exercising the minds of lawmakers worried about American jobs.
The NAF Forum later focused on the future for America’s middle class, and questioned why its living standards had been steadily declining as overall wealth increased. Threatening noises were made about the U.S. K-12 education system, second only to China as a bugbear. What wasn’t properly explored was the effect of mass immigration, legal and illegal, on the bottom end of the job market. If WalMart is paying wages that are insufficient to live on to a large proportion of its employees, it is nevertheless finding willing victims in today’s job market. The theory propounded by large employers of cheap labor that “nobody else will do” the jobs they offer is nonsense; most of their jobs are not exceptionally unpleasant and could easily be filled by domestic labor, but only at a higher wage level.
Paying higher wages would not make WalMart uncompetitive, because its competitors would also have to pay higher wages (though it might downsize the wave of luxury retailing and art galleries that has engulfed Bentonville, Arkansas.) Unlike software, it is impossible to outsource retailing, hairdressing, cooking or waiting tables to India or China, because these services need to be provided in locations where customers live. Hence a shortage of workers in these categories, which produced a rise in their wage levels, would depress consumption of the services slightly as prices rose, but would result in no significant outsourcing. Furthermore, the industrial worker who loses his $60,000 a year job when the factory closes will be much more able to survive if there are a plethora of local service jobs available, paying wages not too horrendously below the job he has lost.
This is the difference between trade and migration, and is why liberal protectionists who protest free trade are hypocritical if at the same time they favor high immigration. Whereas free trade threatens jobs in a minority of industries, where goods or services can be produced more cheaply overseas (and produces jobs in other industries such as automotive design, where new foreign markets open opportunities) free immigration threatens jobs throughout the economy, but especially at the low skill level. A barber in Boston is no more skilled than a barber in Bangalore, but he is able to command a higher wage because of his location. Allow the Bangalore barber to move to Boston, and you have destroyed the Boston barber’s livelihood in a way that could never happen through free trade alone.
The supporter of protectionist politicians in Pennsylvania, Illinois, North Dakota or South Dakota understands this, and vehemently objects both to free trade and to high immigration. Unfortunately the politicians pay too much attention on trade, where the balance of economics points against the voters’ views, and little or no attention on immigration, where the voters’ views are all too painfully valid.
As usual, politicians have it precisely wrong.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.