Free trade has failed the U.S.

October 25, 2010|By Charles Campbell

Two countries — Germany and China — quickly recovered from the recession, while we continue to be mired in high unemployment, with an unsustainable internal debt and a massive foreign exchange deficit coupled to the prospects of a war over exchange rates. Top administration economic officials Christina Romer and Larry Summers are on their way back to academia, and former White House Budget Director Peter Orszag has left the scene, leaving the economy in a shambles. It would be propitious to take a step back and find out why other nations are succeeding and we are failing.

The U.S.' most brilliant economist, Paul Samuelson, and Andy Grove, the godfather of technological innovation, reach the same conclusion about our problems: Solutions do not rely on currency realignment.

Wolfgang Stolper and Paul Samuelson developed models in the 1940s promoting free trade that became the cornerstone of U.S. industrial policy. Five decades later, Mr. Samuelson stunned his peers by suggesting that entire nations can lose from free trade. He wrote that Americans are still working but are in jobs that pay less and are shorn of benefits. His epiphany produced a view that as a whole the U.S. is relatively worse off because of free trade.

Andy Grove founded Intel in 1968 and sold microprocessors to IBM, Apple, Compaq, Dell and HP. These companies were the engine of economic growth through the 1980s, creating a tremendous need for highly skilled U.S. manufacturing employees. Mr. Grove recently talked about the stunning changes that have occurred over the last two decades: The U.S. still leads in innovation; however, companies are going offshore for manufacturing. As an example, 250,000 Foxconn employees in China at wages of $1 an hour produce Apple products and components which are assembled by 25,000 Apple employees in the U.S. Across the board, U.S. companies have 10 foreign employees or subcontractors for each U.S. employee.

U.S. high-tech companies still have a limited number of highly paid, added-value workers performing high-end innovation and final assembly, but the country also has masses of unemployed who will never work in manufacturing. Mr. Grove says that not only did we lose an untold number of jobs, but we broke the chain of experience that is so important in technological evolution.

Germany and China recovered rapidly because they have high rates of savings; manufacture goods; and run massive trade surpluses. Germany, which has a larger current account surplus than China, bristles at U.S. calls for limiting exports and artificially increasing consumption. China is expected to end 2011 with reserves in excess of $3 trillion and emerging economies as a whole will have about $6.8 trillion — 50 percent higher than before the economic crisis began.

Economic success stories in Japan, South Korea, Taiwan, Singapore and Hong Kong all have similar features. They have few natural resources; import raw materials; restrict imports of finished goods; limit foreign investment in local markets; obtain whatever foreign technology is necessary by any means; produce finished goods; and sell those goods to the U.S. All of these economies were built on the backs of unemployed, highly skilled U.S. citizens. The wealth of these nations was simply the difference between the cost of raw materials and the income from finished product sales to the U.S. These successful countries are examples of mercantilism at its finest.

Asian companies receive large grants, special tax breaks and guarantees against losses from underbidding competitors in massive foreign construction projects; and they cooperate with governments to advance their countries' position internationally.

China is now a rising world power and is a giant corporate state using mercantilism to its fullest. China now has dominant positions in the manufacture of telecommunication equipment as well as green technologies – wind turbines, solar panels and lithium ion batteries. Foxconn is the world's largest contract manufacturer of consumer electronics which has crushed U.S. high-tech manufacturing. The company has 920,000 employees in China and intends to hire another 400,000 by the end of 2011.

In 1970, U.S. technology was superior to that of every other nation in the world; we manufactured nearly everything we consumed; we were essentially self-sufficient in energy; we exported food; and we imported little of consequence.

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