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Trade With China and India Will Not Collapse America's Economy

Politics / US Economy Aug 27, 2011 - 01:07 PM GMT

By: Gary_North


Best Financial Markets Analysis ArticleFor over half a century, I have read warnings that free trade is a threat to America. The freer it gets, the more we are told that slave labor in Asia is threatening the workers of America.

We hear calls for fair trade. Who is to decide what is fair trade? Congress. Ah, yes: Congress. The source of fairness if ever there was one. No special interests there, putting their PAC-filled fingers on the balance scale of justice.

The evil dragon used to be Japan. Now it's China. India will get its turn soon enough. Americans are supposedly out of work because of China.

The fact is, Chinese imports are marginal to the U.S. economy. How marginal? You tell me. (Then I will tell you.) What percentage of Americans' personal consumer expenditures (PCE) is met by imports from China? Take a guess. Here was the correct answer in 2010.

Chinese goods account for 2.7% of US PCE, about one-quarter of the 11.5% foreign share. Chinese imported goods consist mainly of furniture and household equipment; other durables; and clothing and shoes. In the clothing and shoes category, 35.6% of US consumer purchases in 2010 was of items with the "Made in China" label.

Obviously, if a pair of sneakers made in China costs $70 in the United States, not all of that retail price goes to the Chinese manufacturer. In fact, the bulk of the retail price pays for transportation of the sneakers in the United States, rent for the store where they are sold, profits for shareholders of the US retailer, and the cost of marketing the sneakers. These costs include the salaries, wages, and benefits paid to the US workers and managers who staff these operations.

You probably guessed that this figure was much higher. Because we see "Made in China" stickers on our clothes, we imagine that Chinese exports are a major factor in replacing jobs in the USA. If you are employed as a low-wage textile worker in South Carolina, you feel the pain. But you are probably not a low-wage worker making socks.

As an aside, why should there be a Federal law requiring "Made in China" (or anywhere else) on products we buy? Do you think this may be the result of special-interest legislation from some political action committee? As a consumer, I don't care. I just want cheap socks, so that I can save money to invest, or spend on some other service or product, which is probably made in the USA.


Why is urban Asia growing richer? Mostly, because Asian governments have moved away from the older state economic controls. They have freed up their economies.

China is the obvious example. It has moved from Communist economics under Mao to mercantilist economics, funded by the central bank. This is surely better for the Chinese people than Communist economics. That system killed at least 60 million people. It is far better for the government to subsidize one sector of the market economy – the export sector, which is relatively small – than to turn the entire economy over to the state sector.

We think of the export sector as small. But China has 1.3 billion people. There are no internal regional tariffs. It is the largest free trade zone on earth. China must feed itself, house itself, transport itself. To imagine that the export sector is the main sector is a mistake. It is the most innovative sector. It is where growth is transferred from an elite to the masses. But China is a huge nation. Do not forget that.

There is something else. For any sector of an economy to receive an operationally significant subsidy from the government, it has to be a small sector. There has to be a much larger sector in order to siphon off enough funds to make the subsidized sector profitable, long-term. Put in the form of a metaphor, a parasite needs a large, healthy host. When the parasite gets too big, it kills the host. This is simple to understand, but people don't make the connection to economics.

The free market and the price system rewards people who implement ideas that customers are willing to pay for. People with good ideas have an incentive to implement them. This benefits customers. With a population of 1.3 billion, there are a lot of people with good ideas.

Then toss in India, with its 1.15 billion people. All those people. All those ideas.

The thought of the sheer numbers of productive, creative people out of almost three billion cheers me up as a customer. Of course, the same idea depresses people with widely used products that are likely to be replaced. But all of life is about replacement. We replace one condition for another until the day comes when we are replaced. Dust to dust, and all that. But, in the meantime. . . .

To imagine that all those Chinese and Indians are waiting breathlessly for a few of us Westerners to buy something from them, is a bit silly. Besides, one reason why we can afford to buy something from them is because the US Treasury has sold debt to Chinese and Indian central banks. They created the money out of thin air, bought dollars, and then bought US government IOUs.

Yet from what I read in some "sky is falling" websites – the sky is tipping, but not falling – the United States economy is headed for a collapse because Asian central banks are lending money to our government. Have you heard this?

I am here to tell you that we are facing major economic problems. A big one is the fact that the Federal government is getting bigger, because Asian central banks keep lending it money at cheap rates. Then the government spends this money.

That's not what the collapse-is-imminent sites say.


Here are some arguments from a site that predicts collapse. Here are some of the reasons.

Our politicians simply do not care that America is bleeding jobs. Amazingly, even with rampant unemployment plaguing this nation, Obama administration officials continue to declare that it is okay that we are losing manufacturing jobs because a lot of cheaper products are things that "we don't want to make in America" anyway.

The politicians talk about little else than creating jobs, as if the government had the power to create jobs. The government has the power to reduce business regulations, reduce taxation, and let entrepreneurs create jobs.

Yes, we are losing manufacturing jobs. We have been losing them since 1950. How many Americans send their kids into a factory job instead of college. "Son, I want you to work in a factory. Forget about college." No? I thought not. (Actually, a factory job in a high tech factory is probably a better idea these days than a B.A. in sociology.)

What the handwringers never mention is that the USA is the largest manufacturing nation on earth, with 20% of the world's total manufacturing output. Wikipedia reports: "The United States is the world's largest manufacturer, with a 2007 industrial output of US$2.69 trillion. In 2008, its manufacturing output was greater than that of the manufacturing output of China, India, and Brazil combined, despite manufacturing being a very small portion of the entire US economy as compared to most other countries."

Second, they also do not tell you that the percentage of all Western nations devoted to manufacturing has fallen since 1980 on average from 23% of GDP to about 17%. The USA is about 13%. In other words, this has been a steady decline for three decades. Collapse? I don't think so.

Unemployment these days comes mainly in the construction sector. This is not a sector threatened by imports. What has hurt this sector is Federal Reserve policy, which created a housing bubble and then popped it.

Here is another reason.

State and local governments all over the country are dead broke, and an atmosphere of austerity is sweeping the nation. Right now state and local governments are slashing jobs at an unprecedented rate.

This is bad? The states are firing people? This means less bureaucracy. I see this as one of the greatest developments in my lifetime. The states' payrolls are shrinking.

In the past, government jobs were considered to be very secure and they definitely paid a lot higher than average. But now that era is coming to an end, at least on the state and local government levels.

According to the Center on Budget and Policy Priorities, state and local governments have eliminated more than half a million jobs since August 2008. UBS Investment Research is projecting that state and local governments in the US will cut 450,000 more jobs by the end of 2012.

Or, as another commentator remarked in a different context, "Free at last! Free at last. Thank God almighty, we're free at last!"

The we are informed about the following:

As I have written about so many times before, the "global economy" is really bad for American workers. When we merged our economy with the economies of nations where it is legal to pay slave labor wages, we made it inevitable that we would start losing massive amounts of jobs.

I have heard this for 50 years. Slave wages. Folks, slave wages are paid to unproductive people. It was what Communist governments paid workers. Those economies exported raw materials and tanks. So, with the end of Communist control over China, people are being paid free market wages. The result: exports. Yet we are told that slave wages are being paid. I see. Freedom is slavery.

If this is bad for American workers, let American workers quit buying imports. What's that? You say they won't stop buying imports? You say they need to be told by men with badges and guns not to buy imports? You say that America's workers need the government to enforce what's good for Americans? I see. Slavery is freedom.

Unfair trade is absolutely killing our economy. It would be one thing if the US was running a massive trade deficit solely because we were incompetent. But the truth is that a big factor is that a number of our "trade partners" are economic predators that are purposely trying to prey on us. . . .

China massively subsidizes their biggest corporations, they brazenly steal technology from anyone that they can, they openly manipulate exchange rates and they allow their workers to be paid slave labor wages.

The Chinese government subsidizes which corporations? The ones that are export-driven? Or the state-owned factories that don't produce anything worth exporting? What percentage of the export sector is subsidized? By how much?

What does it matter? With only 2.7% of consumer expenditures going for Chinese-made goods, what does it matter how much of a subsidy corporations get?

The United States government subsidizes all sorts of projects. The Chinese government has learned this from the USA, where Keynesians reigns and where agriculture is regulated. I see the pot calling the kettle black.

Today, we spend about 4 dollars on imports from China for every 1 dollar that China spends on imports from us. China now even makes more beer than we do. Even the new Martin Luther King, Jr. Memorial on the National Mall was made in China.

So what? They produce what they are good at. We produce what we are good at. We can't compete in certain areas. You can't compete in most areas. You do a few things well enough to be employed. So do I.

Do you care what percentage of goods people in your state sell to people in some other state, vs. how much they buy from people in your state? Of course not. Then why should you care about China? What difference does an invisible judicial line make regarding the profitability of your trade with someone else? Why do you care whether the other guy is named Wong or Brown? UPS will still deliver. So will FedEx.

Until our politicians start insisting on a level playing field, all of this is going to continue.

Yes, I see! We need more regulations! We need more people with guns and badges making things fair for us. Slavery is freedom.

Small businesses are traditionally one of the primary engines of job growth in this country. But right now, small businesses all over America are having a really hard time getting anyone to loan them money. A big reason for this is that the Federal Reserve is actually paying banks not to make loans. Unfortunately, if small businesses can't get the money that they need, then they can't hire people.

The critic fails to mention interest rates. The Federal Reserve pays a maximum of 0.25% on excess reserves. Businesses borrow at 7% or more. So, this guy thinks that 0.25% is a more powerful incentive than 7%. I see. Loss is profit.

Fact: small businesses are not borrowing because they don't want to borrow. This is the report, month after month, of the National Federation of Independent Business, a lobbying group for small businesses. For July, we read:

Four percent reported financing as their #1 business problem, so for the overwhelming majority, "credit supply" is not a problem. Ninety-two (92) percent reported that all their credit needs were met or that they were not interested in borrowing. Eight percent reported that not all of their credit needs were satisfied, and 51 percent said they did not want a loan. . . .


The problem is not China. It is not India. It is not imports. The problem is the endless call from each special-interest group for the government to Do Something to Save America. The problem is that the government has done way to much for too long, all in the name of Doing Something to Save America.

Gary North [send him mail ] is the author of Mises on Money . Visit . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

© 2011 Copyright Gary North / - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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