Failed Trade Policy: Confessions from Our Guy Who Negotiated China’s Entry into the WTO
Robert Cassidy, former assistant U.S. trade for Asia and for China, and Bill Clinton’s point man in negotiating China’s entry into the WTO, now admits the agreement was flawed from the start, benefiting two groups: multinationals that moved to China and financial firms that financed those investments.
The beneficiaries of the agreement with China fall into two groups: multinational companies that moved to China and the financial institutions that financed those investments, trade flows, and deficits.
Sourcing from China, whether from direct investment or through licensing arrangements, has allowed companies to cut costs and increase profits, as reflected in increased corporate profits and the surge in the U.S. stock market.
Exactly what this writer has been saying ad nauseum.
Look down our blog role. What blogs have addressed these issues? Which have followed the party line?
Many economists focused merely on the danger of official inflows: Central bank purchases of Treasury notes, making us the premier debtor nation.
What they have failed to see it was the vast flow of cash to our financial institutions, a flow that was in part responsible for the housing bubble. There is a direct link between globalization and our housing bubble.
Financial institutions now had plenty of cash to lend. That cash was the seed money for the housing bubble. Americans have been trained to believe unthinkingly in credit. Needed were the right conditions: low interest rates to entice the foolish and no regulations to protect them.
The Fed supplied the first. Innovative and unregulated financing provided the second. Credit card companies, already seeing how the game was to be played, with the help of Congress, tightened the noose on consumers.
On the stock market front, sourcing to China created a booming market for companies and investors. Those at the top of the pecking order became unimaginably rich. Of course, working wages stagnated. Economists told us that we had to become more competitive, more educated.
The fleecing of America continued.
Outsourcing. Outsourcing. Labor, tax, and environmental arbitrage. This problem is not merely a Republican or neo-conservative creation. Democrats, Bill Clinton and company, have been party to it as well. And they have studiously avoided the real issue.
China played the game well. It had a plan; we had merely greed.
China has used its vast and poor population as an export machine, all to accomplish its next great leap forward.
Currency manipulation has been, of course, central.
Using China as an example once again, proponents of the free trade model argue that China has a competitive advantage in wage rates that makes it ideal as the global manufacturing center that it has become. A closer examination, however, reveals that China has adopted an export-led development strategy, the centerpiece of which is a currency that is undervalued by 20-80%, with the consensus leaning toward 40%. Thus China’s wages, in U.S. dollar terms, are 40% cheaper than they would have been if the currency were allowed to freely float. Similarly, foreign investors receive a 40% subsidy to develop operations in China. To add insult to injury, our exports are taxed at an additional effective 40% rate.
Initially, foreign firms enjoyed either a 15% corporate tax rate or a ten-year tax holiday, while indigenous Chinese firms paid a 30% rate. Doesn’t this fact tell us something about who profited from China’s exports? That loophole is slowing being closed. But the horse is out of the barn. China focused rapidly growing its infrastructure. Foreign firms in China accounted for over 60% of its exports; in IT, the percentage is closer to 80%. China has no immediate interest in becoming a consuming nation.
Globalization has been designed to benefit those at the top. Congress, the WTO, the World Bank, and hordes of economists have all been complicit. Those who have not addressed the problem directly are equally complicit.
Labor and tax arbitrage have been amply outlined above. How has environmental arbitrage worked? Many multinationals claim they are not directly responsible for China massive pollution problems. Perhaps not, but they have benefited from it. All that rapidly built infrastructure enabled their export machine…as did the required massive increase in energy. The result has been monstrous pollution.
Welcome to how globalization was designed.