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The economics of a global
empire
By Henry C K Liu
The
productivity boom in the US was as much a mirage as the
money that drove the apparent boom. There was no
productivity boom in the US in the last two decades of
the 20th century; there was an import boom. What's more,
this boom was driven not by the spectacular growth of
the American economy; it was driven by debt borrowed
from the low-wage countries producing this wealth. Or,
to put it a tad less technically, the economic boom that
made possible the current US political hegemony was
fueled by payments of tribute from vassal states kept
perpetually at the level of subsistence poverty by their
own addiction to exports. Call it the New Rome theory of
US economic performance.
True, exports can be
beneficial to an economy if they enable that economy to
import needed goods and services in return. Under
mercantilism and a gold standard, for example, an
economy that incurred recurring trade surpluses was
essentially accumulating gold which could reliably be
used for paying for imports in the future.
In
the current international trade system, however, trade
surpluses accumulate dollars, a fiat currency of
uncertain value in the future. Furthermore, these
dollar-denominated trade surpluses cannot be converted
into the exporter's own currency because they are needed
to ward off speculative attacks on the exporter's
currency in global financial markets.
Aside from
distorting domestic policy, the export sector of the
Chinese economy has been exerting disproportionate
influence on Chinese foreign policy for more than a
decade. China has been making political concessions on
all fronts to the US for fear of losing the US market
from whence it earns most of its foreign reserves, which
it is compelled to invest in US government debt. This is
ironic because according to trade theory, a perpetual
trade surplus accompanied with a perpetual capital
account deficit is not in the economic interest of the
exporting nation. China is not unique in this dilemma.
Most of the world's export economies face similar
problems. This is the economic basis of US unilateralism
in foreign affairs.
When Chinese exporters
invest China's current account surplus in dollar
financial assets, the Chinese economy will see no
benefit from exports as more goods leave China than come
in to offset the trade imbalance. True wealth is given
away by Chinese exporters for paper, at least until a
future trade deficit allows China to import an
equivalent amount of goods in the future. But China
cannot afford a balanced trade, let alone a trade
deficit, because trade surpluses are necessary to keep
the export sector growing and for maintaining the
long-term value of its currency in relation to the
dollar. The bulk of China's trade surpluses, then, must
be invested in US securities. This is the economic
reality of US-China trade.
The gap between the
perceived value of the accumulated fiat currency (US) of
the importing economy (US) and the value of that
currency when dollar-denonimated investments are finally
cashed in at market price represents the ultimate
difference in the quantity of goods and services
eventually received between the trading economies. Since
the drivers of trade imbalances are overvalued
currencies of the importer or undervalued currencies of
exporters, obviously the one-sided trade can only end
when the exporter has wasted away all its expandable
wealth, or the importer has run deficits to levels that
exceed the willingness of the exporter to accept more of
the importer's debt. Interest rate policies of central
banks are usually the culprit in this matter as they
drive investment flows in the direction of a high
interest economy, making necessary the perpetual trade
imbalance. Other forms of waste of wealth, such as
pollution, low wages and worker benefits, neglect of
domestic development and rising poverty in both export
and non-export sectors, are penalties assumed by the
exporter.
China exported 4.07 billion pairs of
shoes in 2001, up 2.55 percent from the previous year.
But the value of those exports, US$10.1 billion, was an
increase of only 2.48 percent over 2000. Actual value
growth per unit, then, was a negative. Guangdong
province is China's largest shoe-making region, with
annual production at around three billion pairs,
accounting for almost a third of the world's total.
Assuming the number of Chinese workers making shoes to
be constant, Chinese productivity dropped in the shoe
industry in 2001. The only way productivity could have
remained the same or improved would have been if the
Chinese shoe industry had cut workers, thus contributing
to China's growing unemployment problem.
Imports
from China are resold in the US at a greater profit
margin for US importers than that enjoyed by Chinese
exporters in production for export. In part, this has to
do with the inflated distribution costs in the importing
country (US) because of overvaluation of its currency,
and the higher standard of living in the US made
possible partly by Chinese exporter credit. Thus a $2
toy leaving a Chinese factory is a $3 part of a shipment
arriving at San Diego. By the time a US consumer buys it
for $10, the US economy registers $10 in final sales,
less $3 in imports, for a $7 addition to gross domestic
product (GDP). The GDP gain to import ratio is greater
than two, in this case two-and-a-third. The GDP gain to
export ratio is zero if the $2 export price becomes part
of the importer's capital account surplus. If 50 percent
of the $2 export price is used for paying return to
foreign capital, then the ratio is in fact negative.
The numbers for other product types vary
greatly, but the pattern is similar. The $1.25 trillion
of imports to the US in 2000 are directly responsible
for some $2.5 trillion of US GDP, almost 28 percent of
its $9 trillion economy.
The $400 billion of
Chinese exports are directly responsible for a loss of
$800 billion in Chinese GDP of $1 trillion as compared
to a GDP if that export were consumed domestically. In
other words, if it were to not export at all, China
would almost double its GDP by redirecting the
equivalent productivity toward domestic development. On
a purchasing power parity basis (PPP), the GDP loss to
exports would be four times greater. The higher the
trade surplus in China's favor, meaning more goods and
services leaving China than entering, the more serious
its adverse impact on China's GDP.
Viewing the
greater margins available in the importing country as a
result of a currency valuation imbalance and
understanding that retailing and distribution are
operationally less efficient relative to manufacturing,
it can be observed that imports raise apparent
productivity because sales per employee increase as one
goes from the factory floor towards the final consumer.
Also, the closer in function the factory floor is to the
retail space, the higher its apparent productivity.
Through marketing and proximity to customer, a seller
can gain advantage in the assembly of imported major
parts to order.
Thus a US assembler who
out-sources its content parts can win final sales away
from the offshore integrated manufacturer who makes the
same parts and assembles them abroad. In the high
technology arena, time to market of design innovation is
key. By hiding costs through the use of employee stock
options for compensation (an issue of current debate in
US corporate governance), a local in the importing
country can use the high valuation of his stock, driven
by creative accounting and artificially low production
costs and interest rates at the exporter country, to
raise funds to further subsidize the production costs of
the final product, be it software or hardware. The
content of the product will increasingly come from low
wage, low margin exporting nations, and the out-sourcing
assembler's manufacturing involvement may be little
beyond snapping out-sourced parts in place, advertised
ad nauseum as a US brand. Dell is a classic example, as
is Disney's licensing empire.
To quantify the
order of magnitude of the effect of imports on apparent
US aggregate productivity, a direct relationship to the
trade deficit can be observed. The productivity gain
observed is not as strong as presented by aggregate
data. The 4 percent productivity rise cited in US
government statistics can be primarily attributable to
sharp import increases. The gain in net productivity is
much smaller, on the order of 1.8 percent, since the
technology revolution began affecting the economy a
whole decade earlier. Much of the rest of the
improvement has to do with normal cyclical behavior of
productivity, the result of normal rise in capacity
utilization during boom times from a bubble economy.
There is another measure of increases in trade
flow volume that stems from the appreciation of the
trade-weighted dollar. The trade-weighted dollar measure
shows improvement consistently because of the attempts
of European, OPEC and Japanese holders of US debt to
retain value in the dollar by creating
dollar-denominated debt in emerging economies that
actually produce something, as opposed to the US which
gains foreign income primarily through the use of
international protections for intellectual property.
For the purpose of this discussion, one need
focus only on the broad trade-weighted dollar index
being put in an upward trend, as highly indebted
emerging market economies attempt to extricate
themselves from dollar-denominated debt through the
devaluation of their currencies. The purpose is to
subsidize exports, ironically making dollar debts more
expensive in local currency terms. The moderating impact
on US price inflation also amplifies the upward trend of
the trade-weighted dollar index despite persistent US
expansion of monetary aggregates, also known as monetary
easing or money printing.
Adjusting for this
debt-driven increase in the value of dollars, the import
volume into the US can be estimated in relationship to
these monetary aggregates. The annual growth of the
volume of goods shipped to the US has remained around 15
percent for most of the 1990s. The US enjoyed a booming
economy when the dollar was gaining ground, and this
occurred at a time when interest rates in the US were
higher than those in its creditor nations. This led to
the odd effect that raising US interest rates actually
prolonged the boom in the US rather than threatened it,
because it caused massive inflows of liquidity into the
US financial system, lowered import price inflation,
increased apparent productivity and prompted further
spending by US consumers enriched by the wealth effect
despite a slowing of wage increases.
This was
precisely what Federal Reserve Board chairman Alan
Greenspan did in the 1990s in the name of pre-emptive
measures against inflation. Dollar hegemony enabled the
US to print money to fight inflation, causing a debt
bubble. For those who view the US as the New Roman
Empire with an unending stream of imports as the spoils
of war, this data should come as no surprise. This was
what Greenspan meant by US "financial hegemony".
The transition to offshore production is the
source of the productivity boom of the "New Economy" in
the US. The productivity increase not attributable to
the importing of other nation's productivity is much
less impressive. While published government figures of
the productivity index show a rise of nearly 70 percent
since 1974, the actual rise is between zero and 10
percent in many sectors if the effect of imports is
removed from the equation. The lower values are
consistent with the real-life experience of members of
the blue collar working class and the white collar
middle class.
This era of declining reward for
manual effort coincides with the Reagan shift to having
workers pay for their social benefits, while promoting
heavy subsidies of corporations, particularly in the
earlier stages of corporate growth, through pro-business
tax policies and regulatory indulgence.
Historical timelines for the actual levels of
productivity in the US may be traced back to the
introduction of computer-assisted accounting by IBM and
later EDS in the late 1960s. This cleared the
labor-intensive accounting pools of the large
corporations and mammoth government agencies. Automation
of scientific work began even earlier and entered
mainstream engineering by the mid 1970s. By 1980, the
ordering-inventory and inter-corporate billing systems
were computerized to a great extent, as had occurred in
banking and finance in the 1970s. By the 1990s,
computerized trading and market modeling actually
transformed market efficiency into systemic risk of
unprecedented dimensions.
The current process is
one of standardization and inclusion, as well as
reintroduction of regulatory restraint. Inventory
management in the current "just in time" manner was not
attractive until high US real interest rates made the
holding of inventory unattractive. Prior to this, during
periods of real inflation, inventory was a profit
center, not a cost problem, thanks to FIFO (first in,
first out) accounting where inflation would produce an
annual statement of higher ending inventory value, a
lower cost of goods sold and a higher gross profit. Now
that the world has organized away the inventory that
cushions supply disruptions and price inflation, we are
quite defenseless against them. Never before has
Murphy's Law (if something can go wrong, it will) a
better chance to demonstrate itself with a cruel spate
of price inflation.
The result of this
distortion driven by the monetary system is a decline in
real living standards of producers in all of the
exporting and indebted world, and in the US. Indeed,
reward has been divorced from real effort and reassigned
to manipulators. There have been enormous strides in
productivity around the globe, but few of them came in
the US. It has been the seigniorage of the dollar
reserve system granted to the US without economic
discipline that allowed the import of productivity from
abroad and the superficial appearance of prosperity in
the US economy.
World trade has been shrinking.
The conventional wisdom of market fundamentalism is that
the global economy is slowing to work off excess debt,
causing global trade to shrink temporarily. The world is
waiting for a rebound in the US economy so that other
countries can again export themselves out of recession.
Yet a case can be made that global trade is
shrinking because it transfers wealth from the have-nots
to the have-too-muches, and after two decades, the
unsustainable rate of wealth transfer has slowed,
leading to slower economic growth worldwide. Those
economies that have been dependent on exports for growth
will do well to understand that the recent drop in
exports in more than a cyclical phenomenon. It is a
downward spiral unless balanced trade is restored so
that trade is a supplement to domestic development
rather than a deterrent. Regions like Asia and Latin
America should restructure their export policies to
focus on intra-regional trade that aim at development
instead of those that transfer wealth out of the region.
Places like Shanghai, Hong Kong, Singapore and Tokyo
should stop looking for predatory competitive advantage
and move toward symbiotic trade policies to enhance
regional development.
The purpose of the $30
billion IMF loan of Brazil - an unprecedented figure -
is not so much to help the Brazilian economy escape its
debt trap as it is to bail out US transnational banks
holding Brazilian debt. The net result is to force the
Brazilian economy to export more wealth to the tune of
$30 billion plus interest on top of the mountains of
debt it already has and could not service. Brazil would
be better off defaulting as Russia did. Economist Paul
Krugman lamented in his New York Times column that he
mistakenly bought into the Washington consensus and now
his confidence that market fundamentalists had been
"giving good advice is way down".
The line
between honest mistakes in pushing the regulatory
envelope and fraud is now debated regarding corporate
finance and governance in the US, and many executives
and their financial advisors are being charged with
criminal liability. Are economists who knowingly pushed
the ideological envelope beyond the limits of reality
above the laws of conscience?
Henry C K
Liu is chairman of the New York-based Liu Investment
Group
(©2002 Asia Times Online Co Ltd. All
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