Reports from the Economic Front

a blog by Marty Hart-Landsberg

Category Archives: Europe

President Trump’s Hollow Job Promises

President Trump’s election success rested to a considerable degree on his pre-election attack on globalization and verbal pledge to bring manufacturing jobs back to the United States. However, as I argued in a previous post, there is no reason to believe that President Trump is serious about wanting to restrict corporate mobility or fashion new, more domestically-centered, worker-friendly trade relations.

In fact, several of his appointees to key economic policy positions are people whose past work was promoting the very globalization he criticized.

Still, there are some in the labor and progressive communities who continue to hold out hope that they can find common ground with the Trump administration on trade.  Unfortunately, it appears that these people are ignoring what we do know about the nature of existing manufacturing jobs in the globalized industries that President Trump claims he will target for restructuring.  Sadly, the experience of workers in many of those jobs reveals the hollowness of Trump’s promises to working people.

The Southern Strategy of the Automobile Industry

The automobile industry, one of the most globalized of US manufacturing industries, offers a powerful example of the dangers of thinking simply about employment numbers. As an Economic Policy Institute report describes:

Political and market pressure on Japanese and European (and later, Korean) manufacturers to reduce imports to the United States has led to a rising number of “transplants” supplying auto components and assembling autos.

Initially, the transplants operated in the Midwest, including assembly plants in Illinois (Mitsubishi), Michigan (Mazda), Ohio (Honda), and Pennsylvania (Volkswagen), along with California (Toyota’s joint venture with General Motors, now a Tesla facility). More recently, however, the growth has been in Southern states, including assembly plants in Alabama (Honda, Hyundai, and Mercedes-Benz), Georgia (Kia), Kentucky (Toyota), Mississippi (Nissan and Toyota), South Carolina (BMW and Mercedes-Benz), Tennessee (Nissan and Volkswagen), and Texas (Toyota).

As a result of these trends, the weight of motor vehicle manufacturing employment (including parts suppliers) in the United States has shifted from the Midwest to the South.  And what kind of jobs has this investment brought?  The title of a Bloomberg Businesweek article –- Inside Alabama’s Auto Jobs Boom: Cheap Wages, Little Training, Crushed Limbs – sums it up all too well.

As the article explains:

Alabama has been trying on the nickname “New Detroit.” Its burgeoning auto parts industry employs 26,000 workers, who last year earned $1.3 billion in wages. Georgia and Mississippi have similar, though smaller, auto parts sectors. This factory growth, after the long, painful demise of the region’s textile industry, would seem to be just the kind of manufacturing renaissance President Donald Trump and his supporters are looking for.

Except that it also epitomizes the global economy’s race to the bottom. Parts suppliers in the American South compete for low-margin orders against suppliers in Mexico and Asia. They promise delivery schedules they can’t possibly meet and face ruinous penalties if they fall short. Employees work ungodly hours, six or seven days a week, for months on end. Pay is low, turnover is high, training is scant, and safety is an afterthought, usually after someone is badly hurt. Many of the same woes that typify work conditions at contract manufacturers across Asia now bedevil parts plants in the South.

“The supply chain isn’t going just to Bangladesh. It’s going to Alabama and Georgia,” says David Michaels, who ran OSHA for the last seven years of the Obama administration. Safety at the Southern car factories themselves is generally good, he says. The situation is much worse at parts suppliers, where workers earn about 70¢ for every dollar earned by auto parts workers in Michigan, according to the Bureau of Labor Statistics. (Many plants in the North are unionized; only a few are in the South.)

In 2014, OSHA’s Atlanta office, after detecting a high number of safety violations at the region’s parts suppliers, launched a crackdown. The agency cited one year, 2010, when workers in Alabama parts plants had a 50 percent higher rate of illness and injury than the U.S. auto parts industry as a whole. That gap has narrowed, but the incidence of traumatic injuries in Alabama’s auto parts plants remains 9 percent higher than in Michigan’s and 8 percent higher than in Ohio’s. In 2015 the chances of losing a finger or limb in an Alabama parts factory was double the amputation risk nationally for the industry, 65 percent higher than in Michigan and 33 percent above the rate in Ohio.

The article provides several stories of low paid workers forced to work in unsafe conditions who suffered devastating injuries.  “OSHA records obtained by Bloomberg document burning flesh, crushed limbs, dismembered body parts, and a flailing fall into a vat of acid. The files read like Upton Sinclair, or even Dickens.”

The Story of Reco Allen

Here is one story from the article: in 2013 Reco Allen, a 35 year old father of three, with a wife working at Walmart, took at $9 an hour job with Surge Staffing, a temp agency that provides workers to Matsu Alabama, a Honda parts supplier.  Allen sought and was given a janitorial position at Matsu.  But after six weeks on the job, he was pressured by a supervisor to finish his shift by working on a metal-stamping press.  Matsu was in danger of not meeting its parts quota and the company “could have been fined $20,000 by Honda for every minute its shortfall held up the company’s assembly line.”

Allen received no training on operating the machine.  Moreover, there were known problems with the vertical safety beam that was supposed to keep the machine from operating if a worker was in danger of being caught in the stamping process.  Tragically, Allen’s arm was indeed caught by the die that stamped the metal parts.  As Businessweek reports:

He stood there for an hour, his flesh burning inside the heated press. Someone brought a fan to cool him off. . . . When emergency crews finally freed him, his left hand was “flat like a pancake,” Allen says, and parts of three fingers were gone. His right hand was severed at the wrist, attached to his arm by a piece of skin. A paramedic cradled the gloved hand at Allen’s side all the way to the hospital. Surgeons removed it that morning and amputated the rest of his right forearm to avert gangrene several weeks later.

The company had been told by the plant’s safety committee several times that the machine needed horizontal as well as vertical safety beams. In fact, one year before Allen’s accident, another worker suffered a crushed hand on the same machine.  Moreover, the company’s treatment of Allen was far from unusual.  Matsu “provided no hands-on training, routinely ordered untrained temps to operate machines, sped up presses beyond manufacturers’ specifications, and allowed oil to leak onto the floor.”

And what happened to the company?  They received a $103,000 fine from an Occupational Safety and Health Review Commission.

The Businessweek article includes several other stories of workers maimed because of unsafe work conditions at firms with long histories of safety violations.  And they all ended in much the same way: with corporations paying minimal fines.  And, apparently with little change in corporate behavior.

Known Knowns

We know that most employers will push production as hard as they can to cut costs, with little regard for worker safety.  We also know that union jobs are better than non-union jobs in terms of wages and benefits, and safety.

We also know that President Trump is taking steps to weaken labor laws and unions, as well as gut federal and state agencies charged with protecting worker health and safety and the environment.

Thus, even if President Trump does succeed in enticing some globalized corporations to shift parts of their respective production networks back to the US, the experience of the auto industry demonstrates that the resulting job creation is unlikely to satisfy worker demands for safe, living wage jobs.

In sum, no matter the campaign rhetoric, and no matter the twists and turns in policy, it should be clear to all that President Trump is committed to an anti-worker agenda.

China’s Downward Growth Trajectory

China remains one of the most dynamic and important growth centers in the world economy.  The country is the single largest contributor to world GDP growth, accounting for almost 40 percent of global growth in 2016.  As I argued in a previous post, China’s rise owes much to its post-1990 embrace of an export-led growth strategy and resulting restructuring as the premier assembly/production base for transnational capital’s East Asia-centered cross-border production networks.

China recorded an unprecedented average rate of growth of nearly 10 percent over the years 1978 to 2008.  However, the slowdown in international trade and continuing economic difficulties in the advanced capitalist countries some seven years after the end of the Great Recession signals a significant change in the global economic environment.  China’s rate of growth has been steadily falling.  But Chinese leaders claim that the country has significantly lessened its trade dependence and begun a successful transformation to a more domestically centered economy.  They speak confidently of achieving an average rate of growth of 6.5 percent over the next five years.  I am dubious that such a transformation is taking place and that the target growth rate can be achieved.  If Chinese rates of growth do continue to fall, as I expect, perhaps to the 2-4 percent range, internal class pressures will likely build for a radical change in China’s current social and economic policies.  And, given China’s key position in the international economy, its slowdown will likely also have important negative consequences for the growth and political stability of many countries, especially those in East Asia, Latin America, and Sub Saharan Africa.

China’s Growth Trajectory

The chart below shows China’s growth performance since 1961.  From 1991 until 2015, the country’s yearly rate of growth never fell below 7.3 percent.  In ten of those years, Chinese GDP grew by at least 10 percent.   With this record as backdrop, the recent downturn in China’s economy stands out.  Not only did the country’s rate of growth fall to 6.9 percent in 2015, a 25 year low, it fell again, to an estimated 6.6 percent in 2016.  And, as noted above, the Chinese government has lowered its target growth rate to an average 6.5 percent for the next five years.

gdp-growth

Moreover, as the chart below highlights, China’s growth over the last few years has consistently fallen short of consensus forecasts.

forecasts

Of course, a slowdown in growth would have been hard to avoid, given China’s reliance on international trade and the severity of the Great Recession and weak post-Recession recovery in the advanced capitalist world.  Still, at the time of the crisis, it appeared that the Chinese economy would just power through the recession.  For example, the economy recorded growth of 9.7 percent in 2008, 9.4 percent in 2009, and 10.6 percent in 2010.   (In fact, a significant minority of economists pointed to this performance to argue that China’s trade dependence had been vastly overstated—more on this below.)  It is now clear that this was a temporary, stimulus-driven, growth spurt and not sustainable. However, the Chinese government, as well as many analysts, are now claiming that the Chinese economy is finally undergoing a long-delayed rebalancing away from its past reliance on external demand.  New policies designed to boost domestic consumption will, they believe, produce a more stable and egalitarian Chinese economy.  And while these policies are unlikely to generate the extraordinary growth rates of the past, they will allow the Chinese government to meet its current growth target and the country to continue to anchor world growth.

I disagree with this consensus.  As far as I can tell, the Chinese government has not achieved (or even pursued, for that matter) a meaningful rebalancing of the Chinese economy.  Thus, I expect the country’s rate of growth to continue to fall well below the target 6.5 percent growth rate.  To understand why I disagree with the consensus requires that we first investigate the Chinese growth experience.

The Chinese Growth Experience

The Chinese economy has gone through several major transformations.

Here I focus on post-1990 developments because it is in this period that the Chinese economy gradually becomes enmeshed in transnational capital’s accumulation dynamics and, as a result, a major force in the global economy.  The Chinese government’s decision to marketize the country’s economy and then privatize state enterprises came at roughly the same time that transnational capital was aggressively looking to internationalize its operations through the establishment of cross border production networks.  The two developments intertwined, and the consequence was that China, with the support of the Chinese state, gradually became the central player in East Asia’s regionally structured production-export networks.

We can see, in the chart below, the steady increase in China’s merchandise exports.  The major acceleration took place after 2001, which is when China joined the WTO.  In 2015, Chinese exports declined.

exports

The following chart puts this export growth in perspective, by showing the rise in China’s exports relative to the growth of the country’s GDP.  The export ratio climbed from 14 percent in 1990, to 21.2 percent in 2000, before reaching its peak in 2006 at a whopping 37.2 percent.  By 2015, the ratio had fallen back to a still considerable 22.1 percent.

exports-to-gdp

The next chart shows the movement in China’s current account balance (which is dominated by movements in the trade balance) as a percent of the country’s GDP.    The current account ratio rose from a relatively insignificant 0.22 percent in 1995, to 1.7 percent in 2000, before dramatically climbing in the period following China’s 2001 membership in the WTO.  The current account ratio went from 2.4 percent in 2002, to 8.4 percent in 2006, before peaking at an extraordinary 9.9 percent in 2007.  The current account ratio rose from 2014 (2.6 percent) to 2015 (3 percent) despite the absolute decline in exports, because imports fell by more.

current-account

To state the obvious: it takes a lot of investment to produce these trade numbers.  Factories have to be built and machinery purchased.  Transportation networks–highways, ports, rail lines, airports–have to be built.  Urban infrastructure—communication, energy, water, and waste systems as well as worker housing—has to be constructed.  We can get some idea of the scale of the Chinese effort by looking the dramatic rise in the ratio of gross fixed capital formation to GDP.  As we can see in the chart below, it reached historic highs of 38.9 percent in 2007, before moving to an even higher 45 percent in 2010.  In 2015 the ratio stood at 44 percent.

gross-fixed-capital-formation

Finally, as we see below, in sharp contrast to the growth in exports and fixed investment, household consumption as a share of GDP steadily declined until the last few years, with the first half of the 1990s and the first half of the 2000s standing out for the steepest declines.  The consumption ratio stood at 56.2 percent in 1970, 46.2 percent in 2000, and a low of 36.4 percent in 2006.  In 2015 the ratio was 37 percent.

consumption

In broad brush, the Chinese state promoted the country’s growth though policies that prioritized the construction of a massive infrastructure for production; the transfer of hundreds of million peasants from farms into cities to serve as wage labor; and the creation of a welcoming environment for export-oriented transnational corporations.   The results, in addition to rapid and sustained rates of economic growth and elevation to one of the world’s largest exporters and destinations for foreign direct investment, include socially devastating environmental destruction, world-ranking inequality, and—key to our discussion here–an export-driven economy.

Now, as noted above, the statement that China’s growth has heavily depended on exports was challenged by some economists who pointed to the country’s high rates of growth over the years 2008 to 2010 in the face of the collapse in international economic activity and trade.  They defended their position using data designed to measure the contribution of different economic sectors to growth.  The table below, which comes from the Asian Development Bank, presents such data for China.

The table provides estimates of the percentage contributions made by consumption (government and private), investment, and net exports to China’s economic growth.  As we can see, net exports, except for the year 1990, make a relatively small contribution to Chinese growth.  In fact, in 2003 and 2004, when exports were rapidly growing, net exports actually subtracted from growth.  To clarify: a negative contribution by net exports during those years does not mean that exports fell, only that the trade surplus narrowed, thereby reducing trade’s contribution to growth.  Viewed from this perspective, Chinese growth is overwhelmingly explained by domestic demand—investment and consumption–even during the years 2005 to 2007, when net exports made its biggest recent contribution.

table-china-growth

However, focusing on net exports is not a useful way to understand the importance of export activity.  The fact is that Chinese imports could be used to support consumption, investment, or export production.  Thus, to test the importance of exports, one would have to adjust each of these three sectors by subtracting the value of imports used by that sector.  The table above is constructed on the assumption that imports are used only in the export sector, an assumption that cannot help but minimize the contribution of trade to Chinese growth.  In addition, given what we know about China’s economic transformation, it seems hard to deny that a significant share of investment, whether in plant and equipment or infrastructure, was also triggered by export activity.  Moreover, the country’s export activity, by generating income for a growing share of China’s workforce, had to have increased the country’s private consumption.  In short, calculating the contribution of exports to Chinese growth requires far more than a simple examination of the contribution of net exports.

A number of economists, using different methods, have concluded that external demand has played a very significant role in driving Chinese growth.  For example, consultants for the McKinsey company, using their own measure of domestic value-added exports, estimated that exports accounted for some 30 percent of Chinese growth over the period 2002 to 2006.

Two Asia Development Bank economists used a different measure to calculate the contribution of external demand to Chinese growth, one that included inflows of foreign direct investment as well as their own estimate of domestic value added exports.  Their measure of external demand “grew steadily and maintained a two-digit annual growth rate [from 2000] until the global financial crisis in 2008. The estimates suggest that the weight of [external demand] on the economy increased gradually during this period—in 2001 it accounted for 18.3 percent of GDP growth; by 2004, almost half of the 10.2 percent GDP growth could be attributed to [it]. During 2005–07, the share of external demand dropped slightly, but remained 38 percent–40 percent.”

Yılmaz Akyüz, Special Economic Advisor to the South Center and former Director of UNCTAD’s Division on Globalization and Development Strategies, using detailed input-output tables, concluded that:

despite a high import content ranging between 40 and 50 percent, approximately one-third of Chinese growth before the global crisis was a result of exports, due to their phenomenal growth of some 25 percent per annum. This figure increases to 50 percent if spillovers to consumption and investment are allowed for. The main reason for excessive dependence on foreign markets is under consumption. This is due not so much to a high share of household savings in GDP as to a low share of household income and a high share of profits.

In short, it seems clear that exports and foreign direct investment have played a major role in China’s high speed growth.  Therefore, it is to be expected that a global recession and very weak post-crisis global recovery would cause a fall in China’s rate of growth.  But that raises these two important questions: by how much and for how long?  And not surprisingly, the answers to those questions depends, in part, on the response of the Chinese government.

The Misleading Rebalancing of the Chinese Economy

In a trivial sense, if exports fall, then domestic spending will become more important to growth.  However, a meaningful rebalancing must mean more than that.  The economy should be transformed in ways that allow for sustainable growth based on domestic demand that is underpinned by and contributes to a rising majority standard of living.  That is what I do not see.

The Chinese government’s immediate response to the global recession was a massive stimulus program supported by a highly expansionary monetary policy.  In November 2008 the government announced a stimulus package, heavily weighted toward infrastructure spending, equal to $586 billion or about 14 percent of the country’s gdp.   Thanks to the government’s control over key state industrial enterprises and the country’s banking system, the spending began one month later and continued throughout 2009.

Two Chinese economists describe the impact of this program on the country’s growth as follows:

Directly after the unveiling of the stimulus package, the year-over-year growth rate of fixed asset investment in China jumped 9 percentage points from 2008:Q4 to 2009:Q1 and accelerated further to 38 percent per year in 2009:Q2. So for the entire year of 2009 the yearly growth rate of fixed investment reached 30.9 percent, almost twice as high as its average pre-crisis growth rate. As a result, gross fixed capital formation contributed a phenomenal 8.06 percentage points to China’s 9.1 percent per year real GDP growth in 2009. In other words, investment alone was responsible for nearly 90% of the robust GDP growth in 2009 when Chinese exports collapsed and shrank by nearly 45 percent. . .

(T)he People’s Bank of China started to expand money supply by the end of 2008. The monetary injection immediately led to sharp increases in credit lending at nearly the same speed and magnitude. Despite positive inflation, the real growth rate of outstanding loan balances increased from 5 percent per year in mid-2008 to 12.49 percent per year in December 2008, and further up to 32.5 percent per year in June 2009, a historical peak during the entire reform era since 1978.

Accompanying this explosion of investment was a change in its composition.  Investment by private sector manufacturing firms fell, while investment by key state owned industries tied to the government’s infrastructure program–which targeted the construction of new roads, railway lines, ports, airports, and the like–grew.  Local governments pursued their own investment activity, supported by cheap and plentiful loans, promoting construction of new industrial parks, shopping centers, and apartment complexes.

All this investment powered the Chinese economy through the period of global collapse; China’s gdp grew by 9.4 percent in 2009 and 10.6 percent in 2010.  However, as to be expected, the effects of the stimulus program gradually weakened, leaving in its wake massive excess capacity in many state owned firms; under-used airports, highways, railways, and shopping centers; and enormous environmental damage.  Determined to keep growth up, the government maintained its expansionary monetary policy.  However, given the continued weakness in the global economy, little of the money was used for productive investment.  Instead businesses, local governments, and wealthy citizens tended to borrow to purchase assets, more specially stocks and housing, producing bubbles in each.  The stock market bubble was popped by policy in 2015.   The housing bubble is ongoing.  Construction of housing has helped offset the decline in state investment in infrastructure.  And the wealth effect from the stock and housing bubbles has boosted consumption (by high income families), as we can see in the chart below. But housing construction is too limited and personal consumption is too small a share of the economy to halt the steady slide in the country’s gdp growth rate.

household-consumption

Underpinning and now threatening the Chinese government’s growth strategy has been a rapid and extreme build up in debt.  Chinese debt levels soared from 150 percent of gdp in 2009 to approximately 280 percent of gdp in 2016.  And the debt build up is accelerating.  In other words ever more debt appears needed to produce a slowing gdp.  And the debt build-up appears to be running up against its own limits.  As the China specialist Michael Pettis wrote in his May 2016 monthly report on the Chinese economy:

in order to achieve current levels of GDP growth, China’s debt is growing at least two-and-a-half times as fast as debt-servicing capacity and is probably growing three or four times as fast. Clearly this isn’t sustainable. And it must become even less sustainable as long as the process continues. If China attempts to maintain GDP growth of 6.5% for the next five years, it won’t be enough for debt to continue growing at the same already-alarming rate relative to GDP growth. In the late stages of overinvestment growth cycles, credit must grow exponentially relative to GDP growth. . . .

If China manages the targeted 6.5% GDP growth over the next five years, in short, so that by the end of 2021 its GDP will be double the 2011 level, its GDP will be nearly 40% larger than it is today. If we assume that it takes 15-16% growth in credit, gradually rising to 20-22% growth in credit, to achieve this GDP growth target, China’s debt will have risen to become between 110% and 170% larger than it is today. This represents an enormously high growth rate on an already high level of debt.

And, as Pettit goes on to say, these projected debt levels “are simply too implausible to take seriously. In my opinion it is, in other words, extremely unlikely that China can follow the targeted GDP growth path because the target can only be met if debt is able to grow to what are effectively impossibly high levels.”

The Chinese government has tried several times over the last years to tighten credit, but each time, worried about the consequences, they have reversed course.  George Magnus, writing in the Financial Times, provides a useful summary of this experience:

Total Social Financing, a broad measure of monthly credit creation, is growing at nearly three times the rate of officially recorded money GDP growth, or more if you don’t believe the official GDP data. Curiously, many private companies face tight credit conditions and so rapid credit creation may be largely for the benefit of the cash-flows of already highly indebted real estate sector, local governments and state enterprise sectors.

Some financial policies have been introduced by way of countermeasures, but to little effect. For example, the government clamped down in 2013 on borrowing by local government financing vehicles, only to relax the curbs last year [2015]. It also introduced a local government bond debt swap scheme last year to allow expensive bank debt to be swapped for cheaper debt instruments. Banks duly bought more than Rmb3tn of bonds, but traditional lending growth continued regardless.

After encouraging the development of shadow banking between 2009 and 2013, lending restrictions were enforced in 2014, but a fall in financial institutions’ off-balance sheet assets simply showed up in an expansion in the main banking system’s assets. . . .

Instead, all we are likely to see is more credit easing, in the wake of the six initiatives since late 2014 to cut interest rates and banks’ reserve requirements, albeit to no economic effect. The credit binge, then, will continue until it can’t.

The decisive factors will be the already compromised debt servicing capacity of borrowers, and the behavior of banks under the weight of rising non-performing and bad loans and emerging funding difficulties as loan to deposit ratios increase further.

Thus, even while demonstrating a willingness to tolerate deepening imbalances, the Chinese government has been forced to accept ever lower rates of growth.  And, there are good reasons to believe that the trade-offs facing the Chinese government are worsening, leaving the government with little choice but to accept a lower growth target.  One reason is that China’s housing bubble will, like all bubbles, eventually come to an end.  C.P. Chandrasekhar and Jayati Ghosh provide the following overview of developments in China’s housing market:

What exactly is going on in the Chinese housing market? Over the past year, there has been a dramatic rise in prices of residential property in many cities, and especially in some of the large metros. This comes after a period just before, when everyone was talking about the “softening” of the Chinese real estate market as the authorities sought to clamp down on what they believed was speculative activity that was leading to excessively high prices and making housing unaffordable for many ordinary Chinese. But since then – and really from early 2015, as [the chart below shows] – prices seem to have gone completely berserk, increasing at unprecedented rates.

housing

The problem, as in most housing booms, is that house purchases are leveraged (albeit to a lesser extent in China than in other countries because of higher down payment requirements). The extent of debt flowing into housing has increased sharply in the current year. According to Bloomberg, outstanding housing mortgages in China increased by 31 percent just in the first half of 2016, three times more than the increase in overall lending. Loans to households increased to account for as much as 71 percent of total new lending in August 2016, compared to 24 percent in January. And this excludes the shadow banking activities that are also dominantly geared to real estate and construction lending. This means that there is bound to be a knock-on effect on banks and other lenders, once the bubble bursts and house prices start coming down. The Chinese authorities are trying to walk the tightrope to bring stability and greater affordability into the housing market without simultaneously destabilizing finance, but this is a difficult task. Indeed, the problem may be urgent, because in fact in many cities the downslide in house prices has already started – and indeed it is evident that in recent months the trend has got aggravated.

The housing market boom has encouraged new home construction and greater consumption, both of which have helped moderate the decline in Chinese growth rates.  Letting the air out of the bubble, even assuming that this can be done in a controlled way, will weaken an important force supporting economic growth.

A second reason for pessimission about Chinese growth is the increasing problem of capital flight.  In brief, rich Chinese and foreign investors are now moving money out of China.  As the New York Times reports:  “In Beijing, confidence has given way to a case of nerves. Local residents often sense trouble coming before foreign investors and are the first to flee before a crisis. Chinese moved a record $675 billion out of the country in 2015, some of it for purchases of foreign real estate.”

money-flows

And, as Bloomberg News points out, this problem will not be easily managed:

China’s balancing act isn’t getting any easier.

Policy makers are grappling with how to attack excessive borrowing and rein in soaring property prices while maintaining rapid growth. They’re also battling yuan depreciation and capital outflow pressures as U.S. interest rates rise, while on the horizon looms the risk of confrontation with America’s President-elect Donald Trump on trade and Taiwan. . . .

Outflows will exceed $200 billion in the fourth quarter [2016] and rise further in the first quarter, said Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong.

Capital is leaving for more fundamental reasons than rising U.S. rates and a stronger dollar, she said. Drivers include rising expectations of yuan weakness, fears of an abrupt policy U-turn trapping funds in the country, and a lack of profitable investment opportunities at home amid rising costs and slowing growth.

“The real nightmare for Beijing – and for markets – is a vicious cycle of capital outflows triggering bigger devaluations of the yuan that in turn drive bigger and faster outflows,” Loong said. “We expect capital outflows to increase in the coming months as Chinese money seeks to maximize exit quotas in case of more stringent restrictions later on.”

The most effective way to halt a capital outflow is to reduce credit and raise interest rates.  However, doing so would likely topple the housing market and threaten the financial health of bank and non-bank lenders and high income borrowers, and push down growth rates.  On the other hand, to do nothing means a continuing rundown in reserves and a self-reinforcing currency decline.

A third reason is the enormous excess capacity of key Chinese industries and continuing slow growth in the world economy.  The consequences of these interrelated problems are well described by two analysts:

As officials from China and the US meet this week [June 2016], they’re scheduled to talk about everything from the US Federal Reserve’s decision-making process to the disputed South China Sea. But China’s “excess capacity” problem is top of the agenda.

US treasury secretary Jack Lew called the problem “distorting” and “damaging” in remarks in Beijing on Monday (June 6) and said it was critical to global markets that China cut its production.

That’s because some of China’s factories have been pumping out more steel, solar panels, and other goods than the world wants or needs—in order to keep China’s GDP growing and citizens employed.

Widespread labor strikes and a slowing domestic economy have put pressure on local Chinese officials to keep factories going, even as leaders in Beijing have pledged to cut capacity and said they could lay off millions. Most of these factories are state-owned, meaning they’re subsidized by the government, rather than making market-driven decisions.

That means Chinese manufacturers can lower prices of what they make to keep factories busy more easily than private companies. China’s producer price index, which measures wholesale prices they command for their goods, has fallen for 50 months in a row.

The net effect for some industries outside of China has been devastating, marked by mass layoffs and closing factories, as lower-priced Chinese goods flood the market—and that has been no where more apparent than the steel industry.

producer-prices

This is not a sustainable situation.  The combination of growing debt with falling producer prices is a deadly one for business stability.

And it is worth mentioning a fourth: the changing labor situation in China.  Workers are increasingly fighting and winning wage increases despite Chinese government efforts to the contrary.   As a result, as the New York Times explains:

Labor costs in China are now significantly higher than in many other emerging economies. Factory workers in Vietnam earn less than half the salary of a Chinese worker, while those in Bangladesh get paid under a quarter as much.

Rising costs are driving many companies in a variety of sectors to relocate business to a wide range of other countries. In the most recent survey from the American Chamber of Commerce in China, a quarter of respondents said they had either already moved or were planning to move operations out of China, citing rising costs as the top reason. Of those, almost half are moving into other developing countries in Asia, while nearly 40 percent are shifting to the United States, Canada and Mexico.

Many of the factories moving away make the products often found on the shelves of American retailers.

Stella International, a footwear manufacturer headquartered in Hong Kong that makes shoes for Michael Kors, Rockport and other major brands, closed one of its factories in China in February and shifted some of that production to plants in Vietnam and Indonesia. TAL, another Hong Kong-based manufacturer that makes clothing for American brands including Dockers and Brooks Brothers, plans to close one of its Chinese factories this year and move that work to new facilities in Vietnam and Ethiopia.

Other companies with an extensive presence in China may not be closing factories, but are targeting new investments elsewhere.

Taiwan’s Foxconn, best known for making Apple iPhones in Chinese factories, is planning to build as many as 12 new assembly plants in India, creating around one million new jobs there. A pilot operation in the western Indian state of Maharashtra will start churning out mobile phones later this year.

To this point, labor activism largely remains limited to shop-floor struggles aimed at forcing corporations to meet wage, benefit, and safety standards mandated by law.  However, capitalist mobility gives the Chinese state little room to maneuver.  For now, state repression has kept the insurgency from become a movement.    But, a sustained slowdown could trigger more militant activism, and on a wider scale, which would negatively impact foreign investment and production.

What Lies Ahead For The Chinese Economy?

The Chinese government faces enormous challenges.  Its strategy of building a powerful export sector is now threatened by stagnation in the advanced capitalist countries.  It sought to compensate by directing a massive, wasteful, and environmentally destructive infrastructure program that has largely run its course.  It now confronts a growing debt spiral, a housing bubble, and capital flight, as well as industrial over capacity and a growing worker insurgency.  There is no simple set of policies that can solve any one of these problems without making another worse.  For example, government spending to sustain production will only add to capacity and debt problems as well as increase capital flight.  Tightening credit markets will help reduce over capacity and capital flight, but likely collapse the housing market and significantly dampen economic growth.

In making this case for difficult times ahead, I do not mean to suggest that the Chinese economy is on the verge of collapse.  Rather I mean to argue that the country’s growth can be expected to slow considerably, perhaps to the 2 to 4 percent range.  And for China that likely means an intensification of internal pressures for structural change, especially from workers who have enjoyed few of the gains they helped produce during the country’s many years of high-speed growth.

And, since most of the third world has become ever more export-dependent, and China has been the prime export market for the parts and components produced by Asian countries and the primary commodities sold by many Latin American and Sub Saharan African countries, China’s slowdown can be expected to have a significant negative effect on growth rates in most of the third world.   At the same time, unless the slowdown in China’s growth rate triggers a major restructuring of the Chinese economy that disrupts/reorients existing cross border production networks, something that has yet to happen, the effects on US and European economies should be far less.  The consequences might be greater for Japan, given its tighter integration with East Asian economies.

In sum, those expecting China, or East Asia more generally, to anchor a resurgent global economy, will be disappointed.  Transnational corporations have gone far in creating a world to their liking, but the resulting contradictions and tensions are multiplying rapidly, even in those countries and areas where accumulation dynamics have been the most robust.  The need is great for meaningful change in how economies are structured and interconnected.

Asia’s Economic Future

There is strong reason to expect a further weakening of global economic activity over the next several years, putting greater pressure on majority living and working conditions.

In brief, Asia’s economic dynamism is ebbing.  Given the region’s centrality in the international economy, this trend is both an indicator of current global economic problems and a predictor of a worsening global situation.

Asia’s central role in the global economy

Asia’s central role in the world economy is easily documented.  For example, as the Asian Development Bank points out, “Global headwinds notwithstanding, developing Asia will continue to contribute 60% of world growth.”

Asia’s key position is anchored by China.  China is the single largest contributor to world GDP growth, likely accounting for almost 40 percent of global growth in 2016.  Stephen Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, estimates that China’s contribution to global growth was 50 percent larger than the combined contributions of all the advanced capitalist economies.

The rise of Asia, and in particular China, owes much to the actions of transnational corporations and their strategy of creating Asian-centered cross-border production networks or global value chains (GVC).  In the words of the Asian Development Bank, these networks or chains involve “dividing the production of goods and services into linked stages of production scattered across international borders.  While such exchange of inputs is as old as trade itself, rapid growth in the extent and complexity of GVCs since the late 1980s is unprecedented.”

The strategy was initiated by Japanese transnational corporations who began shifting segments of their respective production processes to developing Asian countries in the late 1980s; US and European firms soon followed.  The process kicked into high gear in the mid to late 1990s once China opened up to foreign investment and decided to pursue an export-led growth strategy.

Asia, as a consequence, became transformed into a highly efficient, integrated, regional export machine, with China serving as the region’s final assembly platform.  Developing Asian economies became increasingly organized around the production of manufactures for export; their share of total world manufacturing exports rose from 18.4 percent to 32.5 percent over the period 1992-3 to 2011-12.   And, following the logic of cross border production, a growing share of these exports were parts and components, which were often traded multiple times within the region before arriving in China for final assembly.   Parts and components accounted for more than half of all developing Asian intra-regional manufacturing trade in 2006-7.

China, befitting its regional role, became the first or second largest export market for almost every developing Asian country, with the majority of those exports the parts and components needed for the assembly of advanced electronics.  Between 1995 and 2014, the electronics share of manufacturing exports to China from Korea grew from 8.5 percent to 32.2 percent.  Over the same period, the electronics share from Taiwan exploded from 9.1 percent to 63.7 percent, for Singapore the share grew from 17.5 percent to 36.8 percent, and for the Philippines it rose from 3.4 percent to 78.3 percent.  China’s exports to the region, and especially outside the region, were mostly final goods, with the most technologically advanced assembled/produced under the direction of foreign transnational corporations.  In line with this development, China became the premier location for foreign investment by transnational corporations from Japan, Korea, and Taiwan, as well as leading non-Asian corporations.

This history allows us to appreciate the forces that powered Asia’s growth.  Growing demand for manufactures by consumers and retailers in the US and the Eurozone became increasingly satisfied by exports from Asia.  The production of these exports triggered the production of and trade in parts and components by developing East Asian countries and their final assembly in China, as well as massive investment in new factories and supportive infrastructure, especially in China.  East Asian export production also required significant imports of primary commodities, which were largely purchased from countries in Latin America and Sub Saharan Africa, who experienced their own growth spurt as a result.

As we now well know, this growth was heavily dependent on the borrowing capacity of working people in the advanced capitalist world, especially in the US, whose incomes had been falling in large part because of the shift of production to Asia.  The collapse of the debt-driven US housing bubble in 2008 triggered a major financial crisis and global recession, which also greatly depressed international trade.   A weak international recovery has followed; international trade and growth remain far below pre-crisis levels, raising questions about Asia’s future economic prospects.  To appreciate why I am pessimistic about Asia’s economic future requires us to delve more deeply into the ways in which Asian economies have been restructured by transnational capital’s accumulation dynamics.

The Dynamics of Asia’s Economic Transformation

The three charts below, which come from an article authored by the Monetary Authority of Singapore in collaboration with Associate Professor Davin Chor of the National University of Singapore, provide a useful visualization of the Asian economic transformation described above, in particular, changes in the trading relationships of the countries, with each other and with the rest of the world.  The authors use what they call a measure of “upstreamness” to highlight “where a country fits in the operation of cross border production networks, more particularly whether it specialized in producing raw input, intermediate inputs or finished goods.”  The more a country specializes in producing raw inputs, the greater is the value of its upstreamness index; the more it specializes in producing final goods, the smaller is its upstreamness index.

More precisely: the upstreamness index for an industry takes on values equal to or larger than 1.  A value of 1 means that the industry’s output “is just one stage removed from final demand.” A greater value means that the industry’s output enters the relevant production process as an input that is a number of stages removed from final demand.  Here are some examples of upstreamness values for select US industries:

index-values

For the charts below, the upstreamness measure for each country is calculated by weighting the upsteamness of its export industries by the share of each industry in the country’s total exports for the year in question.

As the authors explain:

Charts 2 to 4 depict the changing networks of trade flows between the Asian economies, and in relation to the US, UK, Eurozone (EZ), Australia, as well as the rest of the world (ROW). In these charts, the arrows indicate the direction of the net trade balance between each pair of economies, while the width of each arrow is proportional to the magnitude of this balance.

The arrows are color-coded to reflect the upstreamness of the export flows that move in the same direction as the net trade balance between each pair of nodes. For simplicity, export upstreamness values lying between 1 and 2 are labelled as “downstream” (green), those between 2 and 2.5 as “midstream” (yellow), and those above 2.5 as “upstream” (red).

As we can see in Chart 2, in 1995, a time when cross boarder production networks were still limited, Japan dominated the Asian region.  It was a significant downstream (green) exporter to the US, the Eurozone, the UK, and China.  And it was a significant supplier of key midstream machinery to Korea, Taiwan, Hong Kong, Singapore, Thailand and Malaysia.  It generally purchased its upstream inputs from the ROW.   As we can also see, China was well on its way to becoming a major exporter of final goods to the US, the world’s dominant consumer of both downstream and midstream goods.

chart-2

chart-3

By 2005, as illustrated in Chart 3, Japan’s role in the region had dramatically diminished.  China was now the region’s hub, and as such, the dominant exporter of finished goods to the US, the Eurozone, Hong Kong, and the ROW.  The economies of Korea and Taiwan had also been transformed, increasingly oriented to supplying upstream parts and components to China-based exporters.

chart-4

Chart 4, which captures conditions in 2014, shows a deepening of the trade patterns of the previous period.  China’s export dominance is greater yet, as illustrated by the increase in the width of its green trade arrows pointing to the US, ROW, EZ, and Hong Kong.  The Korean and Taiwanese economies are even more dependent on sales of parts and components to China.  Because of their relatively small trade activity, it is difficult to appreciate the transformations experienced by other Asian countries.  Many ASEAN countries, as noted above, had become suppliers of key electronic components to China.  Vietnam, due in large part to the expansion of South Korean production networks, has become an important assembly and export location for some consumer electronics such as smart phones.

What is also not visible from these charts is the effect that transnational corporate-driven regionalization dynamics have had on the structures and stability of individual countries, and of course on the working and living conditions of Asian workers.  One consequence of the rise of China as the region’s key final assembly and production platform is that leading firms from other Asian countries significantly reduced their domestic investment activity as they located operations in China. This deliberate deindustrialization was a natural outcome of the establishment of cross border production networks which involve, as stated above, the dividing of production activities into segments and the location of one or more of these segments in other countries.

The chart below highlights the dramatic decline in Japanese investment as Japanese firms shifted segments of production overseas.   This ongoing decline in investment is one of the most important reasons for the country’s ongoing economic stagnation.

japan

The following chart shows a similar sustained decline in investment, although beginning at a later date than for Japan, for the grouping “Rest of emerging Asia,” which includes Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea and Thailand.   China, on the other hand, has experienced a dramatic and sustained rise in its investment ratio. Chinese state activity, rather than foreign direct investment, accounts for the great majority of this investment, although in many cases it was undertaken to attract and support foreign production.

asian-investment

As leading Asian transnational corporations expanded their production networks, their actions tended to restructure their respective home economies in ways that left these economies more unbalanced and crisis prone.  For example, almost all Asian economies became increasingly export dependent at the same time that their exports narrowed to a limited range of parts and components.   And with transnational corporations increasingly able to shift production from one national location to another, China’s pull became ever stronger.  One consequence was that governments throughout Asia were forced to match China’s relatively low labor costs and corporate friendly business environment.  In many cases, they did so by transforming their own labor markets though the introduction of new laws and actions designed to weaken labor rights.  This, in turn, tended to suppress regional purchasing power, thereby reinforcing the region’s export dependence.  Not surprisingly then, the decline in exports that has followed the post 2008 Great Recession poses a serious challenge to Asia’s growth strategy.

According to the Asian Development Bank:

Developing Asia’s exports grew rapidly in real terms at an annual rate of 11.2 percent in 2000–2010 (Figure 1.2.1). Excepting a brief rebound in 2010, the region’s export volume growth has slowed since the crisis, recording annual growth of 4.7 percent in 2011–2015. A major concern is that developing Asia’s exports actually declined by 0.8 percent in 2015, which was a particularly bad year for world trade. Regional trends follow the lead of export growth in the PRC, which contributes about 40 percent of developing Asia’s export value.  PRC export growth slowed from an annual average of 18.3 percent in 2001–2010 to 6.4 percent in 2011–2015, falling into a 2.1 percent decline in 2015. The slowdown in developing Asia excluding the PRC was less pronounced as growth halved from 8.0 percent in 2001–2010 to 4.1 percent in 2011–2015, still growing marginally in 2015 at 0.8 percent. . . .

The slowdown has meant that developing Asia’s export growth in 2011–2015 was, at 4.1%, similar to the 4.3% averaged by other developing economies and not much higher than the 3.6% of the advanced economies—two groups that developing Asia has historically outperformed in export growth.

trade-trends

And as the region’s export growth rate declined, so did overall rates of GDP growth, as we see in the table below.

rates-of-growth

Still, these growth rates remain impressive, especially in light of the steep decline in regional exports.  Perhaps not surprisingly, developing Asia’s buoyancy owes much to China’s ability to maintain its relatively high rates of economic growth.  However, as I will discuss in a following post, contradictions and pressures are mounting in China that will intensify its economic slowdown and significantly depress growth in the rest of Asia, with negative consequences for the rest of the world.

Confronting Capitalist Globalization

Trade agreements were a major issue in the US presidential election.  Bernie Sanders and Donald Trump both made opposition to the Transpacific Partnership a central part of their respective campaigns, and the popularity of this position eventually forced Hillary Clinton to also oppose it.  A number of mainstream economists even began to acknowledge that many working people actually had reason to be critical of globalization dynamics.  These economists still held that globalization brought positive benefits to the country.  The problem, in their opinion, was that the gains had not been equally distributed, with many workers, especially in manufacturing, suffering wage and employment losses.  Of course, few offered meaningful suggestions for correcting the problem.

Now that Trump has been elected, economists again appear to be downplaying the negative consequences of globalization, arguing that it is technology, rather than globalization, that best explains the growth in inequality and worker insecurity.  No doubt this stems from their concern that popular dissatisfaction with current economic conditions might grow from opposition to trade agreements into an actual challenge to contemporary globalization dynamics, which means capitalism itself.

Contemporary globalization dynamics are an expression of capitalism’s logic.  Faced with profit pressures, leading firms in core countries began to internationalize their operations in the mid-1980s by shifting production to the third world.  This internationalization process was shaped by the creation of cross border production networks or value chains.  Firms would divide the production of their goods into multiple segments and then locate the individual segments in different third world countries.

Sometimes, these leading firms built and operated their own overseas production facilities, directly controlling the entire production process.  More often, especially in electronics and telecommunications, pharmaceuticals, textiles and clothing, and automobiles, leading firms relied on “independent” partner firms to organize production under terms which still allowed them to direct operations and capture the majority of profits from sale of the final goods.

In broad brush, Japanese transnational corporations centered their product chains in China and several East Asian countries.  US transnational corporations centered theirs in China, Mexico and several Caribbean countries.  German transnational corporations centered theirs in China and several Central and Eastern European countries.   China’s role in the global economy grew explosively because it was a favorite location for production and final assembly for transnational corporations from all three core countries.

One consequence of this development was that both the US trade deficit, especially with China, and the Chinese trade surplus, especially with the US, grew large.  The chart below highlights this development, showing changes in size of the US and Chinese current account balances relative to their respective GDP.

us-and-china

The following chart looks just at the US trade balance and shows its dramatic decline beginning in the late 1990s.

us_trade_balance_1980_2014-svg

US manufacturers were not alone in benefiting from the shift in production to lower cost third world countries.  US retailers also gained as the lower costs allowed them to boost sales and profits.  And the US financial industry also gained.  The large deficits meant large dollar flows abroad which were returned for investment in financial instruments such as stocks and bonds.  Moreover, as conditions worsened for growing numbers of working people in the US (more on that below), many were forced to borrow to maintain their life style which further expanded financial activity and profits.  In addition, globalization has enabled many transnational corporations to shift profits to those countries with the lowest tax requirements, thereby further boosting their profitability and that of the financial sector.

Not surprisingly, the expansion of international production by US and other transnational corporations took its toll on US manufacturing workers.  As Dean Baker explains:

As can be seen (in the chart below), manufacturing employment stayed close to 17.5 million from the early 1970s to 2000. We had plenty of productivity growth over these three decades, but little net change in manufacturing employment, in spite of cyclical ups and downs. It was declining as a share of total employment, which almost doubled over this period. Then, as the trade deficit explodes, we see manufacturing employment plummet. Note that most of the drop is before the Great Recession in 2008.

jobs

In other words, while it is true that manufacturing employment as a share of total US employment had been falling for some time, the dramatic decline in the number of workers employed in manufacturing dates to the period of rapid expansion of third world-centered international production networks.

Jared Bernstein and Dean Baker summarize the results of two studies that examine some of the costs paid by US workers for this global restructuring:

Trade deficits, even in times of strong growth, have negative, concentrated impacts on the quantity and quality of jobs in parts of the country where manufacturing employment diminishes. . . . There is, for example, a lot of research confirming that deindustrialization in the Rust Belt is partly a result of the fact that America meets its domestic demand for manufactured goods by importing more than it exports. One oft-cited academic study found that imbalanced trade with China led to the loss of more than 2 million U.S. jobs between 1991 and 2011, about half of which were in manufacturing (which worked out to 17 percent of manufacturing jobs overall during that time).  Further, the economist Josh Bivens found that in 2011 the cost of imbalanced trade with low-wage countries cost workers without college degrees 5.5 percent of their annual earnings (about $1,800). Far from a small, isolated group, these workers represent two-thirds of the American workforce.

Unfortunately, many US workers have viewed globalization from a nation-state perspective, believing that third world workers, especially those in China and Mexico, are stealing their jobs.  In reality, few workers employed in these product chains have enjoyed meaningful gains.  For example, the number of manufacturing workers in China has also been falling.  And growing numbers of them are forced to work long hours, in unsafe conditions, for extremely low wages.  Firms operating in China as subcontractors for foreign multinational corporations are squeezed by these corporations to lower costs.  They in turn employ a variety of tricks to lower worker wages and intensify the work process.  And they do this with the approval of local government officials who want to maintain the production in their jurisdiction.

One common trick is to use employment agencies to provide them with students under so-called internship programs.  As students, they are not considered workers under Chinese labor law and thus are not covered by such things as minimum wage laws, overtime benefit laws, and pensions.  A recent study by China Labor Watch provides one example:

University students who worked summer jobs at one of China’s leading small-appliance factories were forced to live in cramped, ill-equipped dorm rooms, made to sweat through 12-hour days in a hot factory and then were stiffed on pay, according to a report by China Labor Watch and confirmed via interviews with students and the agents who hired them.

The 8,000-employee Cuori factory in Ningbo, south of Shanghai on China’s east coast, manufactures kitchen appliances, irons, heaters and vacuum cleaners under its own name and for such multinational firms as Cuisinart, Hamilton Beach and George Foreman. Stores in the U.S. carrying items made there include Walmart and Home Depot.

More often, the students are from technical schools and forced to accept jobs as part of their curriculum.  This is just one way that firms operating within international production networks seek to push down wages to maximize their own profits and satisfy the demands of transnational corporations for low cost production.

Seen from this perspective the problem facing US workers, and those in Japan and Germany who face similar competitive pressures and downward movement in their living and working conditions, is not job theft by workers in the third world, but the working of contemporary capitalism.   And this is the perspective needed to judge the likely policies of newly elected US president Donald Trump.

We already have two indicators that the Trump administration will do little to threaten contemporary globalization dynamics.  During the campaign, Trump made big news when he told Carrier, an air-conditioning and furnace manufacturer, that the company would “pay a damn tax” if it carried out its plan to lay off some 1400 workers and close one of its factories in Indianapolis and move its production to Mexico.  Later he said that if Carrier moved its Indianapolis production to Mexico he would, if President, levy a steep 35 percent tariff on any of its products coming back to the US from off-shore factories.

Well, on December 1, 2016, Trump announced the terms of the deal he worked out with Carrier.  Carrier would “keep” 800 workers in its Indianapolis factory.  But approximately 600 workers would still be laid off as the factory’s fan coil assembly line would still be moved to Mexico.  And in exchange, the state of Indiana would provide Carrier with a $7 million subsidy including tax breaks and training grants.  This is no attack on capitalist globalization.  And when the president of the union at the factory voiced his disapproval of the agreement, Trump tweeted out that the union needed to “Spend more time working-less time talking. Reduce dues.”

As for Trump’s claim that we will look carefully at NAFTA to see if it should be rewritten, the US Chamber of Commerce has already gone on record in defense of NAFTA but welcoming its revision to incorporate issues like e-commerce that were not included at the time of its approval. In line with the Chamber’s confidence, a former Chamber lobbyist who has publicly defended NAFTA and outsourcing more generally has just been appointed to Trump’s transition team dealing with trade policy.

In short, if we are going to build a strong economy that works for the great majority of US workers we need to build a movement that is critical not just of the Transpacific Partnership but the entire process of capitalist globalization.  Moreover, that movement needs to be built in ways that strengthen relations of solidarity with workers in and from other countries.  And, it is critical to start the needed educational process now, before the new administration has a chance to trumpet new misleading initiatives and confuse people about the real threat to our well-being.

The Trump Victory

The election of Donald Trump as president of the United States is the latest example of the rise in support for right-wing racist and jingoistic political forces in advanced capitalist countries.  Strikingly this rise has come after a sustained period of corporate driven globalization and profitability.

As highlighted in the McKinsey Global Institute report titled Playing to Win: The New Global Competition For Corporate Profits:

The past three decades have been uncertain times but also the best of times for global corporations–and especially so for large Western multinationals. Vast markets have opened up around the world even as corporate tax rates, borrowing costs, and the price of labor, equipment, and technology have fallen. Our analysis shows that corporate earnings before interest and taxes more than tripled from 1980 to 2013, rising from 7.6 percent of world GDP to almost 10 percent.  Corporate net incomes after taxes and interest payments rose even more sharply over this period, increasing as a share of global GDP by some 70 percent.

global-profit-pool

As we see below, it has been corporations headquartered in the advanced capitalist countries that have been the biggest beneficiaries of the globalization process, capturing more than two-thirds of 2013 global profits.

advanced-economies-dominate

More specifically:

On average, publicly listed North American corporations . . . increased their profit margins from 5.6 percent of sales in 1980 to 9 percent in 2013. In fact, the after-tax profits of US firms are at their highest level as a share of national income since 1929. European firms have been on a similar trajectory since the 1980s, though their performance has been dampened since 2008. Companies from China, India, and Southeast Asia have also experienced a remarkable rise in fortunes, though with a greater focus on growing revenue than on profit margins.

And, consistent with globalizing tendencies, it has been the largest corporations that have captured most of the profit generated.  As the McKinsey report explains:

The world’s largest companies (those topping $1 billion in annual sales) have been the biggest beneficiaries of the profit boom. They account for roughly 60 percent of revenue, 65 percent of market capitalization, and 75 percent of profits. And the share of the profit pool captured by the largest firms has continued to grow. Among North American public companies, for instance, firms with $10 billion or more in annual sales (adjusted for inflation) accounted for 55 percent of profits in 1990 and 70 percent in 2013. Moreover, relatively few firms drive the majority of value creation. Among the world’s publicly listed companies, just 10 percent of firms account for 80 percent of corporate profits, and the top quintile earns 90 percent.

bigger-the-better

Significantly, most large corporations have chosen not to use their profits for productive investments in new plant and equipment.  Rather, they built up their cash balances.  For example, “Since 1980 corporate cash holdings have ballooned to 10 percent of GDP in the United States, 22 percent in Western Europe, 34 percent in South Korea, and 47 percent in Japan.”  Corporations have often used these funds to drive up share prices by stock repurchase, boost dividends, or strengthen their market power through mergers and acquisitions.

In short, it has been a good time for the owners of capital, especially in core countries.  However, the same is not true for most core country workers.  That is because the rise in corporate profits has been largely underpinned by a globalization process that has shifted industrial production to lower wage third world countries, especially China; undermined wages and working conditions by pitting workers from different communities and countries against each other; and pressured core country governments to dramatically lower corporate taxes, reduce business regulations, privatize public assets and services, and slash public spending on social programs.

The decline in labor’s share of national income, illustrated below, is just one indicator of the downward pressure this process has exerted on majority living and working conditions in advanced capitalist countries.labor-share

Tragically, thanks to corporate, state, and media obfuscation of the destructive logic of contemporary capitalist accumulation dynamics, worker anger in the United States has been slow to build and largely unfocused.  Things changed this election season.  For example, Bernie Sanders gained strong support for his challenge to mainstream policies, especially those that promoted globalization, and his call for social transformation.  Unfortunately, his presidential candidacy was eventually sidelined by the Democratic Party establishment that continues, with few exceptions, to embrace the status-quo.

However, another “politics” was also gaining strength, one fueled by a racist, xenophobic, misogynistic right-wing movement that enjoyed the financial backing of the most reactionary wing of the capitalist class.  That movement, speaking directly to white (and especially male) workers, offered a simplistic and in its own way anti-establishment explanation for worker suffering: although corporate excesses were highlighted, the core message was that white majority decline was caused by the growing demands of “others”—immigrants, workers in third world countries, people of color, women, the LGBTQ community, Muslims, and Jews—which in aggregate worked to drive down wages, slow growth, and misuse and bankrupt governments at all levels.  Donald Trump was its political representative, and Donald Trump is now the president of the United States.

His administration will no doubt launch new attacks on unions, laws protecting human and civil rights, and social programs, leaving working people worse off.  Political tensions are bound to grow, and because capitalism is itself now facing its own challenges of profitability, the new government will find it has little room for compromise.

According to McKinsey,

After weighing various scenarios affecting future profitability, we project that while global revenue could reach $185 trillion by 2025, the after-tax profit pool could amount to $8.6 trillion. Corporate profits, currently almost 10 percent of world GDP, could shrink to less than 8 percent–undoing in a single decade nearly all the corporate gains achieved relative to world GDP over the past three decades. Real growth in corporate net income could fall from 5 percent to 1 percent per year. Profit growth could decelerate even more sharply if China experiences a more pronounced slowdown that reverberates through capital-intensive sectors.

future

History has shown that we cannot simply count on “hard times” to build a powerful working class movement committed to serious structural change.  Much depends on the degree of working class organization, solidarity with all struggles against exploitation and oppression, and clarity about the actual workings of contemporary capitalism.  Therefore we need to redouble our efforts to organize, build bridges, and educate. Our starting point must be resistance to the Trump agenda, but it has to be a resistance that builds unity and is not bounded in terms of vision by the limits of a simple anti-Trump alliance.   We face great challenges in the United States.

Capitalist Globalization: Running Out Of Steam?

The 2016 edition of the Trade and Development Report (TDR 2016), an annual publication of the United Nations Conference on Trade and Development, is an important study of the changing nature of capitalist globalization and its failure to promote third world development.

The post-1980 period was marked by an explosion of transnational corporate activity, with investment increasingly taking place in the third world, especially Asia.  The resulting investment created a system of cross border production networks in which workers in third world countries produced and assembled parts and components of increasingly advanced manufactures under transnational capital direction for sale in developed country markets.

Mainstream economists supported this process, arguing that it would promote rapid industrialization and upgrading of third world economies and the eventual convergence of third world and advanced capitalist living standards.  However, the TDR 2016 makes the case that the globalization process appears to have run its course and that mainstream predictions were not realized.

Capitalist globalization under pressure

The TDR 2016 shows that the post-2008 slowdown in developed capitalist country growth has led to a significant downturn in third world exports and economic activity.  The following charts show that while international trade has long grown faster than global output, the ratio grew dramatically bigger over the first decade of the 2000s.  This was in large part the result of the expansion of cross border production networks.  This explosion of trade also brought ever expanding trade imbalances.

trade-trends

But, as the above charts also show, globalization dynamics appear to have lost momentum.  According to the TDR 2016:

International trade slowed down further in 2015. This poor performance was primarily due to the lackluster development of merchandise trade, which increased by only around 1.5 per cent in real terms. After the roller-coaster episode of 2009–2011, in the aftermath of the global financial and economic crisis, the growth of international merchandise trade was more or less in line with global output growth for about three years. In 2015, merchandise trade grew at a rate below that of global output, a situation that may worsen in 2016, as the first quarter of the year showed a further deceleration vis-à-vis 2015.

This loss of momentum has hit the third world, which has become ever more export-dependent, especially hard. As the following table shows, the growth rate of third world exports has dramatically slowed, and is now below that of the developed capitalist countries.  East Asian export growth actually turned negative in 2015.

table-1

This slowdown in trade has been accompanied by growing capital outflows from the third world, again especially Asia, as shown in the following chart.

capital-flows

The combination of developed country stagnation and dramatically slowing international trade has begun to stress the logistical infrastructure that has underpinned capitalist globalization dynamics.  This is well illustrated by Sergio Bologna’s description of the consequences of Hanjin’s bankruptcy:

The world’s seventh largest shipping company, the Korean company Hanjin, went bankrupt. Overburdened by $4.5-billion in debt, it has not been able to convince the banks to continue their support.

As a matter of fact, it did not convince the government of South Korea, because the main financier of Hanjin is the Korean Development Bank, a public institution, which is also struggling with the critical situation of the other major shipping company, Hyundai Merchant Marine (HMM), and the two Korean shipyards, STX Offshore & Shipbuilding and Daewoo. It may sound like a mundane administrative issue, but imagine what it means to have a fleet of about 90 ships, loaded with freight containers valued at $14-billion, roaming the seas because if they touch a port their loads are likely to be seized at the request of creditors.

In fact, the Daily Edition of the Lloyd’s List dated September 13th . . . reported that 13 vessels had been detained. Other ships are being held in different ports, waiting for judiciary sentences. Others are at anchor and maybe had to refuel. Not to mention the 1,200-1,300 crew members who are not able to find suppliers willing to sell them a can of tuna or a bottle of water. In a Canadian port, the crew had to be assisted by the mission Stella Maris.

The intertwining of the ramifications of this problem is impressive. Hanjin must face legal proceedings at courts in 43 countries. For starters: Most of the ships are not owned by Hanjin, and those it owns, to a large extent, are not worth much. Sixty per cent of the fleet is leased, and Hanjin has not been paying the leases for a long time. This threatens to bankrupt old-name companies like Hamburg’s Peter Dohle, the Greek Danaos, and the Canadian Seaspan; there are about 15 companies who leased their ships to Hanjin, but in terms of loading capacity, the first four add up to more than 50 per cent.

Then there are the ports and other infrastructure service providers. The ports are owed fees for services (towing, mooring); the terminals, for load/unload operations to Hanjin ships on credit; the Suez Canal has not been paid the passage tolls and today won’t let the Hanjin ships through; in addition, the onboard suppliers, recruiting agencies of the crews, the ship management firms. The list does not end here, it has just begun. Because the bulk of creditors are thousands of companies, freight forwarders and logistics operators who have entrusted their merchandise to Hanjin, around 400,000 containers (the total capacity of the Hanjin fleet is estimated at 600,000 TEUs), goods that are stuck on board.

Why did this happen? Why did it have to happen? . . .

Because for years, the shipping companies have been transporting goods at a loss. They have put too many ships into service and they continued to order increasingly larger ships at shipyards. The ships competed fiercely for the orders and built the ships at bargain prices, although they are technological jewels. With the increase in freight capacity, freight rates plummeted, volumes grew but the income per unit of freight transported decreased. Then, China slowed exports, creating the perfect storm. . . .

And now? How many of the 10 to 15 most important companies still active on the market are zombie carriers?

The false promise of capitalist globalization

Critically, the globalization process has been aided by labor repression.  The transnational corporate drive for market share encouraged state policies designed to hold down labor costs.  And the resulting decline in wage demand reinforced the pursuit of exports as the “natural” engine of growth.  As TDR 2016 explains:

those countries that did exhibit increases in their global share of manufacturing exports did not show similar increases in wage shares of national income relative to the global average. . . . This suggests that increased access to global markets has typically been associated with a relative deterioration of national wage income compared with the world level.

The following chart illustrates the global ramifications of the globalization process for worker earnings.wage-share

As for convergence, the TDR 2016 compared the performance of third world economies relative to that of the United States using several different criteria.  The chart below looks at the ratio of per capita GDP of select countries and country groups relative to that of the United States.  We see that Latin America and the Caribbean and Sub-Saharan Africa have actually lost ground since the 1980s.  This is especially striking since the US growth rate also slowed over the same period.  Only in Asia do we see some catch-up, and outside the so-called first-tier NIEs and China the gains have been small.

comparisons-with-us

In fact, as the TDR 2016 explains: “The chances of moving from lower to middle and from middle- to higher income groups during the recent period of globalization show no signs of improving and have, if anything, weakened.”

This conclusion is buttressed by the following table which shows “estimate chances of catching up over the periods 1950–1980 and 1981–2010.”  The United States is the target economy in both periods with countries “divided into three relative income groups: low (between 0 and 15 per cent of the hegemon’s income), middle (between 15 and 50 per cent) and high (above 50). The table reports transition probabilities for the two sub-periods and the three income levels.”

catch-up

The TDR 2016 drew two main conclusions from these calculations:

First, convergence from the low- and the middle-income groups has become less likely over the last 30 years (1981–2010) relative to the previous period (1950–1980). As reported in the table, the probability of moving from middle- to the high-income status decreased from 18 per cent recorded between 1950 and 1980 to 8 per cent for the following 30 years. Analogously, the probability of catching up from the low- to the middle-income group was reduced approximately by the same factor, from 15 per cent to 7 per cent.

Second, and perhaps more strikingly, the probability of falling behind has significantly increased during the last 30 years. Between 1950 and 1980 the chances of falling into a relatively lower income group amounted to 12 per cent for middle-income economies and only 6 per cent for high-income countries.  These numbers climbed to 21 per cent and 19 per cent respectively in the subsequent period.

Uncertain times lie ahead

In short, globalization dynamics have restructured national economies in ways that have enriched an ever smaller group of transnational corporations.  At the same time, they have set back national development efforts with few exceptions and generated serious contradictions that are largely responsible for the stagnation and downward pressures on working and living conditions experienced by the majority of workers in both advanced capitalist countries and the third world.

While globalization dynamics have lost momentum the economic restructuring it achieved remains in place.  And to this point, dominant political forces appear to believe that they can manage whatever economic challenges may appear and thus remain committed to existing international institutions and patterns of economic activity.  Whether they are correct in their belief remains to be seen.  As does the response of working people, especially in core countries, to their ever more precarious conditions of employment and living.

The Fading Magic Of The Market

Poorer than their Parents?  That was the question McKinsey & Company posed and attempted to answer in their July 2016 report titled: Poorer Than Their parents? Flat or Falling Incomes in Advanced Economies.

Here is the report’s key takeaway, which is illustrated in the figure below:

Our research shows that in 2014, between 65 and 70 percent of households in 25 advanced economies were in income segments whose real market incomes—from wages and capital—were flat or below where they had been in 2005.  This does not mean that individual households’ wages necessarily went down but that households earned the same as or less than similar households had earned in 2005 on average.  In the preceding years, between 1993 and 2005, this flat or falling phenomenon was rare, with less than 2 percent of households not advancing.  In absolute numbers, while fewer than ten million people were affected in the 1993-2005 period, that figure exploded to between 540 million and 580 million people in 2005-14.chart-1

More specifically, McKinsey & Company researchers divided households in six advanced capitalist countries (France, Italy, the Netherlands, Sweden, the United Kingdom, and the United States) into various income segments based on their rank in their respective national income distributions.  They then examined changes in the various income segments over the two periods noted above.  Finally, they “scaled up the findings to include 19 other advanced economies with similar growth rates and income distribution patterns, for a total of 25 countries with a combined population of about 800 million that account for just over 50 percent of global GDP.”

The following figure illustrates market income dynamics over the 2005-14 period in the six above mentioned advanced capitalist countries. For example, 81 percent of the US population were in groups with flat or falling market income.

six-target-countries

The next figure provides a more detailed look at these market income dynamics.

market-income-six-target-countries

McKinsey & Company researchers also looked at disposable income trends, which required them to incorporate taxes and transfer payments.  As seen in the first figure of this post, government intervention meant that the percentage of households experiencing flat or declining disposable income was considerably less than the percentage experiencing flat or declining market incomes, 20-25 percent versus 65-70 percent.

The researchers attempted to explain these trends by analyzing “the patterns of median market and median disposable incomes for two periods: 1993 to 2005 and 2005 to 2014.  We focus on income changes of the median income household because middle-income households are representative of the overall flat or falling income trend in most countries, with the singular exception of Sweden.”

They highlighted five factors: aggregate demand factors, demographic factors, labor market factors, capital income factors, and tax and transfer factors.  As we can see from the second figure above, labor market changes hammered median market income in the United States, the United Kingdom, and the Netherlands.  And as we can also see, tax reductions and transfer payments helped to offset declines in median market disposable income in those three countries. In the case of the United States, while median market income fell by 3 percent over the period, median disposable income grew by 2 percent.

What is the answer to the question posed by McKinsey & Company?  Most likely large numbers of people will indeed be poorer than their parents.  Why?  Aggregate demand continues to stagnate as does investment and productivity.  Employment growth remains weak while precariousness of employment continues to grow.  Finally, the elite embrace of austerity works against the likelihood of new progressive government social interventions.  Without significant change in the political economies of the major capitalist countries, the next 14 years are going to be painful for billions of people.

Brexit and Grexit

With all the talk of Brexit it is easy to forget about Greece and the terrible cost that county continues to pay for its Eurozone membership.  [For more on the Greek crisis and political responses to it see my article The Pitfalls and Possibilities of Socialist Transformation: The Case of Greece.]  Unfortunately, the UK vote to leave the European Union has done nothing to encourage EU leaders to modify their view that the economically weaker European country governments must continue to impose austerity on their respective populations.

Matthew C Klein, in a Financial Times blog post, illustrates what EU-imposed austerity has meant for Greece.  As he comments, “The collapse of the Greek economy is almost without precedent.”

As we see in the figure below, real household consumption has fallen 27 percent since its peak.  Consumption only fell by 6 percent during the period of the global financial crisis.

Greece-real-HH-consumption-590x290

As a result of mass unemployment, wage cuts, and tax increases, Greek disposable household income has fallen even more.  The collapse in consumption was “moderated” only by massive dissaving.  From 2006 to 2009 the personal savings rate averaged 6 percent.  In 2015, Klein reports, it was -6 percent.

Since mid-2011, Greek households have suffered a €19 billion decline in savings.  This includes, as shown in the next figure, a decline of €36 billion in household deposits and cash, including deposits in non-Greek banks and foreign currency.  One has to wonder how many Greeks have already run out of savings.

Greece-HH-deposits-by-type-590x303


Greek spending on housing and consumer durables, what Klein calls household investment, has fallen from about one-fifth of disposable income in 2007 to just 2 percent in 2015.  This spending is too low to offset depreciation. “After accounting for wear and tear, Greek household spending on housing, cars, etc is now running at a rate of -5 per cent of household incomes.”

Greece-HH-net-investment-rate-590x303
Greek business has also been disinvesting.  And until recently so was the government.  “The combined effect [of household, business and government disinvestment] is Greece’s capital stock has been shrinking by about 6 to 7 per cent of output since 2012.”

Greece-disinvestment1-590x301

According to Sharmini Peries, the executive producer of The Real News Network:

With the Brexit vote clinched by those who voted to leave the E.U., the possibility of a Grexit has reemerged in the minds of some. Greece has far more reason to leave the E.U. than the U.K. In a recent survey done by Pew Research, E.U.’s favorability has dropped by double digits in the continent. In Greece more than any other E.U. country, 71 percent of those who took part in the survey said that they had unfavorable views of the E.U.–far higher than the U.K. Further, more than 90 percent disapprove the way in which the E.U. has handled economic issues and the migrant crisis, where the Greeks bear the brunt of that burden.

So, how has the EU responded to the UK vote and Greece’s continuing economic unraveling?

In the words of Dimitri Lascaris, who Peries interviewed for perspective on the impact of Brexit on Grexit:

Well, I think the Greeks would be wildly supportive of anything that results in a relaxation of the austerity policies. As we’ve seen, however, the electorate of the Greek will has virtually no impact on policymaking in the E.U. That was demonstrated in rather brutal fashion in July of last year after over 60 percent of Greeks rejected a less severe austerity program than was ultimately imposed on them.

So it’s interesting, it’s very instructive to look at how the E.U. elite has reacted to the Brexit vote, in particular in the context of Portugal, because Portugal late last year elected a government, a socialist minority government, that appears to have some level of support from leftist parties and the Greens, enough to maintain power for the time being. And initially that party said that they were going to roll back the severe austerity that had been imposed on Portugal. And Portugal is widely viewed as being the country that is most at risk after Greece in the eurozone because of the debt and austerity and the rest of it.

So what happened with the last 48 hours, well after the E.U. elite in the IMF had time to digest the results in Britain? The IMF issued a statement urging the Portuguese government to redouble its commitment to austerity. And Wolfgang Wolfgang Schäuble, the finance minister of Germany, caused quite an uproar when he told the press in the last couple of days that if Portugal didn’t stick by the austerity dictates of the current bailout, it would be forced to come hat-in-hand to the E.U. to beg for yet another bailout. And that caused quite a bit of outrage in Portugal.

So at this stage there’s absolutely no indication, as far as I can see, that the E.U. elite has learned any lessons from the Greek referendum in July of last year or the Brexit vote, both of which were certainly, at least to some degree–this isn’t the whole story, I think, but to some degree they were an expression of discontent with the economic policies of the E.U. and with the fundamentally antidemocratic character of the E.U. So at this stage there’s little reason to believe that the E.U. elite is going to draw the lessons that ought to be drawn from these two votes.

Of course, it is also possible that the EU elite have correctly understood the political moment.  After all, imposed austerity policies have enabled them to shift much of the costs of the recent crisis and ongoing economic stagnation onto working people in Europe’s so-called periphery and blunt potential political challenges to existing European relations of power.  Human suffering doesn’t appear to figure prominently in their calculations.

Third World Countries Lose Ground

Globalization advocates celebrated the 2003-08 period, pointing to the rapid rate of growth of many third world countries as proof of capitalism’s superiority as an engine of development.  Overlooked in the celebration was that fact that growth and development are not the same thing, and in most countries the benefits of growth were only enjoyed by a small minority.  Also overlooked was the fact that this growth was achieved at the cost of ever increasing damage to the health of our planet.  Finally, these cheerleaders also minimized the unbalanced, unstable, and unsustainable nature of the growth process; some seven years after the end of the Great Recession most countries continue to struggle with stagnation, with working people disproportionately suffering the social consequences.

The following figures, taken from the World Bank’s latest annual Global Economic Prospects report, highlight the severity of the post-crisis growth slowdown.

Figures 1 and 2 illustrate the extent of the growth slowdown.   Emerging Market and Developing Economy (EMDE) commodity exporters have suffered the worst declines.  In terms of region, EMDEs in Europe and Central Asia and Latin America and the Caribbean recorded the lowest rates of growth.  Sub Saharan African countries experienced one of the sharpest declines in growth relative to the 2003-08 period.

Figure 1: Gowth By Group

Growth by group

 

Figure 2: Regional Growth EMDEs (weighted average)

regional growth weighted

This ratcheting down of EMDE growth rates means a significant setback in progress towards achieving advanced economy levels as shown in Figure 3 A and B.

Figure 3: Catch-Up of EMDE Income To Advanced Economies

catch up

The Financial Times discusses the significance of this development:

That downgrade [in world growth] came alongside a new analysis showing that for the first time since the turn of the century a majority of emerging and developing economies were no longer closing the income gap with the US and other rich countries.

Last year just 47 per cent of 114 developing economies tracked by the bank were catching up with US per capita gross domestic product, below 50 per cent for the first time since 2000 and down from 83 per cent of that same sample in 2007 as the global financial crisis took hold.

That, the bank’s economists warned, would have a meaningful impact on the future people in those countries could expect.

“Whereas, pre-crisis, the average [emerging market] could expect to reach advanced country income levels within a generation, the low growth of recent years has extended this catch-up period by several decades,” they wrote.

Leading International Monetary Fund officials have warned in recent months that the so-called process of “economic convergence” had slowed to two-thirds of its pre-crisis rate. But the warning from the bank paints an even starker picture.

In the five years before the 2008 financial crisis, emerging markets could expect to take an average of 42.3 years to catch up with US per capita GDP, according to the bank’s analysis.

But over the past three years, as major emerging economies such as Brazil, Russia and South Africa have slowed or fallen into recession, the slower average growth means the number of years it would take to catch up with the US has grown to 67.7 years.

For frontier markets, those more fragile economies further down the development scale, such as Nigeria, the catch-up period more than doubled from 43.1 years to 109.7 years.

And, it is important to add, even these projections are likely optimistic.  The IMF and World Bank have repeatedly overestimated future rates of growth and tend to downplay the possibilities of yet another global crisis.

Patterns Of Globalization

Capitalism is a dynamic system and so is its globalization process.  In its contemporary form, capitalist globalization has been shaped by the efforts of transnational corporations to establish and extend cross border production networks or global value chains (GVCs) which, in the words of the Asian Development Bank, involve “dividing the production of goods and services into linked stages of production scattered across international borders.  While such exchange of inputs is as old as trade itself, rapid growth in the extent and complexity of GVCs since the late 1980s is unprecedented.”

Asia, in particular Northeast and Southeast Asia, is the region that has been most transformed by the establishment of these cross border production networks.  Japanese transnational corporations began the process with their investment in several Southeast Asian countries.  This move eventually forced Korean and Taiwanese corporations into adopting a similar strategy.   The process kicked into high gear in the mid to late 1990s, once China opened up to foreign investment and embraced an export-led growth strategy.  European corporations have established their own regional GVCs with investment in several of the European Union’s new member countries.  And US corporations took advantage of NAFTA to build their own regional networks.  Still, thanks to China’s extensive built infrastructure and sizeable low wage work force, European and North American transnational corporations have also invested heavily in that country, thereby securing Asia’s status as the premier location for the production and export of manufactures.

The Development of Cross Border Production Networks

The economist Prema-chandra Athukorala charts the development and significance of this new corporate strategy using trade data to isolate the trade in parts and components and final assembly within global production networks.  (See Prema-chandra Athukorala, Southeast Asian Countries in Global Production Networks in Bruno Jetin and Mia Mikic, editors, ASEAN Economic Community, A Model for Asia-wide Regional Integration?)  One consequence: the share of developed countries in total world manufacturing exports fell from 77.9 percent to 61.8 percent over the period 1992-3 to 2011-12.  The share of total world manufacturing exports produced by developing East Asian countries (DEA—East Asia without Japan) rose from 18.4 percent to 32.5 percent over the same period.  In 2011-12, DEA countries accounted for 85.1 percent of all third world exports of manufacturers.

The developed country share of network produced exports of manufactures also fell, from 78 percent in 1992-93 to 49.7 percent in 2011-12. The DEA share of network produced exports of manufactures greatly increased over the same period, from 18.8 percent to 43.8 percent, which means that DEA countries account for more than 87 percent of all third world network activity.

DEA countries, with few exceptions, are now largely producers of parts and components, which are traded multiple times within the region, before the final assembly of the product, more often than not in China, and its eventual export outside the region.  The DEA share of total world final assembly activity rose from 22.5 percent 50.9 percent over the period 1992-93 to 2011-12.  China alone accounted for 25.6 percent of all final assembly work done within networks in 2011-12, up from 1.9 percent in 1992-93.

As the table below shows, parts and components accounted for more than half of all DEA intra-regional manufacturing trade in 2006-2007.  In contrast, the share was only 28.8 percent for intra-Nafta trade and 22 percent for intra-EU15 trade.  One can see China’s special role as final assembly hub for the region:  China’s imports from DEA countries, especially members of ASEAN, are overwhelmingly parts and components.  For example, 74 percent of China’s imports from ASEAN countries are parts and components.  China’s exports to the region, and especially outside the region, include a relatively low share of parts and components.

trade

Source: Prema-Chandra Athukorala and Archanun Kolpaiboon, Intra-Regional Trade in East Asia, in Masahiro Kawai, Mario B. Lamberte, and Yung Chul Park, editors, The Global Financial Crisis and Asia, Implications and Challenges.

 

The Asian Development Bank promotes an alternative methodology to measure the growth of cross-border production activity.  As explained in the Asian Development Outlook 2014 Update, the OECD–WTO Trade in Value-Added (TiVA) database, which combines national input-output tables with trade flows for 57 economies and 18 industries, is used to:

segregate gross exports into three parts: (i) foreign value added that is used to produce economy X’s exports (GVC-B), (ii) domestic value added that is used by a destination economy to produce its exports (GVC-F), and (iii) domestic value added that is consumed in the destination economy. The first two parts identify the two distinct ways that an economy’s trade can integrate into GVCs. GVC-B is economy X’s backward linkage into GVCs, using imported inputs to produce its exports. GVC-F is its forward linkage into GVCs, producing and exporting intermediate goods that are subsequently used in the production of other economies’ exports. Adding the two together provides a measure of total GVC participation.

This can be expressed relative to total trade, which includes an economy’s regular value-added trade that is not part of GVCs and its value added for domestic consumption. A participation value of 50%, for example, means that half of a nation’s trade is comprised of either forward or backward GVC linkages.

Researchers found that the share of GVC trade (GVC-B + GVC-F) in total manufacturing exports from the countries included in the TiVA data base rose from 36.9 percent to 48 percent over the period 1995 to 2008.  Thus, by the late 2000s, approximately half of all manufacturing exports were produced within cross border production networks.

Network operations in Asia tend to be far more complex than those in Europe or North America.  In the words of one economist quoted approvingly by the Asian Development Bank:

what makes Asia’s production networks stand out is their intricate open-loop web of transactions within and between firms that span a number of economies and continents. Figure 2.2.1 shows in the left-hand panel production sharing between the US and Mexico, which tends to display a comparably simple structure of closed-loop, back-and-forth transactions. To illustrate, a US firm’s headquarters may send components to its Mexican factory and have final products shipped back to it to sell in the US market. European GVCs have a similar structure. By contrast, the right-hand panel shows a somewhat simplified rendering of the more complex Asian model, with reference to the production and distribution networks of a Japanese manufacturer in the electronics industry, which extends all over East Asia and the US.

organization

As we see in the table below, transnational corporate organized activity in Asia, especially in East Asia, has been the driving force behind the expansion of GVC trade.  The GVC trade share of world manufacturing exports produced in Asia almost doubled, from 8.55 percent in 1995 to 16.20 percent in 2008; the East Asian share more than doubled.  The European share, although higher, remained largely unchanged.

new asia

Transnational capital’s strategic embrace of Asia has had serious consequences for the region’s economies.  Their growth has become more dependent on the production of exports.  And their exports have increasingly narrowed to parts and components.  And their trade patterns have been forced in line with network needs, which means that a growing share of regional economic activity is directed at satisfying extra-regional demand.  For example, as the table below shows, Taiwan’s participation rate, or the share of its exports produced within network structures, rose from less than 50 percent in 1995 to over 70 percent in 2008.   Korea has also had a significant increase in its participation.

new participation

 

The Asian Development Bank also expanded their study of GVCs to include services and commodities as well as manufacturing.  The figures below:

depict the geographic orientation of GVCs and how they are increasing connected. Three main hubs—the US, Germany, and the PRC—occupy the center of a tightly knit web of value-added transfers, mainly among regional economies engaged in split production processes. The US is at the center of the GVCs both as the largest exporter of goods and services measured in gross terms and as the main exporter of value added to the exports of other economies. Germany and the PRC follow in rank in terms of gross and value-added exports. Compared with the US, these economies are positioned further downstream in the GVCs and are involved in a substantial share of value-added inflows and outflows.

In the European regional network, horizontal integration prevails, with value added to goods flowing in both directions between pairs of countries. Asian production networks are more hierarchical. At the top, Japan and the US inject value by providing key components and services directly to the PRC, which is the downstream hub. Malaysia, Thailand, and some other Southeast Asian economies, as well as India, also supply components to the PRC that often embody valued added by the US and other industrial economies. Other key players right at the center of the regional networks are the Republic of Korea, Singapore, and Taipei, China—each economy exporting high shares of foreign value added that reflect their strong GVC involvement.

The time progression panels in [the figures below] show that GVCs have expanded rapidly and grown more complex since 1995. By 2005, the PRC had overtaken Japan as the center of the Asian regional production network. GVC expansion reached a peak in 2008. This was because the global economic crisis slowed consumption in 2009, causing the temporary collapse of international trade that year and curtailing the trade flows associated with GVCs.

expanding 1

expanding 2

expanding 3

expanding 4

Winners and Losers

The work cited above demonstrates the growing web of transnational corporate shaped production and trade.  Most economists see the expansion of GVCs is a boon to development, in that it allows a finer and more efficient comparative advantage to shape global economic activity.  It certainly has been a boon to transnational capital.

For example, the Asian Development Bank cites a study that attempts to break down the winners and losers from the expansion of global value chains.   It concludes that:

From 1995 to 2008, capital’s share of value added in GVCs rose from 40.9% to 47.4% while the share of low- and medium-skilled labor fell from 45.3% to 37.2%. Second, emerging economies increasingly focus on capital-intensive activities. The Republic of Korea saw its low- and medium-skilled labor share fall by 17.1% (as its capital income share rose by 9.3%), the PRC by 11.4% (capital income share up by 9.3%), India by 7.6% (4.5%), and Indonesia by 6.8% (5.3%).

These results are not surprising given that this new corporate strategy was designed to increase corporate mobility and by extension corporate power over labor.  As a consequence national governments find themselves engaged in competition to secure ever narrower segments of corporate production networks, which by their nature can never be made secure.  And they compete by offering up their workers.  Thus, we see ongoing state efforts throughout Asia and elsewhere to weaken labor rights and organization.

Moreover, as I and others have argued, contemporary capitalist globalization dynamics contained a serious contradiction, one that led to mounting global imbalances and instabilities and eventually our current problems of economic stagnation. In the pursuit of profit, transnational corporations promoted an East Asian–centered production system designed to export to core countries, especially the United States, that simultaneously undermind the overall purchasing power of core country consumers, including those in the United States. This contradiction was masked for approximately a decade because of the rise of speculative bubbles in the United States. Those bubbles finally burst and the economies of the US, Japan, and Europe now suffer from stagnation.  This, in turn, has left an export-driven Asia, Latin America, Africa, and Middle East in an increasingly precarious position.

Unfortunately, given the deep structural roots of capitalist globalization in the workings of national economies, there is no way working people will be able to meaningfully improve their living and working conditions without challenging and transforming existing patterns of international production and consumption.  The growing movement against newly proposed trade agreements is a small step in the right direction.