US Trade Deficits, Trump Trade Policies, and Capitalist Globalization

Understandably concerned about the consequences of the large and sustained US trade deficit, many workers have grown tired of waiting for so-called market forces to produce balance.  Thus, they cheer Trump administration promises to correct the imbalance through tariffs or reworked trade agreements that will supposedly end unfair foreign trade practices.

Unfortunately, this view of trade encourages workers in the United States to see themselves standing with their employers and against workers in other countries who are said to be benefiting from the trade successes of their employers.  As a consequence, it also encourages US workers to support trade policies that will do little to improve their well-being.

To understand the driving force behind and develop a helpful response to US trade imbalances one must start by recognizing the interrelated nature of US domestic and international patterns of economic activity.  Large US multinational corporations, seeking to boost profits, have slowly but steadily globalized their economic activity through either the direct establishment of overseas affiliates or their use of foreign-owned subcontractors that operate under terms set by the lead multinational.  This process of globalization has meant reduced investment in plant and equipment and slower job creation in the United States, and the creation of competitiveness pressures that work to the disadvantage of workers in both the US and other countries.  It has also led to the creation of a structural trade deficit that is financed by massive flows of money back into the US as well as consumer debt, both of which swell the profits of the financial industry.  In other words, the real problem confronting workers here is capitalist globalization.

The globalization of the US economy

The World Bank divides international trade into either intra-firm trade or arm’s length trade.  Intra-firm trade refers to international trade carried out between affiliates of the same multinational corporation.  Arm’s length trade refers to international trade carried out between “independent” firms.  Independent is in quotes here because international trade between a multinational corporation and a firm operating in another country under contract would still be classified as arm’s length, even though the production and resulting trade activity is determined by the needs of the dominant multinational corporation.

As the World Bank explains in its study of intra-firm trade:

In practice, multinationals employ intra-firm and arm’s length transactions to varying degrees. In 2015, intra-firm transactions are estimated to have accounted for about one-third of global exports. Vertically integrated multinational companies, such as Samsung Electronics, Nokia, and Intel, trade primarily intrafirm. Samsung, the world’s biggest communications equipment multinational, has 158 subsidiaries across the world, including 43 subsidiaries in Europe, 32 in China and 30 in North and South America. Other multinationals, such as Apple, Motorola, and Nike, rely mainly on outsourcing, and hence on arm’s length trade with non-affiliated suppliers.

The four figures below, taken from the World Bank study, illustrate the extent to which multinational corporations shape US trade patterns with both other advanced economies (AEs) and emerging markets and developing economies (EMDEs).  The numbers shown in figures A and B are averages for the period 2002 to 2014.

Figure A shows that approximately one-third of all US exports of goods are intra-firm, meaning that they were sold by one unit of a multinational corporation operating in the US to another unit of the same multinational corporation operating outside the US.  Figure B shows that approximately one-half of all US imports of goods are intra-firm.  In both cases the share of intra-firm trade was higher with AEs than with EMDEs.  Figure E shows that the share of intra-firm exports to AEs remained remarkably constant despite the overall slump in trade that followed the 2008 Great Recession.  Figure F reveals that the share of imports that are intra-firm actually grew over the period, especially from EMDEs.


As noted above, many multinational corporations choose to subcontract production, producing arm’s length trade, rather than establish and buy goods from their own foreign affiliates.  In this case, arm’s length trade is not really independent trade.  We can gain some insight into how important this development is by examining the main sources of arm’s length US imports.  As we can see in figure B below, more than half of all US arm’s length imports come from China.

Most of these Chinese imports are actually exported by non-affiliated suppliers that operate within corporate controlled cross border production or buyer networks. For example, China is the primary US supplier of many high technology consumer goods, most notably cell phones and laptops.  Almost all are manufactured by foreign companies operating in China under according to terms set by the relevant lead multinational corporation.  The same is true for many low technology, labor intensive products such clothing, toys, and furniture, which are usually produced under contract by foreign suppliers for large retailers like Walmart.

Thus, the relatively low share of intra-firm imports from EMDEs compared with AEs owes much to the preference of many important US based multinational corporations–like Apple, Dell, and Nike–to have non-affiliated supplier firms hire workers and produce for them in China.  The same is true, although not on such a large scale, for a significant share of arm’s length US imports from Mexico.

In sum, it is likely that the globalization strategies of multinational corporations, not the decisions of truly independent foreign producers, are responsible for some 2/3 of all US imports.

Trends in trade

Global trade growth has dramatically slowed since the end of the Great Recession.  Global trade grew by an average of 7.6 percent a year over the years 2002 to 2008.  It has grown by an average of only 4.3 percent a year over the years 2010-14.  Significantly, the greatest decline has come in arm’s length trade.  This should not be surprising, since intra-firm trade is essential to the operation of the world’s leading multinational corporations.  US trade exhibits a similar trend.

In the words of the World Bank:

The U.S. trade data highlight that arm’s length trade accounted disproportionately for the overall post-crisis trade slowdown. This reflected a higher pre-crisis average and a weaker post-crisis rebound in arm’s length trade growth compared with intrafirm trade. . . . By 2014, intra-firm trade growth had returned close to its pre-crisis average (4.3 percent of exports and 5.0 percent for imports). In contrast, arm’s length trade growth remained significantly below its high pre-crisis average: its growth slowed to a post-crisis annual average of 4.7 percent compared to 11.3 percent during 2002-08.

Figures A and B below highlight these trends in US trade.

As trade becomes ever more dominated by intra firm exchanges, it will become ever more difficult for governments to manage their international trade accounts using traditional trade tools, and that includes the US government.  For example, according to the World Bank:

Trade conducted through global value chains generally shows less sensitivity to real exchange rates. That’s because competitiveness gains from real depreciations are partly offset by rising input costs. To the extent that intra-firm trade is more strongly associated with global value chains than arm’s length trade, intra-firm U.S. exports may have benefited less from the pre-crisis U.S. dollar depreciation and been dampened to a lesser degree by the post-crisis appreciation than arm’s-length exports. In addition, firms integrated vertically may have a wider range of tools available to them to hedge against exchange rate movements.

The take-away

The US trade deficit is the result of a conscious globalization strategy by large multinational corporations.  And this strategy has greatly paid off for them.  They have been able to use their mobility to secure lower wages (by putting workers from different countries into competition for employment) and reduced regulations and lower taxes (by putting governments into competition for investment).  The result is a structural deficit in US trade that is no accident and not likely to be significantly reduced by policies that do not directly challenge multinational corporate production and investment decisions.

It is hard to imagine that the Trump administration, no matter its public pronouncements, will pursue its tariff policy or NAFTA renegotiation efforts in ways that will threaten corporate power and profits.  Whether its misdirection efforts on trade can continue to encourage workers in the United States to see other workers rather than corporate globalization as the main cause of its problems remains to be seen.

Globalization and US Labor’s Falling Share Of National Output

As the Trump administration pushes ahead with its effort to renegotiate NAFTA, we must never miss an opportunity to remind people that the globalization of US economic activity has, by design, shifted the balance of class power away from working people.  A commonly cited indicator of class power is labor’s share of output (or income), which, as shown below, dramatically fell after the turn of the 21st century after decades of slow decline.

Michael W. L. Elsby, Bart Hobijn, and Aysegül Sahin, writing in the Fall 2013 Brookings Papers on Economic Activity, tested several hypotheses about the cause of labor’s declining share of output.  They concluded, based on their econometric work, that “increases in the import exposure of U.S. businesses” was key, accounting for approximately 85 percent of the decline in the U.S. payroll share over the period 1987 to 2011.  This finding led them to suggest “that a particularly fruitful avenue for future research will be to delve further into the causal channels that underlie this statistical relationship, in particular the possibility that the decline in the U.S. labor share was driven by the offshoring of the labor-intensive component of the U.S. supply chain.”

Labor’s share of income

It is important to be clear about how the labor share is estimated and how well it captures class dynamics.  The starting point is simple: labor’s share of output is calculated by dividing the labor compensation earned during a given period by the economic output produced over the same period.  Things quickly get more complicated, however, because the labor compensation used in the calculation is actually the sum of the labor earnings of two different groups of workers: those who work for others and those who work for themselves.

The compensation of the first group includes the sum of all employee pay and benefits: wages and salaries; commissions; tips; bonuses; severance payments; early retirement buyout payments; exercised stock options; and employer contributions to employee pension and insurance funds, and to government social insurance.  Calculating the employee share of output, known as the payroll share, is relative straightforward thanks to employer fillings.

Things are not so simple when it comes to the second group, since their earnings reflect “both returns to their work effort and returns to the business property they invested in” and there is no simple way to separate their earnings into those two components.  The Bureau of Labor Statistics (BLS) handles this problem by assuming that the self-employed receive an hourly labor compensation similar to that earned by employees who work in the same sector of the economy.

The figure below, from the Brookings Papers article, shows the division of the labor share into its two component parts, the payroll share and the self-employed share.  As we can see, the payroll share is significantly greater than the self-employed share.  In fact, the share of hours of the self-employed in total work hours “has declined steadily from about 14 percent in 1948 to 8.5 percent in 2012.”  However, as Elsby, Hobijn, and Sahin point out, “In spite of the relatively small share of self-employment hours, the treatment of self-employment income plays an important role in the recent behavior of the evolution of the labor share.”

A number of economists have raised concerns about the methodology used by the BLS to divide the compensation of the self-employed into its labor and capital returns components.  One example: the BLS methodology ends up crediting the self-employed with more labor compensation than their total reported earnings for much of the 1980s and early 1990s, a highly unlikely outcome.

Alternative methodologies have been suggested, and the authors of the Brookings Papers article calculate labor’s share using the two most often cited.  The one they call the “asset basis” assumes that the return on self-employed capital is the same as the return on capital in the non-farm business sector, with the remaining earnings credited to labor.  The other, called the “economy-wide basis,” assumes that the division between labor compensation and capital income is the same for the self-employed as it is for the non-farm business sector.  As we see below, the two alternatives generally produce labor share trends that are relatively close together, and significantly lower than that published by the Bureau of Labor Statistics from the start of the series until the late 1990s, when all three series generally converge.

Because of its methodological shortcoming, Elsby, Hobijn, and Sahin prefer either of the two alternative measures, which leads them to the conclusion that use of the BLS series overstates the actual decline in the labor share.  As they explain:

The upshot of these comparisons is that around one third of the decline in the headline measure of labor’s share appears to be a by-product of the methods employed by the BLS to impute the labor income of the self-employed. Alternative measures that have less extreme implications regarding the return to capital among proprietors are more consistent with one another and indicate a more modest decline.

The fact that the difference between the BLS and the alternative measures of labor’s share largely disappeared beginning in the late 1990s suggests that the average hourly earnings of the self-employed have grown much faster than that of the employed.  This, in turn, suggests a significant transformation in the make-up of the self-employed; in particular an increase in the number of individuals engaged in highly lucrative professional work.  In this regard it is important to recall that labor compensation includes not just wage and salary earnings but also things like bonuses and stock options, rewards that became increasingly popular for a select few starting in the late 1990s thanks to the run-up in the stock market.

And in fact, this transformation is confirmed by the authors, who disaggregated the structure of the labor share for employees and total earnings for the self-employed.  The results are illustrated in the following figure, which shows that “the share of income accounted for by both payroll wages and salaries and by proprietors’ income [the sum of their labor and nonlabor earnings] has been buoyed up since the 1980s by substantial rises in the shares accounted for by the very top fractiles of households in the United States.”

As the authors point out:

This rise in inequality is even more striking for proprietors’ income than it is for payroll income. In 1948 the bottom 90 percent of employees earned 75 percent of payroll compensation. By 2010 this had declined to 54 percent. For entrepreneurial income, however, this fraction declined from 42 percent in 1948 to 14 percent in 2010. Even more starkly, over the same period the share of proprietors’ income accounted for by the bottom 99 percent fell from 74 percent to 45 percent. This suggests that the sharp rise in the average hourly compensation of proprietors relative to the payroll-employed since the late 1980s is related to substantial increases in income inequality among proprietors that dominate even the considerable rise in inequality witnessed among the payroll-employed. Moreover, this has been driven by extreme rises in proprietors’ income at the very top of the income distribution—the top 1 percent in particular.

In short, there are a lot of moving parts to the calculation of and evaluation of trends in the labor share of income.  The BLS measure may have overstated the decline, but the explosion of inequality means that the measure’s two components mask an even greater fall in the share of income going to the great majority of working people.

Globalization and the decline in the payroll share of output

Although the labor share is the “headline” statistic, the authors decided to narrow their focus to the payroll share.  As we saw above, it is no simple matter to determine the labor compensation of the self-employed.  In contrast, the payroll share is relatively easy to measure and, as a bonus, can be disaggregated by industry.  Moreover, it is the largest component of the labor share, which means that its movement is most responsible for changes in the overall labor share.

Elsby, Hobijn, and Sahin begin with a standard neoclassical aggregate production model and the most common neoclassical explanations for the decline, which rest on investment and technological change: the growth in the capital/labor ratio and skill-biased technical change.  The basic neoclassical argument is that growing investment shifts income away from labor in the first case and unskilled workers in the second.  However, in both cases the authors found that the movement in relevant variables was not consistent with the actual movement in the payroll share.

Recognizing the limitations inherent in a simple aggregate production function model of the economy, the authors decided to take advantage of their industry data to see whether a more micro/industry perspective yielded better results. More specifically, they econometrically tested whether investment specific technological change, declines in unionization, or increases in import competition can explain the decline in the payroll share.  They found that “Our data yield one robust correlation: that declines in payroll shares are more severe in industries that face larger increases in competitive pressures from imports.”

In the case of investment specific technical change, the authors looked to see whether those industries which enjoyed the lowest price increases for investment goods had the largest declines in payroll share, with the assumption being that these industries would be the most likely to replace workers with capital.  In fact, it turned out that there was a weak negative relationship between the change in equipment prices and the change in payroll shares across industries, the opposite of what was expected “if capital deepening due to the decline in price of equipment were the driving force of the decline in the payroll share.”  This result reinforced the conclusion from their aggregate analysis that investment activity does not explain the decline in the payroll share of output.

The test of unionization was more straight forward.  The authors looked to see if there was a positive relationship between changes in union density in an industry and changes in payroll shares.  While they did find “a positive correlation between the change in unionization and the change in payroll shares across industries,” the relationship was weak. “The weighted least squares regression indicates that cross-industry variation in changes in unionization rates explains less than 5 percent of the variation in changes in payroll shares across industries.”

Last was the test of globalization, or more specifically a test of whether the import-caused hollowing out of US industry was a primary cause of the decline in the payroll share.  Elsby, Hobijn, and Sahin assumed two possible channels for a rise in imports to cause a fall in the payroll share.  The first involved trade-generated capital deepening.  In this case, the outsourcing of production by US firms would lead to a reduction in labor, a rise in the capital-labor ratio, and a decline in the payroll share of income.  However, as the authors noted, they had already tested capital deepening as a potential cause of the decline and found no support for the hypothesis.

The second trade channel relied on wage differentials rather than shifts in capital intensity.  Industries with high labor shares likely have high labor costs, making them vulnerable to import competition.  The greater the competition the more likely firms in these industries were to take actions to lower those costs, including offshoring segments of their production process, thereby producing a decline in their payroll share.

The authors pursued this possibility by computing the import exposure of each industry.  They did so by asking the following question:

If the United States were to produce domestically all the goods that it imports, how much additional value added would each industry have to produce? For example, if all U.S. imports of clothes were produced domestically, how much would value added increase in sectors like retail, textile manufacturing, and so on.

To be able to calculate this measure of import exposure we use the annual input-output matrices that are available for the years 1993 to 2010 from the BLS. Import exposure is expressed as the percentage increase in value added needed to satisfy U.S. final demand if the United States would produce all its imports domestically.

The figure below shows the relationship between changes in import exposure and changes in the payroll share for each industry.  As we can see, import exposure increased for almost all industries—reflecting the growing hollowing out of the US economy–and the larger the exposure the greater the decline in payroll share.  A simple regression showed that the import exposure variable was significant in explaining changes in the payroll share, with cross-industry variation in changes in import exposure explaining 22 percent of the variation in changes in payroll share.

The authors then ran a regression which included all three possible explanations for the decline in the payroll share.  The globalization variable remained highly significant and was the only variable to do so.  With the import exposure valuable included in the regression, the unionization variable became insignificant.  “This suggests that those sectors where deunionization was most prevalent are also sectors that saw the biggest increase in import exposure.”

Elsby, Hobijn, and Sahin conclude:

our results indicate a cross industry link between the increases in import exposure and the decline in the labor share.  While this result cannot be interpreted as causal, it is worth noting that the statistical relationship between import exposure and payroll shares across industries is large enough to account for a substantial fraction of the aggregate trend decline in the labor share. In particular, aggregating the results of the weighted-least-squares regression across industries suggests that increases in the import exposure of U.S. businesses can account for 3.3 percentage points of the 3.9 percentage point decline in the U.S. payroll share over the past quarter century.

 

We know that trade agreements are about a lot more than lowering tariffs to promote trade.  Foremost, they are about strengthening corporate power and profitability.  And despite mainstream economic theorizing to the contrary, there is strong evidence that these corporate gains come, as designed, at the expense of majority well-being.

Studies of the effect on US workers from imports from China (see Autor, Dorn, and Hanson)  and Mexico (see Hakobyan and McLaren), most of which are produced within US transnational corporate-controlled production networks, show that US workers pay a steep price in terms of job loss and lost earnings from corporate driven globalization.  And, as we have seen, Elsby, Hobijn, and Sahin’s work strongly suggests that this process is also the main factor behind the decline in the payroll share of output.  This is class power at work–unfortunately theirs, not ours.

Just Say No To NAFTA

The North American Free Trade Agreement (NAFTA) is unpopular with many working people in the United States, who correctly blame it for encouraging capital flight, job losses, deindustrialization, and wage suppression.   President Trump has triggered the renegotiation of the agreement, which will likely conclude early next year.  Unfortunately, progressives are in danger of missing an important opportunity to build a working class movement for meaningful economic change.  By refusing to openly call for termination of the agreement, they are allowing President Trump to present himself as the defender of the US workers, a status that will likely help him secure the renewal of the treaty and a continuation of destructive globalization dynamics.

The NAFTA debate

According to a recent poll commissioned by Public Citizen:

At a time of great peril for our democracy and deepening public opposition to Donald Trump on many fronts, he wins high marks from voters on handling trade and advocating for American workers: 46 percent approve of his handling of trade agreements with other countries, 51 percent, his ‘putting American workers ahead of the interests of big corporations’ and 60 percent, how he is doing “keeping jobs in the United States.”

This perception of Trump’s advocacy for workers is encouraged by media stories of the strong opposition by leading multinational corporations to several of President Trump’s demands for changes to the existing NAFTA agreement.

The most written about and controversial proposals include:

  • Major modifications to NAFTA’s investor-state dispute settlement system, which allows foreign investors to sue host governments in secret tribunals that trump national laws if these investors believe that government actions threaten their expected profits. The Trump administration proposes to change this system by (1) establishing an “opt-in” provision that would make participation voluntary and (2) ending the ability of private investors to use claims of denial of “minimum standard of treatment” or an “indirect expropriation” as grounds for filing a claim.
  • A tightening of the rules on the origins of car parts. NAFTA rules govern the share of a product that must be sourced within NAFTA member countries to receive the agreement’s low tariff benefits. The Trump administration wants to raise the auto rules of origin to 85 percent from the current 62.5 percent and include steel as one of the products to be included in the calculations.  It has also proposed adding a new US-only content requirement of 50 percent.
  • The introduction of a NAFTA sunset clause that would allow any of the participating countries to terminate the deal after five years, a clause that could well mean a renegotiation of the agreement every five years.

Canadian and Mexican government trade representatives have publicly rejected these proposals.  The US corporate community has called them “poison pills” that could doom the renegotiating process, possibly leading to a termination of the agreement.  The president of the US Chamber of Commerce has said that:

All of these proposals are unnecessary and unacceptable. They have been met with strong opposition from the business and agricultural community, congressional trade leaders, the Canadian and Mexican governments, and even other U.S. agencies. . . . The existential threat to the North American Free Trade Agreement is a threat to our partnership, our shared economic vibrancy, and clearly the security and safety of all three nations.

Corporate lobbyists are hard at work, trying to convince members of Congress to use their influence to get Trump to withdraw these proposals, but so far with little success.  In fact, the Trump administration has pushed back:

In remarks to the news media in mid-October, Robert E. Lighthizer, the United States trade representative, said that businesses should be ready to forego some of the advantages they receive under NAFTA as the United States seeks to negotiate a better deal for workers. In order to win the support of people in both parties, businesses would have to “give up a little bit of candy,” he said.

It is this kind of public back and forth between corporate leaders and the Trump administration that has encouraged many working people to see President Trump as sticking up for their interests.  In broad brush, workers do not trust a dispute resolution settlement system that allows corporations to pursue profits through secret tribunals that stand above national courts.  They also welcome measures that appear likely to force multinational corporations to reverse their past outsourcing of jobs, especially manufacturing jobs, and promote “Buy American” campaigns.  And, they have no problem with periodic reviews of the overall agreement to allow for ongoing corrections that might be needed to improve domestic economic conditions.

The rest of the story

Of course, NAFTA negotiations are not limited to these few contentious issues.  In fact, trade negotiators have made great progress in reaching agreement in many other areas.  However, because of the lack of disagreement between corporations and the Trump administration on the relevant issues, the media has said little about them, leaving the public largely ignorant about the overall pace and scope of the renegotiation process.

Perhaps the main reason that agreement is being reached quickly on many new issues is because many of the Trump administration’s trade proposals closely mirror those previously agreed to by all three NAFTA country governments during the Transpacific Partnership negotiations.  These include “measures to regulate treatment of workers, the environment and state-owned enterprises” as well as “new rules to govern the trade of services, like telecommunications and financial advice, as well as digital goods like music and e-books.”  In short, taken overall, it is clear that the Trump administration remains committed to “modernizing” NAFTA in ways designed to expand the power and profitability of transnational corporations.

A case in point is the proposed change to the existing NAFTA side-agreement on labor rights.  NAFTA currently includes a rather useless side agreement on labor rights.  It only requires the three governments to enforce their own existing labor laws and standards and limits the violations that are subject to sanctions.  For example, sanctions can only be applied—and only after a long period of consultations, investigations, and hearings–to violations of laws pertaining to minimum wages, child labor, and occupational safety and health.  Violations of the right to organize, bargain collectively, and strike are not subject to sanctions.

The labor standards agreement that the US proposes to include in NAFTA is one that it has used in more recent trade agreements and was to be part of the Transpacific Partnership.  It says that “No Party shall fail to effectively enforce its labor laws through a sustained or recurring course of action or inaction in a manner affecting trade or investment between the Parties, after the date of entry into force of this Agreement for that Party.”

This labor agreement is included in the US-Dominican-Central American Free Trade Agreement (DR-CAFTA) and we now have an example of how it works, thanks to a case filed in 2011 by the US against Guatemala.  The panel chosen to hear the case concluded, in June 2017, that the US “did not prove that Guatemala failed to conform to its obligations.”  The reason: the three person panel made its own monetary calculations about whether Guatemalan labor violations were serious enough to affect trade or investment flows between the two countries and decided they were not.

As Sandra Polaski, former Deputy Director-General for Policy of the International Labor Organization, writes:

The panel reached its decision that Guatemala had not breached its obligations under the DR-CAFTA because the violations had not occurred “in a manner affecting trade” between the parties. . . . The panel chose to establish a demanding standard in its interpretation of that phrase, requiring that a complaining country would have to prove that there were cost savings from specific labor rights violations and that the savings were of sufficient scale to confer a material competitive advantage in trade between the parties.  This threshold is unprecedented in any analogous applications: WTO panels have interpreted similar language much more narrowly, as affecting conditions of competition, without requiring demonstration of costs and their effects. Demonstrating changes in costs at this level would require access to sensitive internal company accounts (at a minimum), and the perpetrators of labor violations would likely have hidden them in any case. This standard could not be met without subpoena power, which does not exist under the trade agreements. . . .

The decision is disturbing for multiple reasons: because of the injustice toward the affected Guatemalan workers; because it invalidated the parties’ explicit commitment to broad enforcement of labor rights contained both in the obligatory commitments and the overall stated purposes of the agreement; and because as the first and as of now only arbitration arising from a labor clause (or environmental clause) it set a precedent for future cases.

In short, labor exploitation is likely to continue unchecked under a possible new NAFTA, which can be expected to remain as corporate friendly as the original agreement.

The need for a new progressive strategy of opposition

President Trump has threatened to withdraw the US from NAFTA if the other two countries do not agree to his demands for key NAFTA changes, in particular to the investor-state dispute settlement system and rules on the origins of car parts, the inclusion of a sunset clause, and an end to government procurement restrictions.  While we cannot predict the future, the odds are great that compromises will be reached on these issues, allowing President Trump to present a renegotiated NAFTA as a win for working people.

As Jeff Faux, founder of the Economic Policy Institute, comments:

The erratic and belligerent Trump might, of course, drive US-Mexican relations over a cliff. But he prides himself as a deal-maker, not a deal-breaker. So the most likely outcome is a modestly revised NAFTA that: 1) Trump can boast fulfills his pledge 2) Peña Nieto can use to claim that he stood up to the bullying gringo 3) doesn’t threaten the low-wage strategy for both countries that NAFTA represents.

Revisions might include weakening NAFTA’s dispute settlement courts, raising the minimum required North American content for duty-free goods, and reducing the obstacles to cross-border trade for small businesses on both sides of the border.

Changes like this could marginally improve the agreement, and would be acceptable to the Canadians, who have been told by Trump that he is not going after them. But from the point of view of workers in the American industrial states who voted for Trump, the new NAFTA is likely to be little different from of the old one. The low-wage strategy underlying NAFTA that keeps their jobs drifting south and US and Mexican workers’ pay below their productivity will continue.

But you can bet that Trump will assure them that it is the greatest trade deal the world has ever seen.

Sadly, the progressive movement has pursued the wrong strategy to build the kind of movement we need to oppose the likely NAFTA renewal or take advantage of a possible US withdrawal.  In fact, it has largely allowed President Trump to shape the public discussion around the renegotiations.

To this point, progressive trade groups, labor unions, and Democratic Party politicians have refrained from calling Trump’s bluff and demanding termination of the agreement, despite the fact that this and other so-called free trade agreements are not really reformable in a meaningful pro-worker sense. Instead, they have concentrated on demonstrating the ways that NAFTA has harmed workers, highlighting areas that they think are in most need of revision and offering suggestions for their improvement, and mobilizing their constituencies to press the US trade representative to adopt their desired changes.  Progressive trade groups have generally turned their spotlight on the investor-state dispute resolution system and outsourcing, as have Democratic Party politicians.  Trade unions, for their part, have emphasized outsourcing and labor rights.

Significantly, these are all areas, with the exception of labor rights, where the Trump administration has put forward proposals for change which if realized would go some way to meeting progressive demands.  The result is that the progressive movement appears to be tailing or reinforcing Trump’s claims to represent popular interests.  And, by focusing on targeted issues, the movement does little to educate the population about the ways in which the ongoing negotiations are creating new avenues for corporations to enhance their mobility and profits, especially in services, finance, and e-commerce.

Apparently, leading progressive groups plan to wait until they see the final agreement and then, if they find it unacceptable with regards to their specific areas of concern, call for termination of the agreement.  But this wait and see strategy is destined to fail, not only to build a movement capable of opposing a revised NAFTA agreement, but even more importantly to advance the creation of a working class movement with the political awareness and vision required to push for a progressive transformation of US economic dynamics.

For example, this strategy of creating guidelines for selective changes in the agreement tends to encourage people to see the government as an honest broker that, when offered good ideas, is likely to do the right thing.  It also implies that the agreement itself is not a corporate creation and that a few key changes can make it an acceptable vehicle for advancing “national” interests.  Finally, because agreements like NAFTA are complex and hard to interpret it will be no simple matter for the movement to help its various constituencies truly understand whether a renegotiated NAFTA is better, worse, or essentially unchanged from the original, an outcome that is likely to demobilize rather than energize the population to take action.  Of course, if Trump actually decides to terminate the agreement, the movement will be put in the position of either having to praise Trump or else criticize him for not doing more to save NAFTA, neither outcome being desirable.

There is, in my opinion, a better strategy: engage in popular education to show the ways that trade agreements are a direct extension of decades of domestic policies designed to break unions and roll back wages and working conditions, privatize key social services, reduce regulations and restrictions on corporate activity, slash corporate taxes, and boost multinational corporate power and profitability.  Then, organize the most widespread movement possible, in concert with workers in Mexico and Canada, to demand an end to NAFTA.  Finally, build on that effort, uniting those fighting for a change in domestic policies with those resisting globalization behind a campaign directed at transforming existing relations of power and creating a new, sustainable, egalitarian, and solidaristic economy.

It is not too late to take up the slogan: just say no to NAFTA!

It is time for audacity: demand the termination of NAFTA and KORUS.

Unfortunately, progressive forces appear content to harp on Trump policies rather than provide leadership in building a class-based movement for real change.  Exhibit A: the unwillingness of key US progressive groups to call for the termination of the North American Free Trade Agreement (NAFTA) and the Korea-US Free Trade Agreement (KORUS).

President Trump has demanded changes to both agreements and threatened to cancel them if he doesn’t get the changes he wants.  He declared NAFTA the worst trade agreement in American history.  He called KORUS a “horrible deal” that has left America “destroyed.” Progressives fought hard to stop approval of both NAFTA and KORUS when they were being negotiated, but now that Trump has raised the possibility of their termination, they seem reluctant to take up the demand.   In my opinion, that is a big mistake.

The costs of holding back

Take the current NAFTA negotiations.  Progressives seem content to criticize Trump’s negotiating process for being nontransparent and negotiating agenda for being too restricted, in particular avoiding change to the Investor-State Dispute System (ISDS). Both true criticisms.  But where is the call for actual withdrawal from the agreement?

For example, here is the AFL-CIO’s trade and globalization policy expert on the current NAFTA negotiations:

On Sept. 5, the United States, Canada and Mexico finished the second round of talks on renegotiating a new North American Free Trade Agreement. The AFL-CIO laid out 17 ways that NAFTA needs to be improved so that we can have a North American economy that works for families, not just global corporations. So how well are the U.S. negotiators doing at creating a better deal for workers? Not well.

Granted, it is early in the process, and we don’t know a lot yet, but that’s part of the problem.

Our number one recommendation was that negotiators should be more transparent, most importantly by making public the rules they’re proposing for the new NAFTA. So far, the U.S. negotiators are failing. There has been no improvement in making the process open to the general public. As working people know, if we are not at the table, we are on the menu, so this grade is crucial.

In some important areas, the United States has not made proposals, including on labor and tax dodging. In other important areas, such as rules of origin or Buy American, the U.S. proposals are incomplete. Basically, this progress report has a lot of incomplete grades.

Is the U.S. team doing well in any areas at all? Well…the positions on enforcement and state-owned enterprises are a good starting point but need to go much further.

In sum, the U.S. negotiators need to up their game. If I were still a teacher and the U.S. negotiators were in my class, I’d be calling the parents tonight to work out an improvement plan to make sure they could pass my class. Of course, there is still plenty of time left to bring the grade up, but the question is whether the U.S. negotiators are motivated to improve or whether they just want to keep recycling failed trade ideas that will add up to another pro-corporate, anti-worker deal.

Another example: a coalition of major progressive groups has united around the demand to remove the ISDS from the NAFTA agreement.  Here is the text of their call to supporters:

If you live in North America, we need you to make sure your government representative stops a corporate power grab in the new NAFTA renegotiations.

NAFTA gave vast new powers for corporations that make it easier to offshore jobs and attack the environmental and health laws on which we all rely.

Deals like NAFTA give multinational corporations the power to sue governments in front of a tribunal of three corporate lawyers. These lawyers can order taxpayers to pay the corporations unlimited sums of money, including for the loss of expected future profits.

The multinational corporations only need to convince the lawyers that a law protecting public health, digital rights or the environment violates their special NAFTA rights. The corporate lawyers’ decisions are not subject to appeal.

This corporate power grab is formally called Investor-State Dispute Settlement (ISDS).

END ISDS: Add your name to demand that any North American Free Trade Agreement (NAFTA) renegotiation removes the corporate power grab known as ISDS.

If You Live In the U.S., Canada or Mexico:

Add your name to tell your government representative (in the U.S., your member of Congress) to commit to oppose any North American Free Trade Agreement (NAFTA) renegotiation or any other agreement that includes Investor-State Dispute Settlement (ISDS).

This focus on the limitations of the process and agenda is problematic for many reasons.  One is that the call for reform can quickly become muddied as people struggle to understand the complex legal and technical nature of the agreement’s various chapters and evaluate whether changes that might be proposed will actually improve or worsen the agreement.

In this regard, it is possible that a renegotiated NAFTA agreement will actually include changes to the ISDS, ones that were proposed by the Obama administration for the Transpacific Partnership agreement.  If that happens, the progressive movement may well find itself divided and unable to communicate a clear position on the agreement’s renewal.

An even more important reason that the call for NAFTA reform is problematic is that it encourages people to believe that the US government is capable of representing something called the “national interest” and that it is possible for a “good” agreement to somehow emerge from the negotiations.  But really, these are corporate agreements negotiated by a captured state to advance a corporate agenda.

In point of fact, if you have a domestic economic agenda that is designed to weaken unions, privatize public services, slash taxes, and deregulate economic activity, like that of the US over the last several decades, then it is almost impossible to have a progressive international economic policy.  International policy flows out of domestic policy.  Said differently, you can’t have anti-worker domestic policies and hope to tack on a progressive international policy.

This means that the progressive movement, anchored by the trade union movement, needs to attack on all fronts in a consistent way, demanding wholesale change in US economic policy by highlighting the integrated and destructive nature of both domestic and international economic policy.  Until that happens, we will remain as we are now, in a situation where international economic issues are largely seen as an add on or set of separate issues that are highly technical and largely divorced from what are considered to be the more important domestic challenges.

Unfortunately, there has been almost no discussion by the progressive community of the KORUS renegotiation.  Public Citizen has been one of the few groups to take the issue on, and it has called for the agreement’s termination, although largely because of the exploding trade imbalance between Korea and the US.  It also correctly points out that most Koreans also oppose the agreement.

The odds are overwhelming that Trump will not terminate NAFTA or KORUS.  Rather it is more likely that the negotiations will end up producing a few minor improvements and several major extensions that will expand corporate power.   If we continue to call for reform rather than termination we will again find ourselves on the political sidelines, with working people turning to the mainstream media for analysis and evaluation, where they will receive misleading information on what was negotiated and the consequences of the renegotiated agreements.

If we want to build a class movement it is time for us to show leadership.  We need to do more than challenge Trump to improve these agreements.  We need to demand that he terminate them; we should call his bluff.

What is holding us back?

So, what is holding us back?  Three reasons come to mind.  The first is that the progressive movement in the US fears being tainted with Trump nationalistic rhetoric.  Some activists have told me that the termination of NAFTA to defend US interests will leave Mexico in a bad situation.  This belief highlights the desperate need within our movements for more class analysis.  The demand for termination is not a demand to defend US interests at the expense of Mexican interests, it is a demand that asserts the rights of workers in the US, Canada, and Mexico against the interests of big capital in all three countries.

A second reason is the fear of being labeled a protectionist.  Most of the progressive movement has always mistakenly accepted the notion that these agreements are primarily about trade. They are clearly about far more than that.  Actually, one could say that one is for fair trade, as most progressive movements like to do, and demonstrate that we could have fairer trade without these agreements.  Having allowed successive administrations to cleverly identify these agreements with trade, the progressive movement has undermined its ability to highlight and take-on the broader neoliberal economic agenda that drives and shapes them.

These agreements are above all designed to boost capitalist mobility, power, and profits.  By making that clear, we can show that our demand for termination is not based on a simple objection to trade, and thus does not represent for a call for protectionism as commonly understood.  Rather, our demand is motivated by a determination to refashion our economy and help workers in other countries do the same; demanding an end to NAFTA and KORUS allows us to stand with workers in Canada, Mexico, and Korea who have also suffered as their economies have become more globalized and dominated by global capitalist accumulation dynamics.

The final reason, and one rarely voiced, is the fear of the unknown.  The media drums into our heads that existing agreements are all that stand in the way of chaos.  We are told that the world economy might spiral into depression if NAFTA and KORUS are terminated.  That is hooey.  If we end these agreements the world will not end.  We still have the WTO after all; trade will continue. But we will terminate chapters that encourage deregulation, privatization, monopolization, capital mobility, competition between workers, and union busting.

Clearly, we need to strengthen our confidence in the belief that there can be life after capitalism, that we can build movements that have the capacity to restructure economic relationships and patterns of economic activity along more sustainable, solidaristic, egalitarian, and democratic lines.  This will never happen if we fear mounting a direct challenge to capitalist imperatives.

Trump has given us an incredible opportunity.  He has put the issue of termination of existing trade agreements on the political agenda.  We need the audacity to seize the moment.

False Promises: Trump And The Revitalization Of The US Economy

President Trump likes to talk up his success in promoting the reindustrialization of the United States and the return of good manufacturing jobs.  But there is little reason to take his talk seriously.

Microsoft closes shop

For example, as reported in a recent article in the Oregonian, Microsoft just decided to close its two year old Wilsonville factory, where it built its giant touch-screen computer, the Surface Hub.  As the article explains :

Just two years ago, Microsoft cast its Wilsonville factory as the harbinger of a new era in American technology manufacturing.

The tech giant stamped, “Manufactured in Portland, OR, USA” on each Surface Hub it made there. It invited The New York Times and Fast Company magazine to tour the plant in 2015, then hired more than 100 people to make the enormous, $22,000 touch-screen computer. . . .

“We looked at the economics of East Asia and electronics manufacturing,” Microsoft vice president Michael Angiulo told Fast Company in a fawning 2015 article that heaped praise on the Surface Hub and Microsoft’s Wilsonville factory.

“When you go through the math, (offshoring) doesn’t pencil out,” Angiulo said. “It favors things that are small and easy to ship, where the development processes and tools are a commodity. The machines that it takes to do that lamination? Those only exist in Wilsonville. There’s one set of them, and we designed them.” . . .

But last week Microsoft summoned its Wilsonville employees to an early-morning meeting and announced it will close the factory and lay off 124 employees – nearly everyone at the site – plus dozens of contract workers. . . .

Even as President Donald Trump heralds “Made in America” week, high-tech manufacturing remains an endangered species across the United States. Oregon has lost more than 14,000 electronics manufacturing jobs since 2001, according to state data, more than a quarter of the total job base.

Microsoft is moving production of its Surface Hub to China, which is where it makes all its other Surface products.  Apparently, the combination of China’s low-cost labor and extensive supplier networks is an unbeatable combination for most high-tech firms.  In fact, the Oregonian article goes on to quote a Yale economist as saying:

“Re-shoring” stories like the tale Microsoft peddled in 2015 are little more than public relations fakery,” [providing] “lip services or window-dressing to please politicians and the general public.”

Foxconn says it is investing

But now we have another bigger and bolder re-shoring story: The Taiwanese multinational Foxconn has announced it will spend $10 billion to build a new factory somewhere in Wisconsin (likely in Paul Ryan’s district), where it will produce flat-panel display screens for televisions and other consumer electronics.

As reported in the press, Foxconn is pledging to create 13,000 jobs in six years—but only 3000 at the start.  In return, the state of Wisconsin is offering the company $3 billion in subsidies.

According to the Trump administration, this is a sign that its efforts to bring back good manufacturing jobs is working.  The Guardian quotes a senior administration official “who said the announcement was ‘meaningful,’ because ‘it [represents] a milestone in bringing back advanced manufacturing, specifically in the electronics sector, to the United States.’”  President Trump followed with “If I didn’t get elected, [Foxconn] definitely would not be spending $10bn.”

However, there are warning signs.  For example, as an article in the Cap Times points out, Foxconn doesn’t always follow through on its promises:

  • Foxconn promised a $30 million factory employing 500 workers in Harrisburg, Pennsylvania, in 2013. The plant was never built, not a single job was created.
  • That same year, the company signed a letter of intent to invest up to $1 billion in Indonesia. Nothing came of it.
  • Foxconn announced it would invest $5 billion and create 50,000 jobs over five years in India as part of an ambitious expansion in 2014. The investment amounted to a small fraction of that, according to The Washington Post’s Todd Frankel.
  • Foxconn committed to a $5 billion investment in Vietnam in 2007, and $10 billion in Brazil in 2011. The company made its first major foray in Vietnam only last year. In Brazil, Foxconn has an iPhone factory, but its investment has fallen far short of promises.
  • Foxconn recently laid off 60,000 workers, more than 50 percent of its workforce at its IPhone 6 factory in Kushan, China, replacing them with robots that Foxconn produces.

In fact, even the Wisconsin Legislative Fiscal Bureau is worried that the state may be overselling the deal, promising billions for very little.  As a Verge article reported:

Wisconsin’s plan to treat Foxconn to $3 billion in tax breaks in exchange for a $10 billion factory is looking less and less like a good deal for the state. In a report issued this week, Wisconsin’s Legislative Fiscal Bureau said that the state wouldn’t break even on its investment until 2043 — and that’s in an absolute best-case scenario.

How many workers Foxconn actually hires, and where Foxconn hires them from, would have a significant impact on when the state’s investment pays off, the report says.

The current analysis assumes that “all of the construction-period and ongoing jobs associated with the project would be filled by Wisconsin residents.” But the report says it’s likely that some positions would go to Illinois residents, because the factory would be located so close to the border. That would lower tax revenue and delay when the state breaks even.

And that’s still assuming that Foxconn actually creates the 13,000 jobs it claimed it might create, at the average wage — just shy of $54,000 — it promised to create them at. In fact, the plant is only expected to start with 3,000 jobs; the 13,000 figure is the maximum potential positions it could eventually offer. If the factory offers closer to 3,000 positions, the report notes, “the break-even point would be well past 2044-45.”

The authors of the report even seem somewhat skeptical of the best-case scenario happening. Foxconn is already investing heavily in automation, and there’s no guarantee it won’t do the same thing in Wisconsin. Nor is there any guarantee that Foxconn will remain such a manufacturing powerhouse. (Its current success relies heavily on the success of the iPhone.)

It is because of concerns like these, that the Milwaukee Journal Sentinel reports that the state’s Senate Majority Leader has said he doesn’t yet have the votes to pass the tax package Governor Scott Walker has promised.

Forget the new trade deals

President Trump has also spoken often about his determination to revisit past trade deals and restructure them in order to strengthen the economy and boost manufacturing employment.  However, it is now clear that the agreement restructuring he has in mind is what he calls “modernization” and that translates into expanding the terms of existing agreements to cover new issues of interest to leading US multinational corporations.

As Inside US Trade explains:

Commerce Secretary Wilbur Ross on Wednesday said “the easiest issues” to be addressed in North American Free Trade Agreement modernization talks “should be” those that were not part of the existing agreement, which entered into force in 1994.

“The easiest ones will be the ones that weren’t contained in the original agreement because that’s new territory; that’s not anybody giving up anything,” Ross said at an event hosted by the Bipartisan Policy Institute on May 31. “And by and large, those should be the easiest issues to get done.”

Ross added that those new issues are important “because one of our objectives will be to try to incorporate in NAFTA kind of basic principles that we would like to have followed in subsequent free-trade agreements, rather than starting each one with a blank sheet of paper.”

Among those issues — which he called “big holes” in the old agreement — he listed the digital economy, services, and financial services. . . .

Ross reiterated the administration’s stance that the “guiding principle is do no harm” in redoing NAFTA, while the second “rule of thumb” is to view concessions made by Mexico and Canada in the Trans-Pacific Partnership negotiations “as sort of a starting point” for NAFTA talks.

Asked whether the administration has set itself up for “unrealistic aspirations” on NAFTA — promising to return to the U.S. jobs that the president has often claimed were lost due to the agreement with Mexico and Canada — Ross cautioned against viewing a retooled deal as a “silver bullet.”

In short, it is foolish and costly to believe the promises made to working people by leading corporations and the Trump administration.  Hopefully, growing numbers of people are getting wise to the game being played, making it easier for us to more effectively organize and advance our own interests.

The Sorry State Of The US Economy

Although reluctant to say it, a recent IMF report on the state of US economy makes clear that US policy makers have failed to protect majority living conditions.

When a country joins the IMF, it agrees to have its economic and financial policies evaluated, in most cases annually, by an IMF team of economists.  As the IMF explains:

The IMF’s regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. . . The consultations are known as “Article IV consultations” because they are required by Article IV of the IMF’s Articles of Agreement.

The IMF recently concluded and published a summary of its Article IV consultations with the United States.  While the IMF generally pulls no punches in criticizing the policies of most member governments if it determines that they threaten to slow capitalist globalization dynamics, it tends to tap dance around disagreements when it comes to the policies of its more powerful member countries, especially the United States.  As Adam Tooze points out in his commentary on the IMF statement:

With respect to the US, the stakes are particularly high. The US has the largest vote on the IMF’s board and Congress controls the largest part of the IMF’s budget.

Not surprisingly, then, the IMF went the extra mile in finding nice ways of talking about the state of the US economy and even more importantly the wisdom of Trump administration policies. Even so, US economic challenges could not be completely hidden.  For example, after noting that the “The U.S. economy is in its third longest expansion since 1850,” the IMF goes on to comment:

However, the outlook is clouded by important medium-term imbalances. The U.S. economic model is not working as well as it could in generating broadly shared income growth. It is burdened by a rising public debt. The U.S. dollar is moderately overvalued (by around 10-20 percent). The external position is moderately weaker than implied by medium term fundamentals and desirable policies. The current account deficit is expected to be around 3 percent of GDP over the medium-term and the net international investment position has deteriorated markedly in the past several years. Most critically, relative to historical performance, post-crisis growth has been too low and too unequal.

To address these shortcomings, the administration intends a wide-ranging overhaul of policies, although a fully articulated policy plan has yet to emerge. The administration’s budget proposes to reduce the fiscal deficit and debt, to reprioritize public spending, and to revamp the tax system. However, during the Article IV consultation it became evident that many details about these plans are still undecided. Given these policy uncertainties, the IMF’s macroeconomic forecast uses a baseline assumption of unchanged policies. Specifically, it neither builds in the effect of tax reform nor the expenditure reductions proposed in the administration’s budget. Under this forecast, growth is expected to rise modestly above 2 percent this year and next, driven by continued solid consumption growth and a cyclical rebound in private investment. Growth is forecast to subsequently converge to the underlying potential growth rate of 1.8 percent.

However, IMF concerns over an uncertain US economic outlook and an unclear Trump administration policy plan pale in importance compared to the decline in US living standards illustrated in the following chart that was also in the report.

In broad brush, the US ranking on most of the selected living standards indicators has declined, which means that the US economy is losing ground relative to the other OECD countries in the sample.  But what really cries out for notice is how low the US is on such key indicators as: life expectancy at birth, overall mortality rate, health coverage, poverty rate, and secondary school graduation.  On these indicators, the US is approaching the bottom of the group of 24.  And of course, Trump administration policies, which aim to reduce spending on Medicare and Medicaid, gut worker-protecting health and safety and labor laws, slash taxes on corporations and the wealthy, and weaken unions will only intensify downward trends.

The IMF could easily have pointed out that, because of competitiveness pressures, US policies harm the well-being of workers in other countries as well as in the US, and pressed the US government to reverse course.  But majority living standards are not the most important thing to the IMF or the US government, and that is not how consultations work.

If we want improved living conditions we are going to have to fight for them.  Perhaps greater awareness of just how bad things are in the United States will help speed the effort.

We Should Demand Withdrawal From, Not Reform Of, Existing Trade Agreements

Many unions and progressive organizations hope to press President Trump to rework NAFTA and other trade agreements, such as the US-Korea Free Trade Agreement,  in ways that will strengthen worker rights in the US.  However, this effort is too limited and unlikely to succeed.  These agreements were designed to strengthen corporate rights and there is no way that they can be rehabilitated.  Our demand should be that the US government withdraw from all existing free trade and investment agreements.  Significantly, that is exactly what a number of countries have begun to do.

For example, as SouthNews reports:

Ecuador has unilaterally withdrawn from its remaining 16 bilateral investment treaties (BITs). With this decision, Ecuador has concluded the termination of 26 BITs signed by the country since 1968.

The 16 BITS which Ecuador is withdrawing from had been signed with the Netherlands, Germany, Great Britain, France, Spain, Italy, Sweden, Switzerland, Canada, the United States, China, Argentina, Bolivia, Peru, Venezuela, and Chile.

The Ecuadorian move is part of similar measures taken in recent years by a growing number of developing countries to withdraw from their bilateral investment treaties. These include South Africa, Bolivia, Indonesia and India.

Ecuador’s decision to withdrawal from its remaining BITs was driven in large part by the work of a 12 person government-civil society audit commission.  The Commission’s charge was to “verify the legality, legitimacy and lawfulness of investment treaties and other investment agreements signed by Ecuador, as well as to audit the validity and appropriateness of the awards, procedures, actions and decisions issued by Investor-State dispute settlement (ISDS) bodies and arbitral tribunals.”

The Commission’s 668 page report found that:

  1. The country’s BITs have not delivered the promised foreign direct investment
  2. The terms of the country’s BITs contradicted and undermined the country’s development objectives laid out in the country’s constitution and National Plan for Well-Being (Buen Vivir)
  3. The costs of the country’s BITs have far outweighed the benefits.

The Commission therefore recommended that the Ecuadorian government terminate all existing BITs and proposed that it negotiate entirely new investment instruments.  These new instruments, as reported by SouthNews:

should restrict the definition of investments, and strengthen the right of the State to regulate for the common good and sustainable development, including by recognizing the right of the State to impose obligations to foreign investors, apply performance requirements, secure the fiscal competence of the State, secure technology transfer, and force investors to respect international standards and human rights and the environment, among others.

The Commission also recommended the State not to include investor-state dispute settlement (ISDS) mechanisms in new BITs, and to strengthen the domestic jurisdiction in order to provide judicial guarantees for investors in national courts. These efforts should include the development of a comprehensive national policy on and specific rules for foreign investment, and the creation of one central agency to be in charge of the institutional governance of foreign investment.

Moreover, as the president of the Commission stated, “Fortunately Ecuador is not alone in denouncing these unjust investment agreements. It is joining a wave of countries around the world calling for a new international legal framework for investment which prioritizes public interest over corporate profits.”

In particular, South Africa, Indonesia, Bolivia and India are all taking steps to terminate their own investment agreements.  As SouthNews described:

Many countries in almost all regions have started to review their investment treaty regimes. . . . For example, South Africa initiated the termination of its existing BITs (when they expire) in recent years, with the objective of safeguarding its right to regulate investments and the right to establish development policies while at the same time protecting investor rights.   Bolivia has also withdrawn from its BITs.  India recently announced it would withdraw from 57 investment treaties with the objective of re-negotiating them based on its new model BIT.

The point is that the governments of these countries did not seek modification of their existing agreements, hoping to make them somewhat more supportive of national development objectives. Rather, they correctly understood that each agreement was composed of a complex interconnected set of standards, objectives, and regulations designed to promote corporate profit-making and as such were not reformable in a meaningful way.

Clearly, the US government is not interested in terminating its existing agreements.  To the extent that the Trump administration speaks about reform it is largely to blunt a growing popular movement against corporate designed globalization while it works to expand their reach to cover the digital economy, services, and financial services.  And that is precisely why we should not get into the reform game.  That is why we should sharpen the debate and make our own position clear: we support those governments that have decided to withdraw from their respective trade agreements and investment treaties and we want the US government to do the same.

 

US Corporations Continue Their Global Dominance

“Make America Great Again,” Donald Trump’s campaign slogan, was cleverly designed to suggest that the nation as a whole has been in decline.  And Trump repeatedly blamed past administrations for this situation, attacking them for pursuing policies that he said left US corporations unable to compete with their foreign rivals to the detriment of US workers.

US workers have indeed experienced a steady deterioration in their working and living conditions.  But Trump’s focus on national decline and call for national revitalization obscures what a class analysis plainly shows: leading US corporations have greatly benefited from past policies and continue to dominate global markets and profit handsomely.  In other words, US workers and US corporations do not share a common interest.  Moreover, Trump administration policies designed to strengthen US corporate competitiveness can be expected to further depress worker well-being.

Globalization Changes Things

We live in a world where economic processes and outcomes are heavily shaped by corporate globalization strategies.  This means that national statistics and measures of economic performance can be misleading.  Sean Starrs, in an essay titled “China’s Rise is Designed in America, Assembled in China,” makes this point by using a global lens to evaluate the relative economic strength of China and the United States.

In the pre-globalization era, a country’s production tended to be nationally rooted.  Thus, for example, Japan’s post World War II rise as a major producer and exporter of cars and consumer electronics meant that Japan’s “rising world share of national accounts [could be considered] synonymous [with] rising national economic power.”  But transnational corporate globalization strategies have dramatically changed things.

Thanks to the expansion of transnational corporate controlled cross-border production networks, the production of many goods and services has been divided into multiple segments, with each segmented located in a different country.  As a result, national economic activity tends to be truncated and less revealing of national value-added than in the past.

These networks are most fully developed in East Asia, and their expansion helped transform China into “the workshop of the world.” China is now the leading producer and exporter, largely to the United States, of such key products as cell phones and laptop computers.  However, in sharp contrast to the Japanese experience, most of the value-added in the production of these high-technology goods is captured by non-Chinese firms.  Thus, Chinese national accounts, especially its trade account, greatly overstate Chinese economic power.  At the same time, US national accounts, including its trade account, greatly overstate the loss of US economic power.

The table below, from Starrs’s article, shows China’s top five exports of manufactures, as well as export values and market share for each product.  It also shows US export values and market shares for the same products.  Finally, it also includes the relative share of global profits from sale of these products earned by Chinese and US corporations.  Starrs used the Forbes Global 2000 list, which ranks the top 2000 corporations in the world using a composite of four indices–assets, market value, profit and sales–and groups them by their appropriate sector of activity, to calculate the profit shares.

As we can see, China was responsible for 38 percent of world exports of telecommunications equipment in 2013, compared with a 7.4 percent share for the United States.  Yet, US firms captured 59 percent of the profit generated by sales of these products; the Chinese share was only 6 percent.  Perhaps even more striking:

There is not a single profitable Chinese firm in textiles that is large enough to make the Forbes Global 2000, despite China’s exports making up 39 percent of the world’s. Exports of clothing from production in the United States is miniscule compared to the rest of the world, at 1.3 percent, yet American firms reap 46 percent of the profit-share — even when the top two firms in the world, Inditex (owner of Zara) and H&M, are both European (Spanish and Swedish, respectively).

The reason for this is simple: Chinese production of the products listed in the table takes place within cross-border production networks largely dominated by US corporations.  US firms are able to monopolize the profits generated by the production and sale of these products thanks to their control over the relevant technologies, product branding, and marketing.

The point then is that in the age of globalization, national accounts are no longer a reliable indicator of national economic strength.

Continued US Global Dominance

A simple look at national accounts does paint a picture of declining US economic power.  For example, the US share of global GDP has slowly but steadily declined.  It was 37 percent in the mid-1960s, 33 percent in the mid-1980s, 27 percent in the mid-2000s, and most recently approximately 22 percent.  The US share of world merchandise exports has also declined.  It averaged approximately 12 percent throughout the 1980s and 1990s and then began rapidly falling.  It was down to 8.5 percent by 2010.

However, Starrs finds that once one takes globalization dynamics into account, US corporations continue to dominate international economic activity.

The table below, again from Starrs’s article, looks at 16 leading sectors and the national profit share for the top 2000 publicly traded global corporations within each sector, for the years 2006, 2010, and 2014.   As we can see, in 2014, the US was the only country with corporations that finished in one of the top three places in all 16 sectors.  US corporations had the largest profit shares in 10 of the 16 sectors, including those at the technological frontier.  They are:

  • Aerospace and defense
  • Chemicals
  • Computer hardware and software
  • Conglomerates
  • Electronics
  • Financial Services
  • Heavy Machinery
  • Oil and Gas
  • Pharmaceuticals and Personal Care
  • Retail

If we define market control as either a 40 percent share of global profits or a profit share more than twice that of the second-place nation, US corporations dominated in 8 of these sectors:

  • Aerospace and defense
  • Chemicals
  • Computer Hardware and Software
  • Conglomerates
  • Financial Services
  • Heavy Machinery
  • Pharmaceuticals and Personal Care
  • Retail

Here are the 6 sectors which were led by a country other than the United States:

  • Auto Trucks and Parts: Japan is first and the US third
  • Banking: China is first and the US second.
  • Construction: China is first and the US tied for second.
  • Forestry, Metals, and Mining: Australia is first and the US third.
  • Real estate: Hong Kong is first and the US third.
  • Telecommunications: the UK is first and the US second.

China is the only country other than the United States that finished first in more than one sector.  But as Starrs points out:

Almost all of these top Chinese firms are state-owned enterprises with heavily protected domestic [markets] with very few operations abroad (with the partial exception of Chinese firms in natural resource extraction). None of these behemoth state-owned enterprises can be characterized as globally competing head-to-head with the world’s top corporations to advance the technological frontier, yet these firms constitute the bulk of the non-foreign ownership of profit from production and investment conducted in China.

And the US is second to China in both sectors.

In short, US corporations remain dominant and highly profitable.  And, US dominance is even greater then these results suggest.  That is because US capital “disproportionately owns not only the economic activity occurring within the territory of the United States, but also around the world.”  Thus, while the US “accounts for only 22 percent of global GDP . . . the proportion of American millionaires and total household wealth is 42 percent and 41 percent respectively [of world totals].”

In sum, it is clear that the US state has done well by leading US firms and their owners.  The problem for us is that the policies that helped produce this outcome—deregulation, liberalization, privatization, and globalization, to list a few—have not benefited US workers, and in most cases workers in other countries as well.  Moreover, sustained US corporate dominance does not guarantee the vitality, or even the stability of the global economy.  Core economies continue to stagnate and there is no reason to think that renewal is on the horizon.  In fact, quite the opposite is true; there are growing signs that the US expansion is near end and that Chinese growth will continue to weaken.

Trump, with his call to “Make American Great Again,” aims to use nationalism to win support for his own efforts to advance US corporate interests. While it remains unclear to what extent his policies will differ from those of past administrations, it is already certain that they will not serve majority interests.  This destructive use of nationalism must be challenged.  The best way is to promote a strategy of resistance that flows from and helps to popularize a grounded class analysis of the workings of our economy.

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 Businessweek 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.

Trump’s Economic Policies Are No Answer To Our Problems

President Trump has singled out unfair international trading relationships as a major cause of US worker hardship.  And he has promised to take decisive action to change those relationships by pressuring foreign governments to rework their trade agreements with the US and change their economic policies.

While international economic dynamics have indeed worked to the disadvantage of many US workers, Trump’s framing of the problem is highly misleading and his promised responses are unlikely to do much, if anything, to improve majority working and living conditions.

President Trump and his main advisers have aimed their strongest words at Mexico and China, pointing out that the US runs large trade deficits with each, leading to job losses in the US.  For example, Bloomberg News reports that Peter Navarro, the head of President Trump’s newly formed White House National Trade Council “has blamed Nafta and China’s 2001 entry into the World Trade Organization for much, if not all, of a 15-year economic slowdown in the U.S.” In other words, poor negotiating skills on the part of past US administrations has allowed Mexico and China, and their workers, to gain at the expense of the US economy and its workers.

However, this nation-state framing of the origins of contemporary US economic problems is seriously flawed. It also serves to direct attention away from the root cause of those problems: the profit-maximizing strategies of large, especially US, multinational corporations.  It is the power of these corporations that must be confronted if current trends are to be reversed.

Capitalist Globalization Dynamics

Beginning in the late 1980s large multinational corporations, including those headquartered in the US, began a concerted effort to reverse declining profits by establishing cross border production networks (or global value chains).  This process knitted together highly segmented economic processes across national borders in ways that allowed these corporations to lower their labor costs as well as reduce their tax and regulatory obligations.   Their globalization strategy succeeded; corporate profits soared.  It is also no longer helpful to think about international trade in simple nation-state terms.

As the United Nations Conference on Trade and Development explains:

Global trade and foreign direct investment have grown exponentially over the last decade as firms expanded international production networks, trading inputs and outputs between affiliates and partners in GVCs [Global Value Chains].

About 60 per cent of global trade, which today amounts to more than $20 trillion, consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption. The fragmentation of production processes and the international dispersion of tasks and activities within them have led to the emergence of borderless production systems – which may be sequential chains or complex networks and which may be global, regional or span only two countries.

UNCTAD estimates (see the figure below) that some 80 percent of world trade “is linked to the international production networks of TNCs [transnational corporations], either as intra-firm trade, through NEMs [non-equity mechanisms of control] (which include, among others, contract manufacturing, licensing, and franchising), or through arm’s-length transactions involving at least one TNC.”

tnc-involvement

In other words, multinational corporations have connected and reshaped national economies along lines that best maximize their profit.  And that includes the US economy.  As we see in the figure below, taken from an article by Adam Hersh and Ethan Gurwitz, the share of all US merchandise imports that are intra-firm, meaning are sold by one unit of a multinational corporation to another unit of the same multinational, has slowly but steadily increased, reaching 50 percent in 2013.  The percentage is considerably higher for imports of manufactures, including in key sectors like electrical, machinery, transportation, and chemicals.

onea

The percentage is lower, but still significant for US exports.  As we see in the following figure, approximately one-third of all merchandise exports from the US are sold by one unit of a multinational corporation to another unit of the same company.

oneb

The percentage of intra-firm trade is far higher for services, as illustrated in the next figure.

services

As Hersh and Gurwitz comment,

The trend is clear: As offshoring practices increase, companies need to provide more wraparound services—the things needed to run a businesses besides direct production—to their offshore production and research and development activities. Rather than indicating the competitive strength of U.S. services businesses to expand abroad, the growth in services exports follows the pervasive offshoring of manufacturing and commercial research activities.

Thus, there is no simple way to change US trade patterns, and by extension domestic economic processes, without directly challenging the profit maximizing strategies of leading multinational corporations.  To demonstrate why this understanding is a direct challenge to President Trump’s claims that political pressure on major trading partners, especially Mexico and China, can succeed in boosting the fortunes of US workers, we look next at the forces shaping US trade relationships with these two countries.

The US-Mexican Trade Relationship

US corporations, taking advantage of NAFTA and the Mexican peso crisis that followed in 1994-95, poured billions of dollars into the country (see the figure below).  Their investment helped to dramatically expand a foreign-dominated export sector aimed at the US market that functions as part of a North American region-wide production system and operates independent of the stagnating domestic Mexican economy.

fdi-mexico

Some 80 percent of Mexico’s exports are sold to the US and the country runs a significant merchandise trade surplus with the US, as shown in the figure below.

trade-mexico

Leading Mexican exports to the US include motor vehicles, motor vehicle parts, computer equipment, audio and video equipment, communications equipment, and oil and gas.  However, with the exception of oil and gas, these are far from truly “Mexican” exports.  As a report from the US Congressional Research Service describes:

A significant portion of merchandise trade between the United States and Mexico occurs in the context of production sharing as manufacturers in each country work together to create goods. Trade expansion has resulted in the creation of vertical supply relationships, especially along the U.S.-Mexico border. The flow of intermediate inputs produced in the United States and exported to Mexico and the return flow of finished products greatly increased the importance of the U.S.- Mexico border region as a production site. U.S. manufacturing industries, including automotive, electronics, appliances, and machinery, all rely on the assistance of Mexican [based] manufacturers. One report estimates that 40% of the content of U.S. imports of goods from Mexico consists of U.S. value added content.

Because foreign multinationals, many of which are US owned, produce most of Mexico’s exports of “advanced” manufactures using imported components, the country’s post-Nafta export expansion has done little for the overall health of the Mexican economy or the well-being of Mexican workers. As Mark Weisbrot points out:

If we look at the most basic measure of economic progress, the growth of gross domestic product, or income per person, Mexico, which signed on to NAFTA in 1994, has performed the 15th-best out of 20 Latin American countries.

Other measures show an even sadder picture. The poverty rate in 2014 was 55.1 percent, an increase from the 52.4 percent measurement in 1994.

Wages tell a similar story: There’s been almost no growth in real inflation-adjusted wages since 1994 — just about 4.1 percent over 21 years.

Representative Sander Levin and Harley Shaiken make clear that the gains have been nonexistent even for workers in the Mexican auto industry, the country’s leading export center:

Consider the auto industry, the flagship manufacturing industry across North America. The Mexican auto industry exports 80 percent of its output of which 86 percent is destined for the U.S. and Canada. If high productivity translated into higher wages in Mexico, the result would be a virtuous cycle of more purchasing power, stronger economic growth, and more imports from the U.S.

In contrast, depressed pay has become the “comparative advantage”. Mexican autoworker compensation is 14 percent of their unionized U.S. counterparts and auto parts workers earn even less–$2.40 an hour. Automation is not the driving force; its depressed wages and working conditions.

In other words, US workers aren’t the only workers to suffer from the globalization strategies of multinational corporations.  Mexican workers are also suffering, and resisting.

In sum, it is hard to square this reality with Trump’s claim that because of the way NAFTA was negotiated Mexico “has made us look foolish.” The truth is that NAFTA, as designed, helped further a corporate driven globalization process that has greatly benefited US corporations, as well as Mexican political and business elites, at the expense of workers on both sides of the border.  Blaming Mexico serves only to distract US workers from the real story.

The US-Chinese Trade Relationship

The Chinese economy also went through a major transformation in the mid-1990s which paved the way for a massive inflow of export-oriented foreign investment targeting the United States.  The process and outcome was different from what happened in Mexico, largely because of the legacy of Mao era policies.  The Chinese Communist Party’s post-1978 state-directed reform program greatly benefited from an absence of foreign debt; the existence of a broad, largely self-sufficient state-owned industrial base; little or no foreign investment or trade; and a relatively well-educated and healthy working class.  This starting point allowed the Chinese state to retain considerable control over the country’s economic transformation even as it took steps to marketize economic activity in the 1980s and privatize state production in the 1990s.

However, faced with growing popular resistance to privatization and balance of payments problems, the Chinese state decided, in the mid-1990s, to embrace a growing role for export-oriented foreign investment.  This interest in attracting foreign capital dovetailed with the desire of multinational corporations to globalize their production.  Over the decade of the 1990s and 2000s, multinational corporations built and expanded cross border production networks throughout Asia, and once China joined the WTO, the country became the region’s primary final assembly and export center.

As a result of this development, foreign produced exports became one of the most important drivers, if not the most important, of Chinese growth.  For example, according to Yılmaz Akyüz, former Director of UNCTAD’s Division on Globalization and Development Strategies:

despite a high import content ranging between 40 and 50 percent, approximately one-third of Chinese growth before the global crisis [of 2008] 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

The figure below illustrates the phenomenal growth in Chinese exports.

china-exports

The US soon became the primary target of China’s exports (see the trade figures below).   The US now imports more goods from China than from any other country, approximately $480 billion in 2015, followed by Canada and Mexico (roughly $300 billion each).  The US also runs its largest merchandise trade deficit with China, $367 billion in 2015, equal to 48 percent of the overall US merchandise trade deficit.  In second place was Germany, at only $75 billion.

china-trade-us

Adding to China’s high profile is the fact that it is the primary supplier of many high technology consumer goods, like cell phones and laptops. More specifically:

(F)or 825 products, out of a total of about 5,000, adding up to nearly $300 billion, China supplies more than all our other trade partners combined. Of these products, the most important is cell phones, where $40 billion in imports from China account for more than three-quarters of the total value imported.

There are also 83 products where 90 percent or more of US imports come from China; together these accounted for a total of $56 billion in 2015. The most important individual product in this category is laptop computers, which alone have an import value of $37 billion from China, making up 93 percent of the total imported.

Of course, China is also a major supplier of many low-technology, low-cost goods as well, including clothing, toys, and furniture.

Not surprisingly, exports from China have had a significant effect on US labor market conditions. Economists David Autor, David Dorn and Gordon Hanson “conservatively estimate that Chinese import competition explains 16 percent of the U.S. manufacturing employment decline between 1990 and 2000, 26 percent of the decline between 2000 and 2007, and 21 percent of the decline over the full period.”  They also find that Chinese import competition “significantly reduces earnings in sectors outside manufacturing.”

President Trump has accused China of engaging in an undeclared trade war against the United States.   However, while Trump’s charges conjure up visions of a massive state-run export machine out to crush the United States economy for the benefit of Chinese workers, the reality is quite different.

First, although the Chinese state retains important levers of control over economic activity, especially the state-owned banking system, the great majority of industrial production and export activity is carried out by private firms.  In 2012, state-owned enterprises accounted for only 24 percent of Chinese industrial output and 18 percent of urban employment.  As for exports, by 2013 the share of state-owned enterprises was down to 11 percent.  Foreign-owned multinationals were responsible for 47 percent of all Chinese exports.  And, most importantly in terms of their effect on the US economy, multinational corporations produce approximately 82 percent of China’s high-technology exports.

Second, although these high-tech exports come from China, for the most part they are not really “Chinese” exports.  As noted above, China now functions as the primary assembly point for the region’s cross border production networks.  Thus, the majority of the parts and components used in Chinese-based production of high-technology goods come from firms operating in other Asian countries.  In many cases China’s only contribution is its low-paid labor.

A Washington Post article uses the Apple iPhone 4, a product that shows up in trade data as a Chinese export, to illustrate the country’s limited participation in the production of its high technology exports:

In a widely cited study, researchers found that Apple created most of the product’s value through its product design, software development and marketing operations, most of which happen in the United States. Apple ended up keeping about 58 percent of the iPhone 4’s sales price. The gross profits of Korean companies LG and Samsung, which provided the phone’s display and memory chips, captured another 5 percent of the sales price. Less than 2 percent of the sales price went to pay for Chinese labor.

“We estimate that only $10 or less in direct labor wages that go into an iPhone or iPad is paid to China workers. So while each unit sold in the U.S. adds from $229 to $275 to the U.S.-China trade deficit (the estimated factory costs of an iPhone or iPad), the portion retained in China’s economy is a tiny fraction of that amount,” the researchers wrote.

The same situation exists with laptop computers, which are assembled by Chinese workers under the direction of Taiwanese companies using imported components and then exported as Chinese exports.  Economists have estimated that the US-Chinese trade balance would be reduced by some 40 percent if the value of these imported components were subtracted from Chinese exports.  Thus, it is not Chinese state enterprises, or even Chinese private enterprises, that are driving China’s exports to the US.  Rather it is foreign multinationals, many of which are headquartered in the US, including Apple, Dell, and Walmart.

And much like in Mexico, Chinese workers enjoy few if any benefits from their work producing their country’s exports.  The figure below highlights the steady fall in labor compensation as a share of China’s GDP.

china-labor

Approximately 80 percent of Chinese manufacturing workers are internal migrants with a rural household registration.  This means they are not entitled to access the free or subsidized public health care, education, or other social services available in the urban areas where they now work; the same is true for their children even if they are born in urban areas.  Moreover, most migrants receive little protection from Chinese labor laws.

For example, as the China Labor Bulletin reports:

In 2015, seven years after the implementation of the Labor Contract Law, only 36 percent of migrant workers had signed a formal employment contract with their employer, as required by law. In fact the percentage of migrant workers with formal contracts actually declined last year by 1.8 percent from 38 percent. For short-distance migrants, the proportion was even lower, standing at just 32 percent, suggesting that the enforcement of labor laws is even less rigid in China’s inland provinces and smaller cities.

According to the [2014] migrant worker survey . . . the proportion of migrant workers with a pension or any form of social security remained at a very low level, around half the national average. In 2014, only 16.4 percent of long-distance migrants had a pension and 18.2 percent had medical insurance.

Despite worker struggles, which did succeed in pushing up wages over the last 7 years, most migrant workers continue to struggle to make ends meet.   Moreover, with Chinese growth rates now slipping, and the government eager to restart the export growth machine, many local governments have decided, with central government approval, to freeze minimum wages for the next two to four years.

In short, it is not China, or its workers, that threaten US jobs and well-being.  It is the logic of capitalist globalization.  Thus, Trump’s call-to-arms against China obfuscates the real cause of current US economic problems and encourages working people to pursue a strategy of nationalism that can only prove counterproductive.

The Political Challenge Facing US Workers

The globalization process highlighted above was strongly supported by all major governments, especially by successive US administrations.  In contrast to Trump claims of a weak US governmental effort in support of US economic interests, US administrations used their considerable global power to secure the creation of the WTO and approval of a host of other multilateral and bilateral trade agreements, all of which provided an important infrastructure for capital mobility, thereby supporting the globalizing efforts of leading US multinational corporations.

President Trump has posed as a critic of existing international arrangements, claiming that they have allowed other countries, such as Mexico and China, to prosper at US expense.  He has stated that he will pursue new bilateral agreements rather than multilateral ones because they will better serve US interests and he has demanded that US multinational corporations shift their investment and production back to the US.

Such statements have led some to believe that the Trump administration is serious about challenging globalization dynamics in order to rebuild the US economy in ways that will benefit working people.  But there are strong reasons to doubt this.  Most importantly, he seems content to threaten other governments rather than challenge the profit-maximizing logic of dominant US companies, which as we have seen is what needs to happen.

One indicator: an administration serious about challenging the dynamics of globalization would have halted US participation in all ongoing negotiations for new multilateral agreements, such as the Trade in Services Agreement which is designed to encourage the privatization and deregulation of services for the benefit of multinational corporations.  This has not happened.

Such an administration would also renounce support for existing and future bilateral agreements that contain chapters that strengthen the ability of multinational corporations to dominate key sectors of foreign economies and sue their governments in supranational secret courts.  This has not happened.

Another indicator: an administration serious about creating a healthy, sustainable, and equitable domestic economy would strengthen and expand key public services and programs; rework our tax system to make it more progressive; tighten and increase enforcement of health and safety and environmental regulations; strengthen labor laws that protect the rights of workers, including to unionize; and boost the national minimum wage.  The Trump administration appears determined to do the opposite.

Such an administration would also begin to develop the state capacities necessary to redirect existing production and investment activity along lines necessary to rebuild our cities and infrastructure, modernize our public transportation system, and reduce our greenhouse gas emissions.  The Trump administration appears committed to the exact opposite.

In short, if we take Trump’s statements seriously, that he actually wants to shift trading relationships, then it appears that his primary strategy is to make domestic conditions so profitable for big business, that some of the most globally organized corporations will shift some of their production back to the United States.  However, even if he succeeds, it is very unlikely that this will contribute to an improvement in majority living and working conditions.

The main reason is that US corporations, having battered organized labor with the assistance of successive administrations, have largely stopped creating jobs that provide the basis for economic security and well-being.  Economists Lawrence F. Katz and Alan B. Krueger examined the growth  from 2005 to 2015 in “alternative work arrangements,” which they defined as temporary help agency workers, on-call workers, contract workers, and independent contractors or freelancers.

They found that the percentage of workers employed in such arrangements rose from 10.1 percent of all employed workers in February 2005 to 15.8 percent in late 2015.  But their most startling finding is the following:

A striking implication of these estimates is that all of the net employment growth in the U.S. economy from 2005 to 2015 appears to have occurred in alternative work arrangements. Total employment according to the CPS increased by 9.1 million (6.5 percent) over the decade, from 140.4 million in February 2005 to 149.4 in November 2015. The increase in the share of workers in alternative work arrangements from 10.1 percent in 2005 to 15.8 percent in 2015 implies that the number of workers employed in alternative arrangement increased by 9.4 million (66.5 percent), from 14.2 million in February 2005 to 23.6 million in November 2015. Thus, these figures imply that employment in traditional jobs (standard employment arrangements) slightly declined by 0.4 million (0.3 percent) from 126.2 million in February 2005 to 125.8 million in November 2015.

A further increase in employment in such “alternative work arrangements,” which means jobs with no benefits or security, during a period of Trump administration-directed attacks on our social services, labor laws, and health and safety and environmental standards is no answer to our problems. Despite what President Trump says, our problems are not caused by other governments or workers in other countries.  Instead, they are the result of the logic of capitalism. The Trump administration, really no US administration, is going to willingly challenge that. That is up to us.