11/06/09 - Basil & Spice

Voter thinking this Tuesday focused on jobs and the economy, and sent a clear message of dissatisfaction with economic progress to-date. Reinvigorating Main Street America’s employment picture, however, will not be easy. Problems have been building for years, long before the sub-prime crisis. Some believe automation is the major source of recent job losses. However, it is difficult to look at the constant parade of long trains carrying shipping containers inland, or the millions of illegals turning up all across America, and conclude that this is the case.

Substantial improvement on Main Street will primarily require drastically limiting ‘Free Trade.’ Free Trade supporters repeatedly cite the imposition of Smoot-Hawley tariffs as substantially deepening and prolonging the Great Depression, and conclude that we must not turn protectionist. Reality, however, is that prior to Smoot-Hawley, the 1929 Trade Surplus was an insignificant 0.38% of our GDP, and could not possibly have had significant impact even if lost entirely. True, international trade plays a much bigger role than in 1930 – however, the fact that we’ve run large and increasing trade deficits for decades is prima-facie evidence that no trade whatsoever would at least stop the bleeding.

As for Adam Smith’s famous Free Trade support, that occurred 200+ years ago – before across-the-board very large and low-cost competitors like China, India, Japan, Korea, Taiwan, and Vietnam, the Internet, jet planes, and massive cargo ships made a much large proportion of economies vulnerable to offshoring than ever before. We need to also remember that protectionism is what allowed the U.S. and its new Asian competitors to achieve their original economic strength. (Smith himself warned against taking Free Trade too far – such that a nation’s security was endangered.)

Free Trade defenders might assert that manufacturing and IT have borne the brunt of offshoring to date, and their future offshoring is not likely to increase. Recent trends and data, however, suggest service jobs will increasingly also become affected. American firms are already establishing R&D facilities in China; Asian competitors not only have a cost advantage competing for engineering work, they also have the advantage of greater experience in production gained through producing our manufactures.

Unfortunately, this also provides them with a natural lead-in to new areas – eg. offshored CRT-tube manufacturing experience helped Asians in new areas of plasma, LCD, photovoltaic, solar, and LED screen development and manufacturing, and this trend probably will extend into nanotubes as well. Data reported in Business Week’s 11/09/2009 issue confirms the shift – over the past year, U.S. employment of scientists and engineers has fallen by 6.3%, while overall employment has fallen only 4.1%.

Proposed U.S. economic remedies frequently suggest increasing the proportion of Americans receiving college degrees as a defense against offshoring. Alan Blinder, former Federal Reserve Vice-Chairman and current economics professor at Princeton, warns that the key distinction in whether a job is likely to be offshored or not will be in whether a particular service is delivered in person (haircuts, brain surgery) or not (computer programming) – not whether it is education intensive. (Elective brain surgery can also be offshored.) Thus, a college degree may no longer be a panacea. Blinder also believes it is quite likely that offshoring (unless changed) will depress the real wages of many U.S. workers who do not lose their jobs, the offshoring transition will continue for 2 – 3 decades and bring gross potential job losses in the range of 30- 40 million, and that American standards of living will decline. Proposals by still others to deal with offshoring job losses via more jobs in high-tech areas (eg. biotechnology) become ludicrous when viewed in the light of these numbers. Professor Blinder’s suggestion makes much more sense – increased vocational education.

Additionally, some Free Trade defenders contend that Chinese labor costs will soon become non-competitive. There are two problems with relying on this ‘defense:’

  1. Chinese productivity has also increased considerably. Economist Steven Roach (author of The Next Asia) lives and works in China and reports that productivity in China’s industrial sector surged nearly 20%/year from 2000-2004. Further, even after six years of double-digit increases, average hourly compensation for Chinese manufacturing workers was only 3% that of the U.S. average in 2004. (It’s difficult to get reliable up-to-date information on China.)
  2. By 2020 it is estimated that there will be 553 million non-agricultural workers in China – 100 million more than in all the developed world, according to Martin Jacques in When China Rules the World.

Others contend that China cannot continue its rapid economic growth without Democracy, something it shows few signs of doing. Jacques, on the other hand, provides data showing that most Chinese believe the political climate has improved since 1989 (Tienanmen Square), and 72% of its population are satisfied with the condition of the country vs. only 39% in the U.S. (As for the widely reported large number of civil disturbances within China reported each year, Jacques contends most have nothing to do with the central government – eg. local land issues.)

Finally, there is the large and growing problem of illegal immigrants taking jobs from American citizens. The U.S. already has enough problems finding work for its own citizens, and the problems are going to become much more severe via currently unfettered offshoring. It is numerically impossible for the U.S. to also provide jobs for the current number of illegal immigrants from Mexico, Central, and South America – we must sharply reduce the estimated 12 million illegal immigrants in the U.S.

– Loyd Eskildson

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Updated and expanded new Chinese edition just released.

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Turkish edition just published!

When China Rules the World is the first book to fully conceive of and explain the upheaval that China’s ascendance will cause and the realigned global power structure it will create.

New edition available now from:

Amazon UK
and all good booksellers.

US second edition is available now via: 

Amazon US