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Peru's President Lays Bare the Big Lie at the Center of U.S. Trade Policy
Sunday, December 30, 2007 - American Economic Alert, U.S. Business & Industry Council

by Alan Tonelson

How depressing, but not surprising, that the most honest and useful statement made about U.S. trade policy this year has come from a foreign leader. Americans owe Peruvian President Alan Garcia a big "Thank you" for making crystal clear that even trade agreements with small countries like his are all about exporting American factories and jobs, not U.S. goods and services.

(left) Alan Tonelson

Garcia revealed that, in spite of globalization supporters' promises to the contrary to Congress prior to each trade vote, the new trade deal between his country and the United States has nothing to do with increasing export opportunities for U.S. domestic producers and their workers, and everything to do with encouraging more offshoring of domestic production and jobs.

In the process, Garcia also provided a vital reminder that what's really wrong with current U.S. trade policies bears no relationship whatever to the "new consensus" on trade reached earlier this year by the Congressional Democratic leadership -- without debate by the full Democratic caucus -- and then agreed to by the Bush Administration.

Speaking to a U.S. Chamber of Commerce victory celebration before dashing to the White House to sign the U.S.-Peru free trade deal, Garcia urged the executives in the audience, "Come and open your factories in my country so we can sell your products back to the U.S."

This singular remark went completely unreported, except by Bloomberg correspondent Mark Drajem. Garcia's statement not only exposes the fundamental falsehood behind every free-trader portrayal of the Peru deal as an exciting new exporting opportunity for America's entire domestic economy, but it also reveals the real rationale behind virtually all of the trade expansion schemes devised by the U.S. economic policy establishment since (and including) the North American Free Trade Agreement. Far from helping U.S.-based producers reach new customers overseas, these agreements have always aimed at helping multinational companies supply the U.S. market from lower-cost, regulation-indifferent, and thus vastly more profitable foreign supply bases.

The depiction of Peru as a promising new consumer market for U.S.-made goods was always laughable -- just as were similar depictions of the New Haven-sized market in Central America (CAFTA), of export-obsessed China (PNTR), and of still-impoverished Mexico (NAFTA). Even though mineral export revenues have been pouring in to Peru thanks to the global commodities boom (fueled largely by China's thirst for raw materials), that country is still strapped with a 50 percent poverty rate and an equally high rate of un- and under-employment. In fact, the whole economy is only the size of that of Hartford, Connecticut. As is the case with its third-world counterparts, Peru is simply too poor and too reliant on net exports for development to afford or want to purchase most of what America still makes.

It's inconceivable that Fortune 500 companies, academic economists, U.S. Executive Branch officials, and Members of Congress don't know or have neglected to learn the facts -- especially since most of the relevant data come from U.S. government web sites. Anyone who gave the data even a superficial glance should have known all along that the big prize in the Peru deal is in fact the U.S. market. Even more outrageous, America's political leaders, as well as the media, should have known this for a decade -- ever since former President Bill Clinton admitted to a labor audience (in another universally available but unreported comment) that NAFTA was really about "factories moving there to sell back to here."

By relocating production from the United States to Peru -- and so many other countries like it, multinational manufacturers can slash production costs (a) by employing workers who command wages and benefits orders of magnitude lower than those of their U.S. counterparts, and (b) by capitalizing on the virtual absence of meaningful environmental or occupational health and safety regulations. Even better, these companies can keep selling products made in the third world to their existing U.S. customers at near-first world prices. It's hard to imagine a better formula for improving their profit margins.

In theory, the multinationals can also sell their offshored output to non-U.S. markets in the developed and developing worlds -- as trade deal supporters have long promised. If these products contained enough U.S. content, such sales could significantly expand demand for U.S. production and workers, and strengthen the domestic economy. In practice, though, few other countries, poor or rich, are interested in significantly increasing net imports enough to create these benefits for U.S.-based producers and workers. The proof is that the U.S. trade deficit in manufactures has become and remained huge during the Age of Offshoring, which began in earnest with NAFTA.

Naturally, Peruvian factories won't ever make all or even close to most of what the United States produces. Even super-low wages and regulatory vacuums won't attract investment if productivity levels aren't satisfactory or capable of becoming so. Not to worry, though -- there are plenty of labor-intensive industries for Peru to enter. Moreover, Peruvian workers are no less intelligent than workers anywhere, and multinational companies are happy to transfer their state-of-the-art product and process technologies, as well as their management savvy -- especially when a recipient country's workforce is so big and so full of jobless people that the intense competition for jobs guarantees wages will stay very low.

At the same time, because the outsourcers have gotten their way in trade policy so often for so long, they have lots of options other than Peru. Its fellow Andean countries Colombia, Ecuador, and Bolivia are on the future trade deals list, and there are scores of other countries and regions clamoring for export-oriented capital. Finally, there are the current beneficiaries of the trade deal club -- Mexico, Central America, the Caribbean Basin, sub-Saharan Africa, and of course China -- where all the same conditions favorable to outsourcing exist.

As a result, the multinationals can watch as each competes against the others to offer the lowest wages, the flimsiest regulatory structures, and the most lavish subsidies in a classic race to the bottom. The more countries involved, of course, the fiercer the competition and the merrier the outcome for the outsourcers.

Garcia can't be too happy about this situation. His "factories" remark shows his awareness that few countries create lasting prosperity by staying in the raw materials business. Industrialization is almost always what's needed. Yet Peru's prospects for competing successfully against China and Asia's other super-exporters can't be bright -- at least judging from Mexico's experience. The country's only real hope is to identify some lucrative manufacturing niches to exploit, but the ruthless fact is that China's industrial policies don't overlook many sectors or even individual products.

U.S.-based producers and workers lose out from the multinationals' trade strategy first and foremost. The small and medium-sized industrial suppliers to multinational firms usually find it excruciatingly difficult to export to factories or assembly plants thousands of miles away, much less set up shop or find partners in foreign environments -- where corruption, bogus legal and regulatory systems, and rampant (often officially encouraged) intellectual property theft pose constant challenges even to the veteran multinational outsourcers the smaller firms seek to service.

And when the smaller and medium-sized firms cut prices to match third world competitors, they deprive themselves of earnings to reinvest in new technology, plant, and equipment. In effect, they plunge into a no-win struggle based largely on price -- in effect an industrial race to the bottom. Either way, of course, their employees lose, as their jobs disappear completely or their wages and benefits are cut way back. Along the way, these workers, and the nation as a whole, steadily lose their ability to pay their import bills responsibly, i.e., through increased earnings and not increased borrowing.

Therefore, America's international finances suffer as well. Expanding trade with countries needing to foster exports and limit imports has inevitably fueled America's enormous trade deficits. And because these staggering imbalances continuously undermine global financial stability, the multinationals and the countries like China that are profiting handsomely in the short run won't escape the crisis coming into view -- with the dollar already beginning to succumb to a lack of confidence.

This, in fact, is the real "NAFTA model" being followed by U.S. trade policy -- a pattern much more dangerous, but also more complex, than the left-wing trade critics' broad-brush charge that global capital has been given breathtaking new opportunities to exploit global labor. It involves using trade agreements to upset the equilibrium between consumption and production that the entire global economy -- and all the countries in it, rich and poor alike -- depends on for durable prosperity. And it's the inevitable consequence of offshoring -- which viewed in this context means stripping countries like the United States of the production capability and thus the earnings opportunities they need to pay for consumption responsibly, and sending this wherewithal to low-income countries that will long remain too poor or indebted or mercantilist to absorb much of this output themselves.

Thus this real NAFTA model condemns the higher-income countries to ever more borrowing in order to maintain consumption levels and living standards, at the very time that it encourages ever more over-production from the consumption-challenged low-income countries.

Just as bad, the new White House-Congressional consensus reached on trade policy over the last year has no capability whatever to change the NAFTA model and put the U.S. and world economies on more solid footings. As explained in previous columns (especially "Democrats' Trade Plan Needs More Work," April 4, 2007), there's simply too big a labor glut in the developing world to boost pay there by protecting worker rights more effectively. That strategy hasn't even worked in the United States once America opened wide to imports. In addition, labor costs are falling as a percentage of manufacturing costs in critical third world countries like China, as they move steadily into more capital-intensive sectors.

Requiring better environmental standards on third world manufacturing is more promising in theory, but runs into a fatal obstacle that undermines the worker rights strategy as well -- enforceability. Simply put, how many zillion American officials are going to have to be running around inspecting how many zillion third world factories to put the necessary teeth into this approach? Again, as a point of reference, the U.S. taxpayer is reluctant to pay for the needed personnel and resources to get that job done even in this country.

As has been the case since the real NAFTA model emerged, the only realistic response is for the U.S. government to recognize its still decisive power, take matters into its own hands, focus on controlling what is controllable (access to the U.S. market) rather than what is uncontrollable (socioeconomic conditions and government policies around the world) and use import restrictions to bring global trade accounts into sustainable balance. International agreement from a world all too accustomed to free-riding would, of course, be valuable in speeding the process. But ultimately the United States has led the way into this mess, and it will have to be the United States that leads the way out.