Free Trade, Open Immigration Dogmas Must Be Rethought

At a time when even

the Wall Street Journal
disappeared into the maw of a huge media conglomerate,
the New York Times remains an independent
newspaper. But it doesn`t show any independence in
reporting or in thought.

The Times issued a mea culpa for letting its

Judith Miller
, misinform readers

about Iraq,
thus helping the

set the stage for their invasion.
Now the Times` reporting on Iran seems to be
repeating the mistake. After the US commits another
senseless act of naked aggression by bombing Iran, will
the Times publish another mea culpa?

The Times editorials also serve as conduits for
propaganda. On August 13, a Times editorial
jumped on China for

"irresponsible threats"
that threaten free
trade. The Times` editorialists do not understand
that the offshoring of American jobs, which the Times
mistakenly thinks is free trade, is a far greater threat
to America than a reminder from the Chinese, who are
tired of US bullying, that


America`s banker.

Let`s briefly review the "China threat" and then
turn to the real problem.

Members of the US government believe, as do many
Americans, that the Chinese currency is undervalued
relative to the US dollar and that this is the reason
for America`s large trade deficit with China. Pressure
continues to be applied to China to revalue its currency
in order to reduce its trade advantage over goods made
in the US.

The pressure put on China is misdirected. The exchange
rate is not the main cause of the US trade deficit with
China. The costs of labor, regulation and harassment are
far lower in China, and US corporations have

offshored their production
to China in order to
benefit from these lower costs. When a company shifts
its production from the US to a foreign country, it
transforms US GDP into imports. Every time a US company
offshores goods and services, it adds to the US trade

Clearly, it is a mistake for the US government and
economists to think of the imbalance as if it were
produced by Chinese companies underselling goods
produced by US companies in America. The imbalance is
the result of

US companies producing their goods in China
selling them in America.

Many believe the solution is to force China to revalue
its currency, thereby driving up the prices of 70% of
the goods on Wal-Mart shelves. Mysteriously, members of
the US government believe that it would help the US
consumer, who is as dependent on imported manufactured
goods as he is on imported energy, to be charged higher

China believes that the exchange rate is not the cause
of US offshoring and opposes any rapid change in its
currency`s value. In a message issued in order to tell
the US to ease off the public bullying, China reminded
Washington that the US doesn`t hold all the cards.

The NYT editorial expresses the concern that
China`s "threat" will cause protectionist US
lawmakers to stick on tariffs and start a trade war.
"Free trade, free market"
economists rush to tell us
how bad this would be for US consumers: A tariff would
raise the price of consumer goods.

The free market economists don`t tell us that dollar
depreciation would have the same effect. Goods made in
China would go up 30 percent in price if a 30 percent
tariff was placed on them, and the goods would go up 30
percent in price if the value of the Chinese currency
rises 30 percent against the dollar.

So, why all the fuss about tariffs?

The fuss about tariffs makes even less sense once one
realizes that the purpose of tariffs is to protect
domestically produced goods from cheaper imports.
However, US tariffs today would be imposed on
the offshored production of US firms.
In the era of
offshoring, corporations are not a constituency for

Tariffs would benefit American labor, something that the
US Chamber of Commerce, the National Association of
Manufacturers, and the Republican Party would strongly
oppose. A wage equalization tariff would wipe out much
of the advantage of offshoring.  Profits would come
down, and with lower profits would come lower CEO
compensation and shareholder returns.

Obviously, the corporate interests and Wall Street do
not want any tariffs.

The NYT and "free trade" economists
haven`t caught on, because they mistakenly think that
offshoring is trade. In fact, offshoring is labor
arbitrage. US labor is simply removed from production
functions that produce goods and services for US markets
and replaced with foreign labor. No trade is involved.
Instead of being produced in America, US brand names
sold in America are produced in China.

It is not China`s fault that American corporations have
so little regard for their employees and fellow citizens
that they destroy their economic opportunities and give
them to foreigners instead.

It is paradoxical that everyone is blaming China for the
behavior of American firms. What is China supposed to
do, close its borders to foreign capital?

When free market economists align, as they have done,
with foreigners against American citizens, they destroy
their credibility and the future of economic freedom.
Recently, the Independent Institute, with which I am
associated, stressed that free market associations

"have defended completely open immigration and free
markets in labor,"
emphasizing that 500
economists signed the

Independent Institute`s Open Letter on Immigration

in behalf of open immigration.

Such a policy is satisfying to some in its ideological
purity. But what it means in practice is that the
Americans, who are displaced in their professional and
manufacturing jobs by offshoring and work visas for
foreigners, also cannot find work in the unskilled and
semi-skilled jobs taken over by illegal immigrants. A
free market policy that gives the bird to American labor
is not going to win acceptance by the population. Such a
policy serves only the owners of capital and its senior

Free market economists will dispute this conclusion.
They claim that offshoring and unrestricted immigration
provide consumers with cheaper prices in the market
place. What the free market economists do not say is
that offshoring and unrestricted immigration also
provide US citizens with lower incomes, fewer job
opportunities, and less satisfying jobs. There is no
evidence that consumer prices fall by more than incomes
so that US citizens can be said to benefit materially.
The psychological experience of a citizen losing his
career to a foreigner is alienating.

The free market economists ignore that a country that
offshores its production also offshores its jobs. It
becomes dependent on goods and services made in foreign
countries, but lacks sufficient export earnings with
which to pay for them. A country whose workforce is
being reallocated, under pressure of offshoring, to
domestic services has nothing to trade for its imports.
That is why the US trade deficit has exploded to over
$800 billion annually.

Among all the countries of the world, only the US can
get away with exploding trade deficits. The reason is
that the US inherited from Great Britain, exhausted by
two world wars, the reserve currency role. To be the
reserve currency country means that your currency is the
accepted means of payment to settle international
accounts. Countries pay their oil import bills in
dollars and settle the deficits in their trade accounts
in dollars.

The enormous and continuing US deficits are wearing out
the US dollar as reserve currency. A time will come when
the US cannot pay for the imports, on which it has
become ever more dependent, by flooding the world with
ever more dollars.

Offshoring and free market ideology are turning the US
into a Third World country. According to the Bureau of
Labor Statistics, one-quarter of all new US jobs created
between June 2006 and June 2007 were for waitresses and
bartenders. Almost all of the net new US jobs in the
21st century have been in domestic services.

Free market economists simply ignore the facts and
proceed with their ideological justifications of open
borders, a policy that is rapidly destroying the ladders
of upward mobility for the US population.



Paul Craig Roberts

] was Assistant
Secretary of the Treasury in the Reagan Administration.
He is the author of

Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington
and the Soviet Economy

Meltdown: Inside the Soviet Economy
and is the co-author with Lawrence M. Stratton of

The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
. Click

for Peter
Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.