January 07, 2003

Will the Dollar Fall Before Saddam Hussein Does?

Joseph Stiglitz, an academic economist at Columbia University and recent recipient of a Nobel Prize, has broken ranks with his colleagues concerning the benefits of globalism. He seems to agree that the U.S. has benefited from globalism, but he argues that poor countries have suffered from entry into their markets by more advanced producers and lack of a social safety net for workers who lose their jobs to imports.

If Stiglitz can establish that it is permissible to question whether globalism works for poor countries, perhaps someone will be able to ask if it works for the U.S. without being shouted down as a protectionist numbskull. After all, if Adam Smith is correct about the gains from trade, trade liberalization should work for all countries.

Adam Smith convinced economists that instead of countries producing everything for themselves, all would benefit if each country specializes in areas of production where they have the greatest advantage or least disadvantage and trade with one another for other wants. This argument was presented in 1776, the year our Declaration of Independence was signed, and Smith’s argument has stood up remarkably well.

By trade Smith meant precisely that. Goods produced within each country would be exported to pay for imports of goods from other countries. Smith did not cover the case that we experience today where U.S. firms relocate their capital and technology in China and India and employ labor in those countries to produce the products that U.S. firms sell in U.S. markets.

This is not trade in the Smithian sense, and it is unclear what the gains are to the U.S. Shareholders and executives of global firms benefit from higher profits, and U.S. consumers pay lower prices until the dollar drops in value from the run-up in the trade deficit. Offset against lower prices is the loss of the jobs or incomes associated with the production that is moved offshore.

Smith did not analyze the case of globally mobile capital, technology and factories. When U.S. firms locate their production for U.S. markets offshore in order to benefit from lower labor costs, where is the comparative advantage for the U.S.?

When global firms chase lowest factor cost--in this case labor--the advantage goes to the countries with the lowest wages. The U.S. is not trading with China; it is using Chinese labor to produce for U.S. markets.

The goods produced by U.S. firms in China count as imports when they enter the U.S., but we are not paying for these imports by selling goods produced in the U.S. to China. The U.S., allegedly a superpower, has close to a $100 billion trade deficit in manufactured goods with China, a third world country.

China’s growing trade surplus is an indication that its currency is undervalued. Normally, currency traders would bid up the dollar price of the Chinese currency or Uncle Sam would lean on China to revalue its currency, thus raising the dollar price of goods made in China. However, no revaluation has occurred, leading to speculation that U.S. offshore producers, whose profits benefit from the undervalued Chinese currency, lobby against revaluation. The U.S. government is happy as long as China pours its trade surplus into U.S. Treasury bonds.

Economists can argue that in the long run offshore production will bid up Chinese wages while lowering those in the U.S. and eventually bring about equal wages and capital stocks across countries. But in the meantime, the U.S. could suffer from a fall in living standards and from a loss in upward mobility as manufacturing and high tech jobs are moved to lower cost countries.

Massive U.S. trade deficits have left the dollar dangerously exposed. A fall in its value could coincide with war in the Middle East. Flight from a depreciating dollar would hurt both stock and bond markets and impair economic recovery. Economic turmoil at home can overshadow victory over Saddam Hussein.

Offshore production for home markets is different from trade liberalization, which means that counries open their markets to each other’s goods. Offshore production doesn’t pay for itself with corresponding exports. Offshore production means a fall in the dollar. There are no gains to American consumers from depreciating purchasing power.

Paul Craig Roberts is the 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 here for Peter Brimelow’s Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.