Who Stole the American Dream? (36 page)

Shenzhen Port officials boasted that Wal-Mart is one of their top customers. “
Wal-Mart sources a huge amount of products from China,” Kenneth Tse, general manager of the export terminal, told me. “We have our contacts in Bentonville. We show them how market-oriented we are. They have to satisfy themselves that China has the infrastructure that they need and that their shipments will flow smoothly. They do their comparative shopping, and I can see now that South China has become the preferred manufacturing base for them.”

“
Wal-Mart is providing a gateway into the American economy for overseas suppliers in China and elsewhere—and it’s doing it on a scale that is unprecedented,” Professor Gereffi confirmed.

Aware of growing anger among Americans about job loss to China, Wal-Mart has played down the scale of its China trade. As early as 2004, I was told, Wal-Mart’s direct imports were
more than $30 billion, plus tens of billions more imported for Wal-Mart by its U.S. suppliers, and those imports were rising sharply. “Next year [the figure] will be higher, and the year after that, it’s likely to be higher as well,” Wal-Mart vice president Ray Bracy told me.

In California, at the Port of Long Beach, I got a firsthand look at our lopsided trade with China—the opposite of what our business and political leaders had promised. On a water tour, Yvonne Smith, the port’s communications director, pointed out ships from China, Japan, and other nations. “But
they’re all carrying Chinese cargo,” she advised. “China is where it’s being manufactured.”

“So what are they shipping in and what are we shipping back?” I asked.

“Well, we’re bringing in consumer products. We’re bringing in about $36 billion worth of machinery, toys, clothing, footwear—$36 billion from China comes through Long Beach alone,” Smith said.

“And what are we shipping back?” I asked.

“We’re shipping out about $3 billion worth of raw materials,” she said. “We export cotton, we bring in clothing. We export hides, we bring in shoes. We export scrap metal, we bring back machinery.”

“So, they’re doing all the …,” I stammered. “We’re like a third world country.”

Her litany went on: “We’re exporting waste paper, we bring back cardboard boxes with products inside them.”

Even more important were cargoes that Yvonne Smith didn’t mention—high-tech equipment, industrial machinery, advanced telecom devices, Internet backbone components, high-quality lasers used in fiber-optic cable systems.

I stumbled into a discovery when I asked Smith about the computerized
cranes that were unloading the cargoes for the Port of Long Beach. Proudly, Smith told me that these were leading-edge technology. Long Beach had sixty of them, costing $6.5 million apiece. They used to be made in Germany; now, mostly in Shanghai.

Wal-Mart may have been the prime mover in pushing the China trade and driving American jobs to China, but almost everyone was in the game: Target, Costco, Best Buy, an army of mass retail chains, plus big manufacturers such as Boeing, which has contracted with the Chinese and Japanese to make parts for the new 787 Dreamliner jet, as well as other U.S. multinationals such as Apple with its iPhones and iPads made in China or Hewlett-Packard and Cisco importing components for laptops, printers, cellphones, and Internet switching gear.

Apple’s longtime CEO, Steve Jobs, won praise for creating jobs in America from Republican leaders like Indiana governor Mitch Daniels, but in fact, Apple under Steve Jobs had only forty-three thousand employees in the United States, while it indirectly employed seven hundred thousand at its overseas suppliers, mainly in China. As
The New York Times
reported,
Apple overlooked sweatshop conditions and fatal explosions at supplier plants in China, not just because Chinese labor was cheap, but because state-subsidized Chinese suppliers jumped to meet Apple’s tight deadlines by rousting workers out of bed at midnight and reportedly working them fifteen hours a day. With a competitive advantage from these
illegal labor practices, confirmed by an outside audit inspection, Foxcomm, Apple’s biggest supplier in China of iPads and iPhones could undercut and beat out American rivals. “
The speed and flexibility is breathtaking,” said one Apple executive. “There’s no American plant that can match that.”

Many other American firms found the pull of China’s low-cost, moderately skilled workforce and its state-supported industrial clusters irresistible. With overseas production based in China shipping goods home to American consumers, U.S. multinationals were contributing
to
America’s record $273 billion trade deficit with China, triple the level a decade earlier. From 2001 to 2010, right after Washington approved free trade with China, the red ink was overwhelming. We Americans
bought $1.928 trillion more
in goods from China than we sold to China.

As a result, China has become not only America’s main supplier, but America’s main banker, the largest holder of U.S. debt, with financial reserves
topping $3.2 trillion, giving it enough financial leverage to wreak havoc with the American economy if it ever chose to sell off a large slice of its U.S. Treasury holdings.

This is the opposite of what America’s business and political leaders promised.

When the House passed the new free trade agreement with China in May 2000, President Clinton proclaimed that it would “
open China’s markets to American products made on American soil—everything from corn to chemicals to computers.” In September, as the Senate was voting, George W. Bush, then the Republican presidential nominee, supported the trade deal and, through his spokesman, declared that it would “open markets to American products and
help export American values, especially freedom and entrepreneurship.” Charlene Barshefsky, the U.S. Trade Representative, rhapsodized about the export potential for the United States “across all sectors and all fields of a magnitude unprecedented in the modern era.”

Business eagerly pushed for the new permanent trade agreement with China, replacing the annual agreements that were subject to bargaining and delays. The Business Roundtable, drumming up congressional votes, ran an ad envisioning massive export gains. “With 1.3 billion people, China is the world’s largest marketplace,” the Roundtable ad asserted. “A new trade agreement opens China’s market to our goods and services.”

General Motors predicted it would sell $2 billion in exports to
China within five years. Telecom companies saw a potential bonanza. Caterpillar and Deere forecast strong exports of farm tractors and combines. Drug companies were optimistic. “
The potential is explosive,” declared Mark Grayson, speaking for the pharmaceutical industry trade group. Dave McCurdy, president of the Electronics Industries Alliance, gushed over new sales on the horizon: “From semiconductors to circuit boards, from PC’s to cellphones, China is simply
the most dynamic international market for U.S. high-tech exports.”

In hindsight, the bravado of American industrial and political leaders sounds like a pipe dream that failed to note that in 2000, the U.S.
trade deficit with China was already $83 billion. Not everyone was so hopeful. Organized labor opposed the trade pact, warning of massive job losses at home as U.S. firms moved plants to China in the chase for cheap labor. Smaller and midsized U.S. manufacturing firms feared that big multinationals were angling for ways to cut costs and squash smaller domestic competitors by producing cheap goods in China for export back to America.

“We were sold a bill of goods,” asserts Alan Tonelson of the U.S. Business and Industry Council, a trade group of two thousand smaller manufacturers. “We thought that expanding trade with countries like China, using multinational companies as the main traders, would tremendously increase U.S. exports to this huge, rapidly growing market. But that assumed that the multinationals largely saw China as an end-use customer. In fact, if you check their websites, it’s clear that they saw China as a production and export platform. I think the multinationals did this quite knowingly. They understood exactly what China offered.
They looked at China like a super-Mexico.”

In fact, Tonelson contended, instead of generating net American exports, America’s biggest corporations have been
adding to the U.S. trade deficits by importing more than they export. “Despite their export mantra,” Tonelson observed, “U.S. multinationals are now running big and steadily growing trade deficits with the world overall and with their favorite offshoring sites in particular.” In 2008, for example, Tonelson calculated the trade deficit of U.S. multinationals at
$172 billion.

“The big
argument is that trade deficits don’t matter,” Tonelson said, parroting the rationale of free trade economists. “Who cares? The economy is going strong. That was the main argument through mid-2007. Then when the economy got into deep trouble, it became clear to many politicians and economists that trade deficits hurt growth. So they really matter. In fact, they mattered all along, but throughout the 1990s and into the first decade of this century, their growth-destroying effects were masked by a series of bubbles—the tech and stock bubble of the late 1990s and the real estate and credit bubble of late in this last decade. But now, we can no longer rely on real estate or financial gimmickry for growth. So the losses from trade are really holding us back.”

Job loss is where ordinary Americans have felt the crunch. According to Robert Scott, an economist with the Economic Policy Institute, a progressive Washington think tank, America lost 2.6 million jobs to China from 2001 to 2010, the decade following the free trade agreement with China, and close to another 1 million in the 1990s. Scott compiles his estimates the same way the government and business calculate the job gains from U.S. exports. In toto, he says,
in the last twenty years, 3.5 million American jobs have been wiped out by offshoring work and by Chinese imports.

Economists differ over those figures. Some trade specialists, including Mike Wessel, a member of the bipartisan U.S.-China Economic and Security Review Commission,
think Scott has understated the job losses, because Scott counts only those jobs that were actually destroyed and not jobs forgone by U.S. corporations, which might have expanded their U.S. operations but for China.

Orthodox market fundamentalists, such as Alan Greenspan and free trade thinkers such as Columbia University economics professor Jagdish Bhagwati,
dispute the notion that trade with China—or trade anywhere—has caused job losses in the United States. Their
view is that trade is a win-win for every country. Citing the theory of competitive advantage put forth by early-nineteenth-century British economist David Ricardo, orthodox free trade economists argue that each country shifts out of production where it is inefficient and gravitates to sectors where it is more efficient; old, outworn jobs are replaced by new and better jobs.

Bhagwati, author of
In Defense of Globalization
, contends that “
putting these jobs overseas is, in economic terms, no different than importing labor-intensive textiles and other goods…. The fact is, when jobs disappear in America it is usually because technical change has destroyed them, not because they have gone anywhere.” Gregory Mankiw, who headed President George W. Bush’s Council of Economic Advisers, adds that whatever “dislocations” are caused by “outsourcing” of U.S. production in the short run, trade delivers long-run gains in new high-tech jobs. Trade deficits don’t matter, according to Brink Lindsey, vice president and senior economist at the Cato Institute, a libertarian research institute in Washington, because the gains of the new winners in America more than offset the losses of those thrown out of work by trade.

“I think that
trade policy or trade flows, one way or another, don’t have an effect on overall employment numbers,” Lindsey asserted. “They affect the kinds of jobs we have. And so some number of jobs have definitely been eliminated because of Chinese competition. Elsewhere in the economy, other jobs have been created because of Chinese competition…. The net effect, most economists think, is a wash….”

Others disagree. Economic revisionists like Clyde Prestowitz, the Reagan administration’s chief trade negotiator for Asia,
dispute the old orthodox argument, contending that it denies reality and defies common sense. “For some time now our ‘best and brightest’ have been invoking false doctrines that are systematically undermining American prosperity,” Prestowitz wrote. “Leading among these is the economic orthodoxy of market fundamentalism, simplistic pure free trade….”

Former IBM vice president Ralph Gomory contended, in testimony
to Congress, that Ricardo’s nearly two-hundred-year-old theory does not match modern conditions. What America has lost to China, Gomory asserted, is not just a shift in production, but a shift in productivity, which puts the United States on the defensive. “When the U.S. trades semiconductors for Asian T-shirts, for example, that is trade in the narrow sense. And the conclusion of the most basic economic theories is that this exchange clearly benefits both countries,” Gomory testified. “But when U.S. companies build semiconductor plants and R&D facilities in Asia rather than in the U.S., then that is
a shift in productive capability, and neither economic theory nor common sense asserts that shift is automatically good for the U.S. even in the long run.”

The longtime dean of American economists, Paul Samuelson, a Nobel laureate from MIT, was so irked by orthodox economists that at eighty-nine he waded into the debate and accused the free market economists of purveying a “polemical untruth” about America reaping net benefits from trade.

“There are no such neat
net
benefits, but rather there are now new, net harmful U.S. terms of trade,” Samuelson asserted. Sometimes, he said, trade does benefit both sides. But at other times, he said, America can suffer “
permanent
hurt” when a country like China improves its productivity.
He challenged the contention that the balance works in America’s favor. “
It is dead wrong about
necessary
surplus of winnings over losings—as I proved in my ‘Little Nobel Lecture of 1972,’ ” Samuelson declared.” And although he agreed with Bhagwati that technology accounts for some of America’s wage losses, he contended that trade exacts a toll in driving down real wages. Mainstream trade economists, he declared, were
ignoring the “drastic change” in incomes between the rich, who are further enriched by free trade, and average Americans, whose “real wage has been lowered” by trade.