- The Washington Times - Thursday, April 25, 2002

From a superpower to a third world country, the United States is in rapid decline. It is a change of which the population, especially the "experts," are unaware. Because of past success, Americans live in a smug no-think world.

It's time to wake up. This is the first in a series of columns about Americans' no-think smugness in an effort to alert Americans to their true prospects.

Today the United States has the export profile of a 19th century third world colony. Columnist Bruce Bartlett takes exception to this characterization, citing official Commerce Department data that capital goods account for 44.7 percent of U.S. exports and agricultural goods account for only 6.2 percent.

Mr. Bartlett is offering an Enron/Arthur Andersen view of trade. A country's trade profile resides in its net exports, not in the gross figures Mr. Bartlett cites.

The gross numbers make the United States look like a manufacturing powerhouse. The latest numbers reporting the first two months of this year show the United States exported $82.6 billion in manufactured goods and only $9.3 in agricultural goods.

However, exports are only half of the story. During the same period, the United States imported $135.7 billion in manufactured goods and $6.2 billion in agricultural goods.

The net result is a $53 billion trade deficit in manufactured goods and a $3 billion surplus in agricultural goods. A large trade deficit in manufactured goods and a surplus in agricultural goods is the profile of a third world colony.

Looking at net exports, it is obvious that the United States does not have trade surpluses in areas associated with high-tech industrialized economies. The largest U.S. trade surplus is in soybeans. Except for small and apparently diminishing surpluses in airplanes and airplane parts, scientific instruments, specialized industrial machinery and spacecraft, U.S. trade surpluses reside in hides and skins, cigarettes, scrap metal, cotton, animal feeds, wheat, coal, rice, corn and meat.

Not all U.S. exports actually are exports. Last year, U.S. companies sent $45.6 billion in goods "in bond" to their Mexican facilities. Such goods are counted as "exports" because they cross national borders. However, such goods are not sold to Mexicans. It is illegal for "in bond" goods to enter the Mexican economy.

U.S. facilities in Mexico used Mexican labor to add $30 billion in value to these goods before they were returned to the U.S. as $75 billion in imports. In truth, there was no $45.6 billion in exports, just $30 billion in imports.

Another misconception is that China's economy is a gigantic sweatshop, cheap labor but low tech. According to the Financial Times, this comforting view is out of date. The rapid shift of manufacturing to China by multinational companies has taken research and development with it.

Intel, IBM, Motorola, Lucent Technologies, GE and Microsoft were among the first to set up R&D labs in China, where skilled researchers can be hired at one-third the U.S. wage. The United States has trained enough Chinese scientists and engineers to support a massive shift in R&D from the United States (and Japan) to China.

The R&D trickle has become a flood. This month, Emerson Electric announced that it is moving at least half of its engineering work to China and India by the end of this year. Emerson's CEO, David Farr, said, "When we finish this calendar year 2002, 70 percent of our manufacturing will be in low-cost countries."

Black & Decker, battery-maker Evercel, and auto parts maker Lear Corp have recently announced closure of U.S. operations and moves to China.

The Japanese are headed there as well. Matsushita has opened a R&D lab in China that will employ 1,750 Chinese engineers within a few years. Nomura is shifting software projects to China and will soon be employing 1,000 Chinese engineers. For its new chip development center, Toshiba is hiring 1,000 Chinese engineers. Hitachi, Sony, Pioneer, Fujitsu, NEC, Honda and Yamaha have announced plans for R&D operations in China.

When these facts are mentioned, free traders have a knee-jerk reaction and rush to the defense of free trade, while excoriating the messenger. However, we are not confronted with phenomena that fit the free trade vs. protection framework. We are confronted with massive desertion of industrial and high-tech production and R&D to China and a consequent decline in middle-class jobs and incomes in the United States.

The United States is not trading with China in the normal sense. The Chinese have access to U.S. markets for products made with Chinese labor. In exchange U.S. companies have access to Chinese markets and U.S. markets with products made by Chinese labor. In this "exchange" where lies the advantage for the U.S. economy?

Free traders, forgetting that consumers have to work in order to consume, think everything is fine as long as consumers are paying lower prices.

But U.S. consumers are also earning lower wages. The lost manufacturing and high tech-jobs are being replaced with low-productivity retailing jobs. Wal-Mart is now the largest U.S. corporation with larger revenues than Exxon-Mobil and Microsoft combined.

The old free trade argument that high American productivity underwrites high American incomes is undercut when U.S. capital, technology and education move abroad and make Chinese equally productive. Eventually, Chinese labor will be bid up as wages and salaries in the United States fall. But before a new equilibrium is established the American middle class, the American dream, U.S. political stability and the mighty dollar will take a beating.

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