Last Man Standing

by Bill Bonner

The problem for the spinmeisters currently, is that a fact as big as an asteroid has come along; they are having a hard time finding a lie big enough to spin it. The fact is China is making a bid for resources that Americans thought were theirs. Asians have been recycling their profits back into the United States for a long time. As long as they were buying T-bonds everyone was happy. Americans thought they could stiff their lenders; they never expected to have to pay up. But now the Asians are coming into the U.S. and competing directly for resources – both natural and man-made.

The politicians and media want to tell the public that protectionist measures are needed. But the trouble is that this lie contradicts the lie they have been telling up to now, that the U.S. economy is the world’s most dynamic and most flexible form of capitalism. If it were really so dynamic and flexible, you wouldn’t think it would need to be shielded from competition from a third world nation run by communists.

We pause here for a fuller explanation. Theoretically, free trade helps everyone get more of what they want. But it helps some more than others; it favors hardworking, disciplined savers with high commercial skills and low wages. When America first asserted its imperial ambitions, free trade favored her. U.S. manufacturers were the most competitive in the world. The declining imperial power of the time – Britain – suffered from problems similar to those of the U.S. today – she bore the costs of an expensive empire, while Americans, Germans, Russians, and Argentines were faster, cheaper, or more technologically evolved competitors. She was losing market share. Then, one by one, America’s competitors fell away. World War One and Two destroyed the Germans. The Bolshevik revolution eliminated the Russians. Juan Peron took Argentina out of serious competition. The U.S. economy was the last man standing.

But now the world has turned again. American manufacturers are expensive. Her businesses have huge social and regulatory costs. They can no longer compete on the world market. They lose market share. Meanwhile, the U.S. adds to the costs of maintaining its empire, by expanding its military activities around the world.

America grows poorer – both relatively and absolutely. In absolute terms, her expenditures exceed her income by more than 6% per year (based on trade deficit figures). Asian, Eastern European and Russian economies grow – with positive trade balances. Wages, per hour, barely rise in the U.S. In these new competitors, they soar.

The trade gap figures show that much of this increase in wages overseas happens at the expense of U.S. incomes. People in the U.S. spend; people in Asia earn. Incomes rise in Asia; in America, they fall.

People don’t really care how wealthy they are, except as it compares to other people. A man with only two goats feels wealthy if the people around him only have one. If he loses his second goat, while his neighbors all gain another one, he is an unhappy man. That is why America is likely to abandon the doctrine of free trade; in the present circumstance it helps others gain goats while we lose ours. When their thoughts finally catch up to the situation even the free trade Republicans will find a way to spin things towards protectionism. All they need is an explanation that sounds plausible, better yet, righteous.

China exploits cheap labor, they will notice. China damages the environment, they will claim. China doesn’t respect women and minorities, they will charge. We will see more and more news stories telling us how awful China is. Chinese vacations are too short…Chinese factories are too dirty…Chinese theatres do not have elevators for people in wheelchairs! The Chinese allow smoking in public places. The Chinese don’t vote. The Chinese don’t have enough women in management. We will hear more and more speeches decrying Chinese practices, and more and more demands for “fair trade.”

It is the “century of liberty,” said George W. Bush over the long weekend. But the “free” will soon be dumped as a modifier for America’s trade practices, we predict.

The Daily Reckoning