Wayne O'Leary

The Mythology of Trade

To hear Donald Trump tell it, we’re in the beginning stages of the End Time when it comes to world trade. An existential struggle is upon us, especially with respect to the president’s chief international bogeyman, the People’s Republic of China.

Foreigners, Trump said during the 2016 presidential campaign, were “killing us on trade,” and China was the worst offender. The Middle Kingdom’s trade surplus with the US ($347 billion) was, he asserted in typical Trumpian overstatement, “the greatest theft in the history of the world.” We were losing money to the Chinese year-in and year-out in a grossly one-sided and unfair business relationship, but the Donald would change the script; he would get tough and “beat China” for the benefit of America’s workers, and he would do it with militant protectionist policies.

Eschewing trade agreements (e.g. the Trans-Pacific Partnership) as a weak strategy, Trump has simply declared a trade war, since in his estimation, “Trade wars are good and easy to win.” Initially, the whole world was to be subjected to a 25% tariff on steel and a 10% markup on imported aluminum, but that was soon limited mostly to China, which National Trade Council Director Peter Navarro characterized as practicing “economic aggression.”

Yet China, our chief importer, was only one of 13 top trading partners with which the US had a trade deficit in 2016; the other leading economic aggressors were (in descending order) Japan, Germany and Mexico, two of which (Germany and Mexico) have also felt Trump’s wrath. Obviously, the president’s notion of who’s trading unfairly is directly related to who we buy more from and sell less to in proportional terms. But you wouldn’t know that from the heated rhetoric emanating from the White House, which accuses China, in particular, of “stealing” American technology, intellectual property, jobs, and factories, the continued desire of American companies to do business there notwithstanding.

There is no doubt China, being a shrewd trading nation, has imposed conditions on outside access to its markets. Still, that doesn’t constitute unfair cheating, but rather sharp trade practice. China has a capitalist economy, but many of its companies are state-run; its government-driven economic model, directed from the top, has been called “neo-mercantilist.” The Chinese leadership uses this to its advantage in globalized competition with the undirected US free-market system, but it does not force American companies to commercially engage it; they want to do so.

By accepting partnerships and joint ventures with Chinese producers and sharing US technology, American companies can reach China’s consumers, avoid certain tariffs (for example, on autos), and gain access to subsidized factories with cheap, nonunion Chinese labor to make their products. There’s been an obvious price to pay in American manufacturing employment, of course.

Since Bill Clinton signed PNTR (permanent normal trade relations) with China in 2000 and the US sponsored China’s entry into the World Trade Organization (WTO) in 2001, job losses variously estimated at between 2 and 3.5 million due to Chinese imports have hollowed out this country’s blue-collar sector. (Mexican outsourcing under NAFTA since 1994 would add perhaps another million.) But considering only the bottom-line interests of American corporations, reduced labor costs abroad have been well worth the price.

The tit-for-tat trade war set off by Donald Trump is being billed by him as a war of nations, with little reference to the real underlying workings of modern global capitalism; it’s the Donald taking on the world — in this case China — with his nationalistic America First agenda. The war, say analysts, is largely symbolic. With apologies to US soybean growers, neither national economy will be much affected by the prospective tariffs, each having economic growth reduced by only an estimated 0.10%.

The supposedly horrific Sino-American trade imbalance ($130 billion in American goods shipped to China last year versus $506 billion in Chinese goods shipped here) is essentially meaningless; US multinationals couldn’t care less about it. The reason? Much of the $506 billion in Chinese “imports” actually took the form of US offshore production — American products manufactured by US multinational subsidiaries in Chinese factories, using local labor, and “exported” back to the home country. One example would be GM’s Buick Envision, an SUV, which the company makes in Shandong Province for sale to American consumers.

Such activity is enumerated in official stateside import statistics, creating a false impression of vast national foreign-trade deficits that don’t, in fact, exist; it accounted in 2009 for nearly a third of purported Chinese imports and over half of those credited to Mexico.

The process of internal trade within multinationals is called “intra-firm” trade, defined by international business economists as cross-border transactions between firms linked by common ownership (that is, between parent corporations and their overseas subsidiaries, or between the affiliates themselves); its opposite is inter-firm or “arm’s length” trade, which is carried on by unrelated companies.

The latest estimate (2011) from the Organization for Economic Cooperation and Development, or OECD, suggests that one-third of all world commerce is probably in the form of intra-firm trade. For the US, it’s more. According to the World Bank, America leads all other nations in direct multinational foreign investment with 23% of the global total, and 43% of its overall trade is intra-firm in nature.

Comparatively complete US customs records on trade, used by both the World Bank and OECD, permit a detailed peek into the economic machinations of America’s globalized corporations. Since the start of the millennium (specifically, for the years 2002-14), fully 50% of US imports and 30% of US exports, averaged annually, have been on an intra-firm basis.

Donald Trump either doesn’t know this, or in his nationalistic desire to promote trade wars, is willfully ignoring it. In his classic 1997 treatise on globalization, One World, Ready or Not, William Greider described the continuing outdated portrayal by politicians and economists of the rapidly globalizing trading system, with its offshoring, complex supply lines, administered transfer prices, and in-house tax shifting, as merely individual nations buying and selling things to each other.

The simplistic concept, one an untutored public could presumably grasp, allows cover even now for the true corporate beneficiaries of transnational global capitalism. And it permits charlatans like Donald Trump to score political points by declaring ersatz “wars” on supposed economic “enemies.”

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.

From The Progressive Populist, June 1, 2018

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