"History is philosophy teaching by example." (Lord Bolingbroke)

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Wednesday, March 08, 2006

China's Reverse Marshall Plan

Very troubling:

Today, China operates a reverse Marshall Plan. To help sustain its massive exports to the United States, it recycles the resulting dollar inflow in the form of loans and asset purchases. Here, the developing nation lends to the developed: money flows in the reverse direction.

As of last December (2005), Chinese net holdings of US securities were US$810 billion. Huge Chinese trade surpluses with the US are turned into dollar holdings - lent back to consumers and the government to enable the continuation of trade and development. More than half of China's 2005 $200-billion-plus trade surplus with the United States resulted from exports by US-based multinational corporations (MNCs). Leading US firms are interested in maintaining this relationship alongside Chinese business and state authorities. Massive rural to urban migration in China and pressure for employment opportunity is partially absorbed through this channel.

Inside China, industrialization and near or above double-digit GDP growth are greatly assisted by the massive inflows of foreign capital, technology and expertise. In sector after sector, production has moved to China from elsewhere, increasing employment, gross domestic product and political stability. The export revenues of China-based enterprises sustain the wage and profit incomes that generate tax revenues for the Chinese government to recycle into dollars. Chinese dollar loans to the US maintain the dollar exchange rate necessary for the exports to continue.

Observers, inside and outside of China, have expressed concerns about accumulating debt, much as Marshall Plan critics once did. Many focus on China's vulnerability from accumulating such a large amount of US assets; others fret over the extent of US asset sales. The US may not be able to repay fully or in a timely fashion; or it may take actions to reduce the value of the debt that will be costly for China.

Such concerns miss a key point: they repeat the error of those concerned about the repayment of Marshall Plan debt. Whether or not liabilities are ever fully honored, China's reverse Marshall Plan is central to the stunningly fast and broad-based industrialization of select areas of its economy. Increasingly modern industrial infrastructure and productive capacity are catapulting China to the front ranks of the world economy. That achievement is infinitely more important and positive than any unpaid debts that may emerge. US MNCs have also benefited from falling production costs and new competitiveness, as recent levels of Fortune 500 profits make very clear.

The deepening dependence of US enterprise profitability on the Chinese economy has only begun to yield its economic and political dividends for China, which will likely outshine the comparable dividends to the US economy. Labor productivity numbers rise as imported components rise in quality and fall in price. Lower costs allow access to global markets populated by hundreds of millions of people with modest incomes. At the same time, firms producing inside the United States reap greater profits because they can pay their workers relatively lower wages, knowing that those workers can buy cheap goods imported from China - think Wal-Mart.

Thus it follows that the US depends now on China's reverse Marshall Plan much as Europe after the war depended on the original. The future will likely show the great historical importance of China's reverse Marshall Plan.

In economic terms, what exactly is labor? Like oil and capital, labor, or labor productivity is a resource to be exploited:

Since according to monetary economics, market value, which is expressed as price, needs to remain stable to prevent inflation, labor productivity in financial terms can only be increased with declining wages per unit of capital. Further, price competition for market share directly depresses wages. Even if wages can at times rise in monetary terms, the ratio of wages to the market value of production must constantly fall in order for increased labor productivity to be monetized as profit. Thus profits from trade under this flawed definition of productivity ultimately can only be derived from falling wages.

The rise of MNC's, multinational corporations or transnational corporations, has created a situation in which the U.S. worker is now in direct competition with workers in other parts of the world. The leveling effect of labor seems to be the effect.

today's allegedly free market in effect deprives labor of any pricing power over its market value. Since capitalism does not recognize any ceiling for fair profit, always celebrating the tenet of "the more the merrier", it must by implication oppose any floor for fair wages, to validate the opposite tenet of "the lower the merrier". The terms of global trade, then, are based on seeking the lowest wages for the highest profit, rather than fair wages for fair profit. This is the linkage between neo-liberal capitalistic globalization and wage arbitrage, both in the domestic labor market and across national borders. Yet in a consumer-based global market economy, low wages lead directly to overcapacity, because consumer demand depends on high wages. The adverse effect on consumer demand from the quest for maximum profit is the critical internal contradiction of the deregulated capitalistic market economy.

Capital is free to move across the world. What about labor? "...obdurate immobility of workers across national borders continues to be maintained through government restrictions on immigration."

Free-trade advocates, from Adam Smith (1723-90) to David Ricardo (1772-1823), in considering the relationship between capital and labor, treat mobility disparity between capital and labor as a natural state, never entertaining that it is a pure political indiosyncrasy. This 'natural' immobility of labor might have been reality in the 18th century, but is no longer natural in the jet-age global economy of the 21st century in which mobility has become a natural characteristic. Labor immobility deprives labor of pricing power in a global market by preventing workers from going where they are needed most and where market wages are highest, while capital is free to go where it is needed most and return on investment is highest. This econo-polilitical regime against labor mobility, coupled with unrestrained cross-border mobility of capital, maintains a location-bound wage disparity that has created profit opportunities for cross-border wage arbitrage, in a downward spiral for all wages everywhere.

Alan Greenspan said:

Aggregate demand is putting very significant pressures on an ever-decreasing available supply of unemployed labor. The one obvious means that one can use to offset that is expanding the number of people we allow in. Reviewing our immigration laws in the context of the type of economy which we will be enjoying in the decade ahead is clearly on the table, in my judgment.

Could this be a reason why the U.S. borders remain wide open and why certain labor policies have been instituted?

Here's down and dirty of the past few decades:

Agricultural growers in the US had hoped to increase the number of immigrant farm workers by attaching a provision in their interest to the highly favored high-technology industry's legislation to increase the number of high-tech immigrant workers. In 2000, high-tech-immigration legislation seemed likely to pass Congress until the administration of president Bill Clinton began attaching legislative riders that would give Latin American refugees legal permanent residency. In addition, the Clinton administration wanted to grant amnesty to a large number of illegal immigrants, most of whom were Hispanics. This political maneuvering stopped the pending high-tech legislation dead in its tracks because Republicans feared that the Democrats were attaching such legislative riders to gain support from the large number of Hispanic voters.

The shortage of high-tech workers forced the industry to move operations overseas, at first not to save money on wages, but to find available workers. The labor unions reacted to immigration with traditional phobia, viewing it as a development that would keep wages low, rather than as a new source for reversing the steady decline in membership. Yet employment data showed that high-tech immigrant workers did not lower wages during the high-tech boom in the US. What eventually did lower high-tech wages in the US was overcapacity resulting from overinvestment caused by excessive debt and inadequate consumer demand resulting from stagnant wages. After its collapse, the US high-tech sector recovered by outsourcing manufacturing jobs to low-wage countries, leaving consumer demand to be sustained by an expanding debt-driven asset bubble.

Be sure to be sitting down when you read the rest of this article and the other three of the series.


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