Sobering Thoughts on Export Policy

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

The export sector of the Chinese economy has been exerting excessive
influence on Chinese foreign policy. China has been making political
concessions to the US for fear of losing the US market. This is ironic
because, according to trade theory, a trade surplus accompanied with a
capital account deficit is not
in the interest of the exporting nation.

Imports are resold in the importing country (US) at a greater margin
than provided for the exporter (China). If the exporter accumulates
bonds and currency of the importer, then the exporter will see no
benefit from exports as goods leave the country but none come in to
offset the imbalance. True wealth is given away by the exporter for
nothing, at least until a long term trade deficit allows the former
exporter to import an equivalent amount of goods. This is the current
situation in US-China trade. The quality of the currency accumulated
makes for the difference in quantity of goods and services received when
the currency and investments in the importer are cashed in. Since the
drivers of trade imbalances are overvalued currencies of the importer or
undervalued currencies of exporters, obviously the one sided trade can
only end when the exporter has wasted away much of its wealth, or the
importer has run deficits to levels that overwhelm the willingness of
the exporter to accept more of the importer's debt. Interest rate
policies of central banks are usually the culprit in this matter, as
they may drive investment flows in one direction, making necessary the
excess export and import situation. Other forms of waste
of wealth, such as pollution and low wages are penalties assumed by the
exporter.

As presented above, the importer enjoys a greater gross margin on the
imported product than the exporter may realize in export. In part, this
has to do with the inflated distribution cost in the importing country
because of overvaluation of the currency. Thus the $2 comb set leaving
the Chinese factory is a $3 part of a shipment arriving at San Diego. By
the time the US consumer buys it for $10, the US economy
registers in GDP, +$10 in final sales, -$3 in imports for a +$7 in GDP.
The GDP improvement to import ratio is greater than two, in this case
2.3. The GDP improvement to export ratio is zero if the $2 export price
becomes  parrt of the importer's capital account surplus. If 50% of the
$2 export price belongs to return to foreign capital, the the ratio is
in  fact negative.

The numbers for other products vary greatly, but the pattern is
similar.  The $1.2-1.3 trillion of imports to the US in 2000 are
directly responsible for some $2 to 2.5 trillion of US GDP, that is over
20% of its $9 trillion economy. Perhaps more. The $400 billion of
Chinese exports are directly responsible for a loss of
$400 to $800 billion in Chinese GDP.   Viewing the greater margins
available in the importing country,
to a great extent, as a result of a currency valuation imbalance and
understanding that retailing and distribution are still very inefficient
relative to manufacturing, one comes to the observation that imports
raise apparent productivity because sales per employee increase as one
goes from the production floor towards the final consumer.  Also, the
closer in function the production floor is to the retail space,  so the
higher its apparent productivity. If through marketing and proximity a
seller can gain advantage in assembly of  imported major parts to order,
the producer can win final sales  away from the offshore integrated
manufacturer who makes the same parts and assembles them abroad. In the
high technology arena, time to market is  key, as are key design
elements. By hiding costs through the use of employee stock options for
compensation, a local in the importing country can use the high
valuation of his stock, driven by artificially low interest rates at the
exporter country, to subsidize the production of final product,
be it  software or hardware. The content of the product will,
increasingly come from exporting nations, and the producer's action may
be but little beyond a glorified twist of a screw driver, advertised ad
nauseum.  In attempting to quantify the order of magnitude of the effect
of importation on apparent aggregate productivity, it is possible  to
observe a direct relationship to the trade deficit. The end
result is that the productivity improvement observed is not as strong as
presented by aggregate data. The 4% level in the government statistics
can be primarily attributable to the great increase in imports. The
improvement in net productivity is much smaller, on the order of 1.8%
since the technology revolution began affecting the economy as a whole.
Much of the rest of the improvement has to do with normal
cyclical behavior of productivity, the result of normal rise in capacity
utilization during boom times.

There is another measure of volume increases in trade flows that stems
from the improvement of the trade weighted dollar. The trade weighted
dollar measure shows improvement consistently because of the
attempts by European, Arab Oil and Japanese holders of US debt to retain
value in the dollar by creating dollar denominated debt in emerging
economy countries that actually produce something, as opposed to the US
which gains foreign income through the use of international protections
for grossly overvalued
intellectual property. This is discussed elsewhere in some detail. For
the purpose of this discussion, one need focus only on the fact  of the
broad trade weighted dollar index being in a rising trend as highly
indebted emerging market economies attempt to extricate themselves from
dollar denominated debt through devaluation of their currencies and
subsidization of exports. The impact on the index of US price inflation
is that of amplifying the trend through the US expansion of monetary
aggregates, also known as
monetary expansion and money printing.

Adjusting for this debt driven increase in the value of dollars, the
import volume into the US can be estimated in relationship to these
aggregates. This is given in the figure below. The growth rate of the
volume of goods shipped to the US has remained near 15% for most of the
1990's. As the slightest and most cursory glance at the chart will show,
the United States enjoys a booming economy when the currency is gaining
ground. This occurs when central bank controlled interest rates in the
US are higher than those in its creditor nations. This leads to the odd
conclusion that raising interest rates in the US actually prolongs the
boom rather than threatening it, because it causes massive flows of
liquidity into the US financial system, lowers import price inflation,
increases apparent productivity, and prompts further spending by the
consumer. For those who view the US as the New Rome, this great stream
of imports is the spoils of war waged by an economic empire plundering
the world, this data would come as no surprise.

If the transition to off shore production is considered to be the source
of the productivity boom of the "New Economy", then what remains of the
productivity increase that is not attributable to the importation of
other nation's productivity, is summarized in the figure below. While
the published government figures of the productivity index show a rise
of nearly 70% since 1974, the actual rise in productivity is between 0
and 10 % for the period. The lower values are consistent with  the life
experience of anyone in the working class and the middle class.   This
experience of declining reward for effort coincides with the
Reagan shift to having workers pay for their benefits, while promoting
steep subsidies of corporations, particularly in the earlier stages of
corporate growth. The record of this transition is chronicled well by
Batra in his books "The Myth of Free Trade", and "The Crash of the
Millenium". Though Batra does not pay attention to the monetary root
cause of the problem, he does record its effects with great powers of
observation.

Historical timelines for the actual levels of productivity in the US may
be traced back to the introduction of accounting computing by IBM and
later EDS in the late 1960's. This cleared the accounting pools of the
great corporations and some government agencies.   Automation of
scientific work began even earlier and entered  mainstream engineering
by the mid 1970s. By 1980, the ordering systems and inter-corporate
billing were computerized to a great extent, as  had  occurred in
banking and finance in the 1970s. By this time, PCs were available,
Digital's Rainbow, Commodore 64, Sinclair, Amiga, and others
were available, and were quickly entering mainstream secretarial work.
By the mid 1980s office automaion was well underway. Computer controlled
manufacturing equipment and processes were the hot
items of the late 1970s and were mainstream by the mid 1980s. Business
to business networking within and without the internet became mainstream
five years ago, as were supply chain management and inventory control.
The current process is one standardization and inclusion,  whereby the
final applications of old technologies are coming to  an end. The
productivity gains are still minor because of the  low level of
brainpower produced by the American public school system can not be
sufficiently ameliorated by the computers that have come to replace
missing intelligence. Inventory management in the current "Just In Time"
manner was not attractive until high real US interest rates made the
holding
of inventory unattractive. Prior to this, inventory was a profit
center,  not a cost center. Now that the world has organized away the
inventory that cushions supply disruptions and price inflation, we are
quite defenseless against them. This is the best chance for Murphy's Law
to demonstrate itself with a cruel spate of price inflation.

In summary, the productivity boom in the US is as much a mirage as the
money that drives the apparent success. There is not productivity boom.
There is an import boom. The imports are not driven by the
great growth of the American economy. They are driven by debt of the
countries producing this wealth. The imports, in the view of the
advocates of the New Rome theory, are a payment of tribute by vassals.
The result of this distortion driven by the monetary system is a decline
in real living standards in all of the indebted world, and in the United
States. Indeed, reward has been divorced from effort. There have been
enormous strides in productivity around the globe, few of them came in
the United States. It has been the seigniorage of the dollar reserve
system granted to the US without economic consideration, that allowed
the import of productivity from abroad and the superficial appearance of
health in the US economy.

Hegemony is a term coined by Gramsci, but proudly borrowed by Greenspan
to use in his congressional testimonies to describe US financial power.
It is not my invention. Preserving US financial hegemony is a key reason
Greenspan poses for resisting market regulation.

Henry C.K. Liu