July 31, 2013    Volume 20, No. 10

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Motor City Dies, But The Big Wheels Keep On Turning

By Dr. Charles McMillion

Ignored by the media, the U.S. Commerce Department routinely records $12 billion monthly trade losses for the country's auto industry. There was no reporting earlier this year when it was officially noted that auto trade losses -- including trucks and parts -- rose last year to an annual world record of $146.9 billion. Since 2000, auto industry trade losses total $1.7 trillion as low-wage or heavily subsidized foreign-produced imports continue to devastate highly productive American jobs and wages, slash tax revenues and public services, and undermine U.S. financial independence requiring massive domestic as well as foreign borrowing. Especially in America's Motor City, families, businesses and communities have been devastated. Now, with Detroit's bankruptcy, more dreams and promises are being broken and debts unpaid.

Detroit has been singled out as uniquely corrupt and financially inept. Yet it is the small globalist financial community that has been in or near a constant state of failure, corruption and public bail out since promoting deregulation and a new form of globalization 30 years ago. Almost as absurdly, Detroit is ridiculed for not adequately adapting to the low-wage global and subsidized "market," with New York Times columnist Paul Krugman literally raising the cliche of "buggy whips," blithely urging Detroit to find a new competitive advantage. (Who wants to buy autos today?)

Like others, Krugman is silent about any new industries, jobs or businesses that could provide good salaries to hundreds of thousands of people in Detroit and millions elsewhere in the country who have been displaced by surging imports. After all, these theoretical jobs must either be in services that cannot be imported or must meet the China price and face China's modern and effective industrial policies.

Over the past 30 years of lobbying by the financial sector in Washington and support by naive academics for "free" trade, the normal, small U.S. trade surplus in goods and services has turned into an unbroken torrent of 30 consecutive annual deficits that now total an astounding $9 trillion of which $7.7 trillion is for manufactured goods.

As Detroit demonstrates, production, businesses and jobs lost to imports are not merely "displaced" and automatically moved to other, more productive and higher-wage uses -- as many economic theorists still claim. In fact, the Labor Department has tracked workers displaced by cutbacks and closings since 1979 and most such workers -- especially in manufacturing -- are either permanently forced out of the paid labor force or eventually forced to take sharp cuts in pay, benefits and hours.

The cuts in compensation for displaced workers reflect the drive to less productive jobs and businesses that are protected from import competition in industries such as health care, education, entertainment, tourism, retail sales and now many levels of "homeland" security. Over the past 30 years of worsening trade losses, all of the net new jobs in the United States are in services. Most all of these jobs have been immune to outsourcing or imports -- although this, too, is changing quickly.

Importantly, auto-sector trade losses nearing half-a-billion-dollars per day reflect the collapse of the product life-cycle theory first developed in the 1950s to describe U.S. trade in autos and advanced products. The most desirable, sophisticated products were built close to where they were invented and only older, less desirable models with standardized production technologies were made more cheaply abroad. But precision, numerically-controlled machine tools, efficient communications, and cheap jet and ocean transport now allow the most modern and complex products to be made first in countries with the lowest wage rates. Businesses no longer face the choice to "automate, emigrate or evaporate;" they can emigrate, automate -- and evaporate.

In the Wall Street-financed push to sell Congress the unpopular NAFTA treaty with Mexico in 1993, "experts" were paid to assure those who were dubious that the agreement would for generations enlarge the then small U.S. trade surplus with Mexico and thereby create tens of thousands of jobs. Their ridicule of those who were skeptical of their claims -- shared by the media -- was withering to anyone concerned about the large wage and other cost differentials in the auto sector between the United States and Mexico. They insisted -- as self-evident -- that high U.S. labor productivity would pay for high U.S. wages.

Today, the media ignore a U.S. auto sector deficit with Mexico that amounts to more than $4 billion per month, surging in 2012 to a record $48.5 billion and totaling a loss of more than $400 billion just since 2000. Mexico exports more vehicles to the United States than the United States exports to all the rest of the world, including to Mexico. The overall U.S. trade surplus with Mexico reverted to a deficit immediately after NAFTA took effect. The total post-NAFTA U.S. current account deficit with Mexico will exceed $1 trillion in 2014.

Finally, total U.S. federal debt at the end of 1980 was $909 billion and total household debt was $1.5 trillion, or a combined 81.3 percent of GDP which, with business cycles, had been falling rapidly since reaching the unheard of record high of 137.9 percent of GDP in 1946 just after WW-II. At the end of 2008, as the severe downturn was beginning, total federal debt was $10 trillion and household debt was $13.7 trillion or a combined record of 164.5 percent of GDP. At the end of the first quarter of 2013, federal debt had ballooned to $16.8 trillion (thanks to tax cuts and stimulus spending) and household debt had retreated slightly to $12.7 trillion. But the combined total nonetheless equaled a new record 184 percent of GDP.

There is no question but that without recent tax cuts and stimulus spending U.S. economic growth would have faltered and the calamitous, rising debt ratio would be far worse. It would be a complicated and contentious matter to estimate just how much U.S. federal and household debt is related to the cancerous trillions of dollars in production lost to trade.

But the bitter experience of Detroit and the worsening global losses of the domestic auto industry should make it clear that the United States and the world are seriously off on the wrong economic track. In a global economy, fixing trade is the essential first step.

-- Dr. Charles W. McMillion is the retired former president of MBG Information Services. He is also a former Contributing Editor of the Harvard Business Review, Associate Director of the Johns Hopkins University policy institute and a founder of the bi-partisan U.S. Congressional Competitiveness Caucus.

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