Can We Just Take Globalization Out Back And Shoot It In The Back of the Head?

My apologies for not having written for so long. I have been “otherwise pre-occupied” and have also been watching the first weeks of the Obama presidency and the accelerating unwinding of the financial markets.

The situation looks increasingly bleak. I hope you are prepared.

Readers know that I have been a critic of globalization in its present form. In this article, I will lay out for you how badly Americans have been fleeced by their own politicians, losing their own jobs, factories and any hope of a better future for themselves and their children. And all this has happened in a country with a supposedly free media, and where people can exercise greater free will than in China, where I am writing from now.

I’m going to keep this simple, but there are some numbers involved. Keep in mind that I’m not an accountant, but I do understand business. To make my illustration, I’m going to create a simplified fictional scenario.

OK, let’s suppose that there is a factory in Pennsylvania which employs 500 people to make widgets. This factory has been making widgets since 1955 and employs 500 people, who make an average income of $2,000 a month. This means that the monthly payroll is US$1 million a month, or US$12 million annually. Of course the factory owners and employees all pay taxes which go to the city, state and federal government.

Now, the owner goes to China and finds that he can go to China, and instead of paying his workers an average of US$2,000 every month, he can get Chinese workers at an average salary of US$200 a month. Their productivity is just as good as the American workers, but they cost only 1/10 the wages. His monthly payroll expenses fall from US$1 million a month to US$100,000 a month, and his annual China payroll becomes only $1.2 million. This means that he can afford to lower the price of his widgets, thus selling more widgets.

Moreover, in order to attract the investment, the local Chinese government is willing to give him cheap land and a tax holiday for several years. This means that his upfront investment costs are lowered drastically to only US$500,000 for land and factory. The business owner would be a fool to turn down such an opportunity, right?

So he goes back to Pennsylvania and begins transferring production to China, gradually laying off his Pennsylvania workers along the way. Now this is where things start getting wacky. As he lays off his workers, they go to the state government to collect unemployment, which for the sake of simplicity, we will say, runs about $400 per worker per week for six months. This cost is carried by the state government. Eventually all are laid off, and the state pays out a total of $5.2 million (400 * 26 * 500) for all the laid-off workers.

Now, our factory widget owner is happy, because thanks to globalization and WTO, not only has he lowered his costs drastically, but he can export all over the world duty-free, since WTO has regulations against import tariffs and barriers. He has more markets, and more market access. His investors are happy because they are making more because of lower costs and higher profit margins.

But what has happened in the US? More and more unskilled, then skilled, workers are losing their jobs. The state governments need to pay unemployment, and they need to tax the employers who remain in the state for corporate taxes to sustain the system. Meanwhile the tax base of factories which remain in the state shrinks while the number of unemployed grows. At the same time, there is a very large group of politicians who rail against taxes, so the states cannot raise taxes even though their tax base is shrinking and the number of unemployed is growing. Meanwhile, the number of people accessing free state services continues to grow.

Basically, this is what has been happening in the US over the past 15 years with globalization. If you think about it, it is amazing the US economy, with all the deficit spending over the past eight years, has not collapsed sooner! And mind you, we have not even talked about subprime mortgages and derivatives yet!

Now before WTO and globalization, there would have been import tariffs. If Chinese costs were so low (which they are), the US would at least have been able to impose some tariffs to bring costs closer to what they would cost in the US and thereby mitigating some of the difference, and bringing money into the US Treasury. China’s growth would have been slower, and probably healthier for China and the rest of the world.

Now there is talk in the US of a “Buy America” campaign. Too late folks! If the US raised tariffs now, it would trigger a protectionist trade war, one which the US is very poorly prepared to win, since it now has to look to China to bail it out of its current mess. In times like these, cash is king, and China has the cash.

Now, is this the fault of the Chinese? I would say no. The Chinese just took maximum advantage of a system which was given to them, and the Chinese government wanted to maximize exports to the US so that it could earn foreign exchange to fund China’s economic development.

Different American politicians and pundits have pedaled globalization to Americans as the panacea to all their ills. But what has happened in reality? Americans have lost their jobs, lost their homes because of the growing subprime and now prime mortgage crisis, and they do not have the skills which are needed for this new period we are entering. The companies are optimized for a world which no longer exists. Americans have lost their own future, and the futures of their children and maybe grandchildren. And most are completely unprepared for this new kind of globalization, which looks like it may very well bring the US standard of living to something more closely resembling the Chinese standard of living.

For your information, until very recently, the Chinese were dirt poor. They remember what it’s like, and even though they do not want to live that way again, they can roll back expenses to the minimum if it needed. Give you an example: there is now a movement among Chinese university students to spend 100 yuan (about US$15) a week. How many Americans can do that?

These are the times we are in for.

Saying that Americans were fleeced by charlatans and politicians on both sides of the aisle does not even begin to describe the situation. Just about the only thing they have left is their own internal organs. Already there are young women who are selling their eggs to make a living. And it will just get worse and worse.

Now does China export jobs? No, China exports Chinese. The country has too many people, and the government is encouraging them to go to Africa where many Chinese companies are investing in hard assets, otherwise known as commodities. Anyone who has lived in China can tell you that Chinese are great believers in hard assets.

So what can President Obama do? It doesn’t look like he can do very much. Collapsing sales and profits reports keep on coming down the pike, and have acquired a momentum all their own. It would be nice if we could take globalization out back and shoot it in the back of the head, but it’s too late. The cat’s out of the bag, and it’s not going back in.

That’s why I’m in China.

Now, why is it the US with its free press, tell the people what was really happening? Or were they just distracted by left-wing/right-wing pseudopolitics and red/blue arguments so much that they did not notice what was happening to them?

If you want another angle on this bleak picture, I’d recommend that you read Clusterfuck Nation.