Cheap Labor Bonanza: Vietnamese Trade Agreement

[unlawflcombatnt]

On Friday, December 8th, the House of Representatives passed H.R. 6406, by a vote of 212-184 This bill allows for "normalization" of trade with Vietnam.

This new "permanent normalization of trade relations" (PNTR) with Vietnam is the first step in opening up their labor market to exploitation by Corporate America and to the outsourcing of American jobs to Vietnam.

What are the relative "benefits" to the United States? It allegedly opens up the Vietnamese "consumer" market to American goods. However, the benefit of such market opening is minuscule. The exchange traded value of Vietnam's entire GDP is only $43 billion. (See the CIA link on Vietnam at https://www.cia.gov/cia/publications/factbook/geos/vm.html ) This is approximately 3/100ths of a percent of U.S. GDP. To put it another way, if Vietnam's entire GDP was spent on American imports, it would raise U.S. GDP .03%. So a U.S. GDP growth of 2.20% would rise to 2.23%. Again, this is assuming ALL of Vietnam's GDP was spent on American goods, which is certainly not going to happen. Vietnam's Exchange Rate per capita GDP is only $521/year. {Vietnam's Purchasing Power Parity (PPP) per capita GDP is listed as $2800. By converting this to an exchange rate value this becomes a per capita income of only $521/year. It's the Exchange Rate income that is important here, because this measures the ability to purchase American imports.} Given these numbers it's very unlikely that we can sell significant U.S production to Vietnamese consumers.

What's the downside? Vietnam has a labor force of 43 million workers. Once Vietnam is opened up to investment by Corporate America, this could become a virtual addition of 43 million workers to America's 152 million participating labor force. If Corporate America replaced 43 million American workers ( averaging $17/hour ) with 43 million Vietnamese workers, it would reduce American labor & consumer income by $1.52 trillion.

(43 million workers X $17/hr. X 8 hrs./day X 365 days/yr. X 5 days/wk divided by 7 days/week = $1.52 trillion. )

This would also reduce American consumer spending power by $1.52 trillion dollars. A decline in consumer spending by that $1.52 trillion, subtracted directly from our $13 trillion GDP, would amount to a direct decline in our GDP of almost 12%. (Applying any multiplier would drop our GDP far more than 12%) Of course, we could "gain" that whopping 0.03% in GDP from selling our exports to Vietnam.

These are theoretical calculations only, designed to show the magnitude of relative benefits vs. costs to Americans from "normalization" of trade with Vietnam. While Corporate America is not likely to hire all 43 million Vietnamese workers, it's clear that the potential loss to our economy is much greater than the potential gain. We'll gain an almost non-existent consumer market from Vietnam, while adding a virtual 43 million workers to America's labor pool. And the direct loss of jobs is only the measurable effect. The decline in American wages from the supply & demand effect of competition with another 43 million impoverished workers hasn't been calculated. Clearly this would decrease American wages and labor income MUCH more than just $1.52 trillion.

To the majority of Americans, permanent normalization of trade with Vietnam is exclusively negative. Once again, it'll put American workers (and their wages) in direct competition with impoverished 3rd world workers.

Clearly the goal here is not to open up the Vietnamese consumer market to American goods. The goal is to open up the Vietnamese labor market to American Multinational Corporations. The true goal is to replace even more American workers with easily exploitable semi-slave laborers of another impoverished country. It'll be another disaster for American workers, and another windfall profit gain for rich Globalist Corporations.

unlawflcombatnt

Economic Populist Forum

EconomicPopulistCommentary

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The economy needs balance between the "means of production" & "means of consumption."

[madrchsod]

1. just read that china is very worried about

losing business to vietnam. interesting is`t it

[unlawflcombatnt]

2. China

Yes, that is interesting. It sounds like Vietnamese workers are paid even less than Chinese workers (which is pretty hard to do.)

[bigluckyfeet]

3. Lets See

We can trade with vietnam,a country where we lost 50,000 American lives,but we cannot trade with Cuba.Strange world.

[unlawflcombatnt]

6. Cuba

That's probably because Castro wouldn't be as friendly to investment by American multinational Corporations as is Vietnam.

[MannyGoldstein]

4. The Big Dawg's Legacy

The BFEE got the outsourcing ball rolling, but Mr. Clinton blew the doors open. Drawing upon his experience in breaking worker protections in Arkansas, he scored big for the Predator Class with NAFTA, "free" trade with China, and other marvelous innovations.

Go Big Dawg!!!

[unlawflcombatnt]

9. Clinton & Outsourcing

Clinton certainly did assist in the wholesale sellout of American workers to globalization. Without his help, NAFTA would not have gone through.

There's an excellent book which references Clinton's part in the whole big picture of outsourcing and globalization. It's called The Global Class War by Jeff Faux. It's very interesting, though very depressing as well. It's a great read for anyone who wants to see the recent evolution of the globalization monster.

[MannyGoldstein]

10. Clinton Really Didn't Give A Crap About The Working Stiff

He was all about winning points with the Predator Class - even down to his pardon of Marc Rich, hours before the end of his Presidency.

[unlawflcombatnt]

11. Yes

That's why he was so highly touted as a alleged "centrist," because he was true friend of big money globalists and multinational corporations.

[PsycheCC]

5. K & R. Another Christmas present for corporate America brought to you

by the Republican Congress. Great post, Unlawful. Thanks for the links too. :applause:

[unlawflcombatnt]

12. Republican Congress

Too bad they couldn't have gone on recess a week sooner. Interestingly enough, when this came up for a vote earlier, there were less opposed to it. It appears 10-20 more reps voted against it his time.

[robcon]

7. Great news.

Free trade benefits both sides - as was proven 200 years ago by David Ricardo. We should have free trade with every country.

[unlawflcombatnt]

8. No, Fair Trade benefits both sides, not "Free"

Speaking of David Ricardo, today's trade policies are NOT consistent with Ricardo's doctrine of "Comparative Advantage."

At present, many economists appear to have a blind spot when it comes to free trade. Free trade advocates are like a religious cult. Their advocacy is based on pre-conceived theory with little regard for actual reality. They just keep chanting "free trade is good. Free trade is good. Free trade is good." Some of these free-trade economic theories are based on a carefully selected set of facts and concepts, while completely ignoring others. Some of these older "theories" do not work, or even apply. The benefits of unrestricted free trade, along with unrestricted free flow of capital, is one such case.

The argument often used to justify "free trade" is that of "comparative advantage." Often, however, one absolute requirement of this theory is completely ignored. Comparative advantage benefits require that CAPITAL AND LABOR CANNOT BE INTERNATIONALLY MOBILE.

Let me repeat this. In order for the "Comparative Advantage" theory to work, CAPITAL AND LABOR CANNOT BE INTERNATIONALLY MOBILE.

Here is the quote from economist Paul Craig Roberts' article regarding David Ricardo's original Comparative Advantage theory:

"For comparative advantage to reign, two conditions are necessary:

One is that capital and labor must be mobile within each country so that the capital and labor employed in England in the production of wine can flow into the production of cloth, where England’s trade advantage lies. In Portugal capital and labor must be able to flow from cloth to wine where Portugal’s advantage is greatest.

The other necessary condition is that capital and labor (factors of production) cannot be internationally mobile. If the factors of production are internationally mobile, capital and labor would move from England to Portugal, where both commodities can be produced the cheapest. Both wine and cloth would be produced in Portugal. Portugal would gain and England would lose.

Ricardo makes it clear that for trade to make both countries better off, trade must be based on comparative advantage. Ricardo gives reasons why, in his time, factors of production are internationally immobile.

Since the time of Ricardo, the key assumption of trade theory remains, in the recent words of trade theorist Roy J. Ruffin, "the inability of factors to move from a country where productivity is low to another where productivity is higher." In a recent article in History of Political Economy (34:4, 2002, pp. 727-748), Ruffin shows that Ricardo’s claim over Robert Torrens as the discoverer of the principle of comparative advantage lies in Ricardo’s realization that comparative advantage, the basis of the case for free trade, lies in "factor immobility between countries." Ruffin notes that "of the 973 words Ricardo devoted to explaining the law of comparative advantage, 485 emphasized the importance of factor immobility."

If factors of production are as mobile as traded goods, the case for free trade--that it benefits all countries--collapses. There is no known case for free trade if factors of production are as mobile as traded goods.

For some time I have been pointing out that the collapse of world socialism and the advent of the Internet have made factors of production as mobile as traded goods. Indeed, factors of production are more mobile. Capital, technology, and ideas can move today with the speed of light, whereas goods have to be shipped.

The collapse of world socialism has made Asian countries, such as China and India, receptive to foreign capital, and it has made first world capital willing to migrate beyond first world countries. The Internet makes it possible for a country to hire knowledge workers anywhere on the globe.

The Internet and the international mobility of capital and technology have, in effect, made labor internationally mobile, especially labor that is paid less than the value of its marginal product or its contribution to output. The huge excess supplies of labor in countries such as China and India ensure that it will be many years before labor in those countries, both skilled and unskilled, will be paid the value of its marginal product.

The international mobility of factors of production is a new phenomenon. It permits 1st world businesses, seeking lower costs, greater profits, and a stronger competitive position, to substitute cheap foreign labor for the entire range of domestic labor involved in the creation of tradable goods and services. Only labor involved in non-traded goods and services is safe from foreign substitution. It is not yet possible to package hair cuts, surgical operations, dentistry or home repairs as internationally tradable services.

Many people confuse the workings of capitalism that lead to lower costs and greater profits with free trade. They overlook the necessary conditions for free trade to be mutually beneficial. The same people tend to confuse the free flow of factors of production with free trade. I have been amazed at the number of fierce adherents of free trade, even among economists, who have no idea of the necessary conditions on which the case for free trade rests..."

The following is the link to the article:
http://www.mises.org/fullstory.aspx?control=1420&id=64

It truly is amazing that economists constantly regurgitate the free trade mantra, and attempt to support it by misapplying the "comparative advantage" theory.

A big problem with some economists is that they "miss the forest for the trees." They often develop complicated mathematical equations to explain theories that don't make any sense. It's almost as if they try to prove mathematically that the sky is red, instead of blue. Then they ignore the fact that most non-economists agree that the sky is actually blue.

I'm going to take a stab at disproving the benefits of unrestricted "free" trade, using a simple equation -- the GDP equation. It is as follows:

GDP=Consumption+Invstmt+GovSpending+TradeBalance

If applied globally, "trade balance" should be zero (unless Martians are buying some of our goods.) Therefore, this should be the "global" GDP equation:

GlobalGDP=GlobalConsumption.+GlobaInvestmnt+GlobalGovtSpending

Economists state that consumer spending, or consumption, is 2/3 of all economic activity. Thus, global consumption is 2/3 of all global economic activity. It's the generally accepted consensus that consumer income is the biggest determinant of consumer spending. Logically, it's the only long-term determinant of consumption. (Consumption financed by borrowing cannot last indefinitely) Thus, global income is the biggest determinant of global GDP. If the aggregate loss of American wages is not compensated for by aggregate foreign wage increase, global income goes down. So does global GDP.

How does global income decrease affect the remaining factors? Let's start with global investment. Global investment will not make any real contribution to GDP if global consumer spending declines. Increased investment is supposed to increase production. If global income falls, so does global demand for production. If global demand falls, there is NO benefit to increased investment. There is no need to build more production facilities or provide more services, if there is no demand for them. Excess "investment" would simply go into corporate coffers, in the form of CEO salaries, stock holder dividends, "cash-on-hand" and bank accounts. In actual reality, as opposed to free-traders' "pseudo-reality," such non-capital investment would add absolutely 0 to global GDP in the long-term. (It's mis-allocated money that would have contributed to global GDP, if it had it gone toward global consumer spending.)

How about government spending? Government spending is financed exclusively from taxes. Taxes subtract directly from private wealth. Thus, government spending reduces private wealth, dollar-per-dollar. In addition, the "marginal" and "average propensities to consume" concepts needs to be considered here. (The salient point is that the more affluent devote a lesser percentage of their wealth towards consumption. In other words, the more affluent individuals are, the smaller the percentage of their income goes towards consumption.) As a result, taxes on lower income individuals reduce consumption more than those on higher income individuals. Taxes directed mainly at consumers, such as sales tax, reduce consumption spending dollar-for-dollar. In contrast, taxes on corporations primarily reduce investment spending. Thus, the type of taxation affects how much it subtracts from consumer spending.

It is also true that government spending subtracts from consumer spending. However, government spending is not subject to marginal or average "propensities to consume." Thus government spending contributes directly to the GDP. (As well as being subject to the multiplier effect.)

In summary, the global GDP equation is highly dependent on global consumer income. Labor cost reductions reduce global income, and global GDP. When $130/day workers are replaced with $2/day workers, global consumer income drops. Global consumer spending then drops as well, further reducing global demand for goods and services. The increased profits made from the labor cost reduction do NOT help the world economy. The increased investment capital that results has NO benefit when global consumption drops. It merely provides a short-term gain in profits, at the expense of a long-term loss in global GDP. Unfortunately, many "free-traders" DO have a blindspot to this simple reality.

[PsycheCC]

14. Great post!

I appreciate how you often give evidence of the truth of ideas that make common sense to me. Thanks for doing the hard work Unlawful.

[robcon]

15. The role of investment is far more crucial than consumption.

Investment is far more mercurial - a far more important determinant of economic growth than consumption. That's been boilerplate since Keynes.

[unlawflcombatnt]

16. No

Investment has no role whatsoever unless consumers buy the products of the investment. This fact has been lost since the Great Depression because the government has always facilitated enough borrowing to make up for a loss in consumer income-financed spending. The most recent episode of this was through creation of a housing/borrowing bubble allowing consumers to continually spend more than they earned. This borrowing bubble is deflating rapidly, and consumption will falter and cause a major economic downturn. That is, unless the new Democratic Congress realizes the errors of the Republi-tard Congress and executive branch and "change the course."

[unlawflcombatnt]

13. Unrelated, but of interest: Wholesale Inventories 12/11/06

Though the "Wholesale Inventory" report is not directly unrelated to Vietnam Trade normalization, it is of interest regarding the U.S. economy. It is another drag on the demand for American labor and another drag on American wages.

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Wholesale inventories rose again for the month of October. The +0.8% increase follows the +0.7% increase in September. Wholesale inventories have increased 10% over the year, while sales have only increased 6%. An increase in inventories in excess of sales means declining sales of inventory, declining demand for wholesale products, and a declining demand for workers to provide wholesale products. It is indicative of an economy that is slowing down. Below is a copy of today's Wholesale Inventory report from Briefing.com. The top chart is the "actual" numbers, while the bottom chart shows the "predicted" and previously posted numbers from 12/10/06.



Note that growth of wholesale inventories was larger than predicted. Also note that September's "Sales" number was revised downward from a -1.2% to a -1.5%.