Morgan Stanley economist Stephen Roach thinks that the USA should pin its hopes for economic growth on increased exports to China. Sounds reasonable, right? China is a fast-growing market after all. But this is probably the dumbest strategy possible. China is a hard-core mercantilist power, and we’ve seen this movie before with Japan.

We have spent decades trying to get Japan to open its markets. And to this day, only 5% of the cars sold in Japan are imports, as opposed to 52.9% in the USA. The Japanese say that their consumers don’t like imports, but in reality Japan is the master of non-tariff trade barriers.

We will see the same from the Chinese. And we will not live to see the day of open markets in China. If we couldn’t accomplish it with Japan, a political ally, how can we expect to fare better with a non-ally like China?

The Chinese have studied the USA-Japan trade relationship, and they have vowed not to repeat Japan’s “errors” – especially the Plaza Accord “error” where Japan allowed the USA to push up the value of the yen.

Roach says not to worry about the yuan because it has been strengthening. But that is not an accurate statement. As a matter of fact, it is a deceptive statement because the PBOC sets the value of the yuan versus the dollar. Roach is trying to fool us into thinking that the value of the yuan is set by market forces.

The fact is that Beijing has been forced by US outrage to fix the yuan higher. We’ve made a tiny bit of progress, but Stephan Roach wants to put an end to it.

What are we supposed to think when confronted by an economist who argues for “free trade” in everything except the yuan? An economist who defends having the yuan set by dictate in Beijing?

When asked (in the linked interview above) how we can level the playing field with China, Roach responds: “Deflect attention away from the currency.” He went on to denounce China’s mercantilist trade practices, but that was an odd way to begin his response, no? “Deflect attention away from the currency” sounds like a talking point to me; probably written by some multinational PR flack.

Each time the PBOC inches up the yuan-dollar peg, the massive sweatshop profits of the multinationals inch down.

Is it impossible to simultaneously pressure the Chinese to float the yuan and open their markets? Not at all. So, Roach’s argument is completely specious.

And the Chinese haven’t strengthened the yuan very much at all in the grand scheme of things. They have only reversed a little bit of their massive devaluations from the 1980s and 1990s. Go here, and make a long-term chart and see for yourself.

Of course, demand for yuan is far higher than it was before the Chinese started devaluing. Just think how many yuan Apple needs to purchase when they go to China to buy iPads from Foxconn. How high would the yuan spike if allowed to float? I don’t know, but you would be hard-pressed to find an economist who thinks it would decline.

If you are bullish on the yuan, you can buy the CYB ETF. However, if you did so when CYB began trading in 2008, you would have only a 1.35% gain. That’s the peg in action. Below is a “percent change” chart comparing the CYB (red line) to the FXE euro ETF (blue line). Click chart to enlarge:

I’m comparing the yuan to the euro to showcase the difference between a currency set by market forces and one set by dictate. The euro bounces around; the yuan is practically a flat line. Anybody who says that China is not a currency manipulator is full of it. The movements of the yuan are purely artificial.

Note: According to the Best Selling Cars Blog, there were no imports at all in the top-30 selling cars in Japan in 2011.

In 1990, West Germany assimilated East Germany. At the time, West Germany had 63.3 million people, and East Germany only 16.1 million. The two nations shared a language, culture, and history, so such a unification should have been easy, right? While it was indeed peaceful, to this day, two decades later, West Germany still spends €60 billion ($79 billion) to support the East. And that’s more than the USA spends on its massive food-stamps program ($65 billion).

In addition to that financial burden, West German workers had their wages beat down when millions of desperate East German workers were dumped into their labor pool.

So, after 20 years of effort, this modest unification process is still causing indigestion for one of the top economic powers in the world.

However, what the USA is doing completely dwarfs the German project.

We have been integrating China into our industrial base for 10 years now. Since trade with this low-wage nation was thrown wide open in 2001, millions of jobs and thousands of factories have been transferred to China. Multinational corporations who now manufacture in China are making huge profits, but the US economy, stock market, labor market, and federal treasury have sustained huge cracks, and poverty has exploded across the USA.

Of course, we don’t make direct payments to China like West Germany does to East Germany. However, we also have imported a record number of legal immigrants (10 million) during the China-assimilation project (and millions more illegals). How many people on the food-stamp rolls are immigrants? Or citizens displaced in their jobs by immigrants or offshoring to China? Quite a lot, no doubt.

So, the German project, and the USA-China project are very similar, except that our project is clearly doomed. The fact is that China’s population of desperate workers is so huge, that the multinationals can literally offshore every job that isn’t nailed down to US soil. And the remaining service workers in the USA suffer intense wage pressure from millions of immigrants.

This is great for the multinationals. Companies like McDonald’s and Walmart can pay peanuts, and still get thousands to line-up for job interviews. But what about the federal treasury that collects taxes from worker paychecks? Not so good, right?

The USA’s credit rating has already been downgraded. Further downgrades seem assured as long as this harebrained project of assimilation continues.

And it will continue. There doesn’t appear to be even a tiny political consensus to put an end to offshoring. The multinationals spend their huge profits to purchase the requisite number of politicians to keep their gravy train rolling. And politicians do nothing to shut down immigration because they need the immigrants to vote for them.

It’s an amazing thing to watch the once-mighty USA being carved up like this.

Assimilating China is literally impossible, and will end in tears for the USA.

Mark my words.

Notes:

1. Wikipedia page on German reunification.
2. West German population data here.
3. East German population data here.
4. Ambrose Evans-Pritchard says about Germany: “There has been no meaningful East-West convergence for the last 15 years.”

I’m glad to see the burst of news stories about Asian sweatshops. Maybe it’s just a campaign to deflect blame for the high unemployment rate on behalf of President Obama. If so, I’m not so sure that it’s a good strategy. I mean, what did Obama really do to bring jobs home, or put an end to sweatshop production?

In any case, what these stories leave out is that the working conditions in the American Gulag (a.k.a. Asian supply chain) are no accident. The global trading system was EXPLICITLY designed to facilitate “military style” sweatshops where hapless third-world peasants are burned to a crisp in easily avoidable industrial accidents.

The fact is that the multinationals architected the World Trade Organization (WTO) to deliberately have no rules about working conditions or wages.

That’s what happens when corporate lobbyists are allowed to write legislation. It comes out all fascist-y.

So, keep that in mind when you read stories like this one. Companies like Apple wouldn’t be experiencing a good-or-evil dilemma in a properly-constructed global trading system.

On a related topic, I haven’t heard any Republicans advocating the elimination of the minimum-wage laws recently. Maybe I turned them back when I wrote: “There’s a Sweatshop in Your Future.” Prospects for bringing the Gulag to the USA seem to have dimmed.

At least for now.

Very few people get what I’m talking about. After all, subjects like global labor arbitrage, and the yuan-dollar currency peg are arcane and complicated. However, when a person finally does get it, they exhibit a panic reaction. You can see what I’m talking about at 5:13 into this video when John Stewart vents some panic:

Why does this happen? You see, we Americans go around thinking that we are citizens of the most powerful sovereign nation on earth. So when a “citizen” realizes that he is just a pleb living in a conquered, and colonized, province of a global sweatshop empire, you can’t blame him for feeling a little panicky.

Taking the red pill is no fun.

No fun at all.

Welcome to the matrix, Mr. Stewart.

I want to repeal the North American Free Trade Agreement (NAFTA) to bring home all the factories and jobs that were sucked down to Mexico. But it might also be a good way to defuse the Mexican drug wars.

The day that NAFTA went into effect, January 1, 1994, the Zapatista Army launched its revolution on the Mexican government in Chiapas. It didn’t take the Mexican army very long to defeat the Zapatistas, but that wasn’t the end of it because the Zapatista were right.

The Zapatistas knew that NAFTA would allow American agricultural exports to flood the country and wipe out Mexico’s small farmers. And so they did.

What did those betrayed farmers do? Many became NAFTA refugees and flooded into the USA, but some turned to growing alternative crops. Drug crops.

Today, Mexico is the #2 producer of opium in the world after Afghanistan, and is wracked with drug violence.

When the British repealed their Corn Laws, and wiped out their farmers, they had a plan. They had factories ready to exploit the new source of cheap, desperate labor. Sure, it was an evil plan, but it was better than no plan at all.

Thanks to NAFTA, Mexico now has chaos, and we have 46.2 million people on food stamps.

Another “triumph” of libertarian ideology.