THE BLOG
05/11/2013 10:55 am ET Updated Jul 11, 2013

Beware the Global Consequences of Further Declines in the American Middle Class

Apple Computer issued bonds last week. Issuing $17 billion of bonds to buy back stock and pay dividends might seem odd for a company that is sitting on an estimated $145 billion of cash, but much of this money was earned overseas and Apple, like many other transnational U.S. corporations, is refusing to repatriate foreign profits because of the tax obligations that would be triggered under the U.S. tax code. Issuing bonds to satisfy shareholder demands was an intuitively illogical, but ultimately financially rational, solution.

The situation is a classic example of moral hazard. Having offered transnational corporations a tax repatriation holiday in 2005 -- a "one-time" opportunity to bring foreign profits back home for a special, low 5.25% tax rate -- corporate America is now holding out for a second bite at the apple, with as much as $2 trillion held hostage in offshore accounts. Cisco Systems CEO John Chambers, whose company's offshore profits approximate $40 billion, threw down the gauntlet recently, stating that Cisco would create no new jobs in the United States until they get their tax holiday.

China has been the largest beneficiary of the offshoring of jobs by U.S. corporations that have produced the trillions of dollars in question. Yet despite seeing millions of workers lives lifted out of extreme poverty, the Chinese are not happy. They believe that they -- like the U.S. treasury -- should be entitled to a cut of those profits. After all, if Chinese workers actually owned the means of production, much of that lucre would belong to them. Instead, China's take has been limited to the jobs that have been created, along with whatever amounts were skimmed off along the way for the personal nest eggs of Chinese officials.

The Apple bond sale came just two weeks after the spring meeting of the International Monetary Fund, a gathering that focused on the eradication of extreme poverty and where, as reported by Annie Lowery in the New York Times Magazine, World Bank President Jim Yong Kim pronounced 2030 as "the global target to end poverty." Kim's optimism comes on the heels of the success of the world community in cutting the share of the world population living in extreme poverty by 50 percent, five years ahead of the target date of 2015 establish a quarter century ago, as the rate fell to an estimated 21 percent in 2010, from 43 percent in 1990.

The linkages between the two events -- profits earned by U.S. corporations overseas and the amelioration of extreme poverty as defined in official statistics -- is not something that is widely embraced in the development community. Indeed, The New York Times article is quite revealing in its conclusions. "For much of the improvement, the world can thank one country: China, which alone accounts for about half of the decline in the extreme poverty rate worldwide. It has also driven significant gains across the region. In the early 1980s, East Asia had the highest extreme-poverty rate in the world, with more than three in four people living on less than $1.25 a day. By 2010, just one in eight were."

China? The rise of the Asian Tigers -- Singapore, Taiwan, Korea, and Hong Kong (then still a British colony) from destitute poverty to affluence came long before China decamped from its faith in the Little Red Book and began its journey down the capitalist road. It is striking that the same newspaper that won Pulitzer Prizes for its reporting on the offshoring of American jobs to and related corruption in China could showcase a piece on the global decline in extreme poverty without even a nod to the American middle class that made it all possible, and paid the dearest price.

Neither the Time's article -- nor for that matter the communique published in the wake of the IMF meeting -- ever once mention the word "trade," yet it has been one of the driving forces in global economic development over the past several decades. The alleviation of poverty in China and India -- the countries that data suggest have seen the greatest alleviation of extreme poverty -- is in particular a direct result of the U.S. embrace of free trade. The rise of the Asian Tigers was based on the export-driven development model that raised Japan up out of the ashes of World War II, and that was subsequently replicated across much of the rest of Asia. The Times article cites the population migration in Cambodia as an example of where extreme poverty has been reduced. "Cities bolster access to health services and public resources; infant-mortality rates, for instance, are 40 percent lower in urban Cambodia than in rural Cambodia. And workers themselves become more productive, often by making the switch from labor-intensive work like farming to capital-intensive work like manufacturing." Yet there is no suggestion of the global economic changes that enabled that transformation.

A national export-driven economic development strategy requires two essential elements. First, one or more trade partners willing to accept trade imbalances -- to import more from than they export to the country in question. And second, a stable, if not pegged, currency relationship, which is necessary to ensure that the intentional trade imbalances do not result in the appreciation of the export country's currency, thereby increasing the cost of their exports and undermining the export strategy. But for the willingness of trade partners to support large trade imbalances with Chinese -- and tolerate the attendant destruction of domestic employment--China's dramatic economic growth would not have been possible. Indeed the relationship described by The New York Times article is inverted: The world need not thank China. Rather, China should thank the world.

U.S. leadership in the promotion and support of global trade has been essential to the alleviation of extreme poverty. While Europeans have for years evinced a deep disdain for American capitalism and imagine their system to be more compassionate, the European polity has steadfastly resisted the national sacrifice that stronger measures in support of open trade with developing nations would require. The French continue to resist opening their agricultural markets to Portugal and Greece, much less to African nations, while Germany has shown no appetite to undermine its own manufacturing export machine that other nations might benefit. Only in America would politicians forsake their middle class constituents and vote for free trade agreements to the benefit of their industry contributors -- and the developing economies of the world.

In 1992, Ross Perot famously described the giant sucking sound of American middle class jobs that would be lost in the wake of free trade. And he was correct: In the two decades that ensued, millions of American jobs were lost as entire industries shifted production offshore. But over the same period, as celebrated at the IMF summit, hundreds of millions of people across the globe have seen their lives lifted up out of extreme poverty.

Companies such as Apple and Cisco Systems, and nations such as China, that have benefited from free trade are part of a closed system that has been built in large measure on the strength and confidence of the U.S. consumer. Yet those beneficiaries have been largely indifferent to the plight of the American middle class -- whose economic well-being and confidence in the future has been undermined by the expansion of free trade -- focusing instead on their own self-interest and entitlement to the benefits of trade. The leaders of Apple and Cisco gripe about tax rates, while the leaders of China disdain American concerns for their predatory trade practices.

If the world is to sustain the momentum of economic development that is essential to Jim Yong Kim's optimism, the companies and countries that have benefitted from expanding free trade have a collective stake in figuring out a path forward that stanches the downward spiral of the American middle class. Failing that, the political coalition that has promoted free trade to date will ultimately unravel, as an increasing number of Americans adopt the stance of the leaders of Apple and Cisco and China, and decide that it is time to ignore the interests of the rest of the world and just pay attention to their own self-interest.

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