Faulty Numbers: Trade Reports Are Using Bad Information

On Aug. 28, the Cato Institute in Washington, D.C., published a report, "Thriving in a Global Economy: The Truth About U.S. Manufacturing and Trade." The report confuses a company's offshored products with its import competition and wrongly concludes that U.S. companies with the most import competition are the companies that are thriving.

This extraordinary mistake results in an incorrect conclusion. The Cato report finds that revenues, profits and value added rose most for industries most exposed to import competition and mistakenly attributes this result to the beneficial workings of free trade.

The Cato report did not set out to prove the benefits to corporations of offshoring. The goal of the report is to combat protectionist sentiments in Congress that might result in trade restrictions. Thus, you have a report that attributes the health of U.S. manufacturing to import competition.

Congress and most economists are as confused about the issues as the Cato report. Today, the profit motive causes capitalists to create job opportunities and GDP in low-wage foreign countries instead of their own. Every job that does not require a "hands-on" presence can be offshored. Charles McMillion and I have pointed out for years that the nonfarm payroll jobs data from the Bureau of Labor Statistics show that the U.S. economy can only create net new jobs in domestic nontradable services.

The Cato report does not acknowledge that the financial prosperity of U.S. capital is at the expense of U.S. labor. The report does not explain how an $800 billion trade deficit can be closed when domestic corporations face powerful incentives to offshore, and it shows no awareness of Susan Houseman's findings that productivity gains and output growth that result from offshoring, and which occur abroad, are mistakenly being counted as U.S. GDP and productivity growth. This phantom U.S. output and productivity growth would explain the disconnect between rapid productivity growth and U.S. real median family income, which is lagging far behind.

The financial prosperity that U.S. corporations are enjoying from offshoring increases the U.S. trade deficit and makes American consumers increasingly dependent on imports. In 2006 (the most recent annual data), the U.S. trade deficit in manufactured consumer durable and nondurable goods was 3.4 times greater than the U.S. trade deficit with OPEC. The U.S. "superpower" has a massive trade deficit in consumer manufactured goods and even has a deficit in capital goods, including machinery, electric generating machinery, machine tools, computers and telecommunications equipment.

In 2006, the U.S. trade deficit with Europe was $142.538 billion. With Canada, the deficit was $75.085 billion. With Latin America, it was $112.579 billion (of which $67.303 billion was with Mexico). The deficit with Asia and Pacific was $409.765 billion (of which $233.087 billion was with China and $90.966 billion was with Japan). With the Middle East, the deficit was $36.112 billion, and with Africa the U.S. trade deficit was $62.192 billion. The trade deficit with OPEC nations was $106.260 billion.

The more U.S. corporations prosper by offshoring, the greater the U.S. trade deficit will grow and the more unbearable the pressure will be on the dollar's role as reserve currency.

At some point, crisis will force Congress, economists and think tanks to deal with the real issues.

*The above article has been excerpted from Paul Craig Roberts’ article “Cato's Trade Report: Blinded by Ideology.” Mr. Roberts is an economist. He served as Assistant Secretary to the Treasury in the Reagan Administration where he earned the nickname the “Father of Reaganomics.” He was an editor and columnist for the Wall Street Journal and Business Week. In 1993, Forbes Media Guide ranked him as one of the top seven journalists in the United States.