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Concerning the Export of Capital

August 7, 2003William L. Anderson

Tags Free MarketsGlobal EconomyInterventionismValue and Exchange

In a recent article  dealing with trade and job losses, I questioned the terminology of "exporting jobs," noting that goods are exported, not jobs, since they are not economic goods. While the points I made were technically correct, something else needs to be added to the mix, that being the importation and exportation of capital.

Indeed, in the past decade, more and more U.S.-based firms have been investing in new factories overseas, and especially in places like China and other Asian countries. To put it another way, American firms have been exporting capital, and capital investment, wherever it may be, will result in the creation of employment (hence, the sloppy terminology, "exporting jobs.")

The exportation of capital is hardly new in the modern economy. During the 19th Century, the United States was a favorite investment target of firms from Great Britain and Europe. In the past two decades, a number of overseas automobile companies, including Toyota, Nissan, Mercedes-Benz, BMW, and Honda have invested literally billions of dollars in plants here. At the same time, a large number of U.S. companies have built plants in Asia and Mexico. There is nothing sinister about this process; individuals ultimately are choosing to invest where they believe beforehand their capital will get the best return.

Yet, the critics of trade persist in their insistence that permitting individuals in this country the freedom to invest where they please undermines the effectiveness of the U.S. economy and ultimately leads to a lower standard of living. Paul Craig Roberts, who has done heroic work in so many areas, including in exposing the legal fraud that has become modern U.S. law, has fired another salvo on trade, arguing that the export of capital in and of itself is ultimately harmful to our economic interests. He writes:

As the U.S. makes less and less of what it consumes, it runs a massive trade deficit. We pay for these foreign-made goods by giving up ownership of our assets—our companies, our real estate, stocks and bonds. Thus, foreigners gain not only the incomes from the manufacturing jobs but also the profits, rents, capital gains, dividends and interest from the assets. A country that loses income streams from millions of lost manufacturing jobs, and from the trillions of dollars in assets it no longer owns, is a country that is losing a lot of income.

As someone who once worked as executive director of a manufacturers' association, I have heard many of these arguments before. In fact, when I was hearing manufacturers make them nearly 20 years go, such opinions hardly were new; Adam Smith's 1776 classic The Wealth of Nations was written in large part as a treatise against the Mercantilist views of his age in which it was believed that a government should do all it could to encourage manufacturing for its own sake, not because the creation of more goods means more wealth for individuals across the board.

Now, there is a ring of truth to what Roberts is saying. Capital does create wealth, and the creation of capital is a good thing, economically speaking. Moreover, if governments follow policies—as is the case in this country today, occurring at all levels of governance—that drive investment in capital away from our shores, then we can expect a lower standard of living to occur.

From environmental policies to labor regulations to the litigation explosion to the vast expansion of federal law that criminalizes what historically have been standard business practices, investors here are receiving the message loud and clear: invest in capital in the United States and you are sure to have someone try to hijack the profits. You may go to prison in the process, especially if you happen to be successful.

The antipathy that the political and intellectual classes have expressed toward private capital seems to have intensified over the past decade, and especially during the last economic downturn. The current group of U.S. presidential candidates, from George Bush to the gaggle of Democrats running for their party's nomination does not exactly instill confidence in the hearts of investors, as the anti-business rhetoric has been especially virulent. Since investors realize the deck is stacked against them, they will continue to look elsewhere.

To his credit, Roberts has pointed this out elsewhere, and especially has been adamant in declaring that the present U.S. legal climate is toxic for new investment. It is also true that if the government and its anti-capitalist allies make new investment difficult, then we will suffer deterioration in living standards. Unfortunately, he does not stop there, but instead compounds a number of errors that indicate that economic protectionism will ultimately lead to a higher standard of living here, a false proposition. He writes:

During the post-WW II period, Americans benefited from high levels of education, technology and capital. This made Americans highly productive and protected them from competition from cheap foreign labor that had less capital and technology with which to work. High-paid U.S. labor could produce so much more per hour than cheap foreign labor that U.S. employment had nothing to fear.

This has all changed. Today capital and technology can go anywhere, and they go to where labor is the cheapest.

This makes "globalism" a direct threat to U.S. living standards. A number of economic factors, such as existing contracts and mortgage debt, make it impossible for U.S. wages and salaries to quickly adjust downward to Chinese and Indian levels. Therefore, Americans will continue to lose ground in the global labor market. The "jobless recovery" is one indication of this lost ground.

It is true that in the two decades following World War II, the U.S. standard of living was relatively higher than the standard of living elsewhere, since many other nations were recovering from the most destructive war in history. However, the important thing to remember here is that the relative standard of living is less important than the absolute standard.

While U.S. workers did enjoy much better living standards than people elsewhere during that period, many people here still lived in poverty. According to Charles Murray, about one-third of all Americans in 1950 were poor, or at least had incomes below the government's official "poverty standard."  If any of us could suddenly be transported to that immediate postwar era, we would see immediately just how low the absolute standard of living was then compared to our living standards today.

Indeed, the idea that Americans are better off only if everyone else in the world is poor flies in the face of sound economics. The period of relative peace following the war, as well as the decision by governing authorities in places like Japan and Hong Kong not to pursue socialism enabled investors to create capital in many places, the end result being the production of large amounts of goods, the ultimate reason that we have seen a vast reduction in poverty worldwide in the past few decades.

If we are to believe that Americans are better off only when others are poor is also to greatly misunderstand the nature of exchange. Socialists are fond of promoting the myth that economic exchange is an action that leaves one party better off at the expense of others. Thus, we hear leftists say that the way to reduce poverty in the Third World is for those countries to pursue protectionist, socialist policies. In the end, we see the destruction of promising economies, including Cuba, which before Castro and communism had one of the highest standards of living in Latin America.

(In the case of Cuba, leftists have created a serious dilemma. First, they claim that trade between the "First World" and "Third World" creates poverty; second, they say that the reason for Cuba's poverty is the U.S. trade embargo. Yet, both views cannot be simultaneously correct, as Cuba cannot be poor both because of trade and lack of trade.)

There are a number of vital errors that Roberts and others like Patrick Buchanan are claiming in saying that free trade lowers our overall standard of living. Indeed, if that were the case, then the United States, being, in effect, a huge free trade zone, would long ago have traded itself into poverty. If one says that the exportation of capital from the USA to Vietnam creates poverty in the USA, then the "exportation" of capital from New York to Georgia would have the same negative sum effect, as there is nothing magic about international borders when it comes to trade.

Second, I emphasize again that we are speaking of exportation of capital, not jobs, since jobs are not economic goods. The way that foreigners pay for capital imported into their countries is to export those goods to this country. Yet, Roberts' claims that the process of exporting capital naturally creates conditions in which most individuals in this country will not be able to afford to purchase those goods made abroad. (There is some truth in his argument that the deterioration of the dollar obviously will make imports more expensive, but it is not the exportation of capital that drives down the dollar, but rather the inflationary policies of the Federal Reserve System.)

This argument does not make economic sense. If Americans will not be able to afford the goods made with exported American capital, then there is no reason to open factories abroad with cheaper labor unless the manufacturers hope to find other markets that can afford the goods.

Much of the argument against free trade is based upon a fallacy that confuses costs and wealth. For example, assume two kids ask to mow my lawn. The first offers to do it for $25, while the second asks for $50. According to the anti-traders, the second choice is the better one, since it will "put more money into the economy."

Yet, Americans did not become the wealthiest people on earth because they are high-cost producers. Instead, they became wealthy because they were able to produce more things, and as long as the government gives investors and workers relative freedom to be productive, this will continue. However, should the government persist in its policies to attack capital and productive people through punitive regulations, laws, and taxation, then we can expect investors to look to more friendly places.

It is vital to note here that there are two processes at work, and they are not identical, although anti-traders tend to confuse them. In a free trade situation within a free market economy, investors will export capital because of the opportunity cost of free labor. For example, when Nissan opened an automobile plant in Smyrna, Tennessee, in the early 1980s, some people who were working in factories that paid less took jobs with Nissan.

In a truly extreme example, after the Exxon oil spill in Alaska in 1989, Exxon offered jobs to help clean the oil off the shore, paying more than $16 an hour. Unfortunately for local employers, that meant that individuals left their current lower-paying jobs, leaving whole canneries and other businesses empty as everyone was cleaning the oil spill.

In the free market case, investors send capital elsewhere because the price for local labor is "too high" to make their investments profitable. The local workers are better paid than what the investors in question can pay them, so they are not injured by the departure of capital. However, when government artificially raises the opportunity cost of labor through the regulatory and legal process, then the local workers left behind are harmed.

There is also the situation in which labor unions have, in effect, hijacked the capital. The so-called Rust Belt is a case in point. For many years, militant labor unions were able to force higher-than-market wages for their labor basically through violent means. However, that also created the incentive for steel manufacturers not to reinvest when the capital became obsolete.

Keep in mind that the imposition of above market wages was not the same as the creation of wealth. Indeed, it was the long-term destruction of wealth, and when the mills closed down, the workers there did not have anywhere else to go. Thus, we see the decline of communities in the Northeast and Mid-Atlantic states that once were prosperous, but now are losing population and seeing their relative standards of living decline.

This phenomenon is not the legacy of free trade, but rather a situation caused by excessive government. Furthermore, by creating conditions that practically invited investors to locate capital elsewhere, government officials and their allies have made it clear that they do not care about the real effects of their actions. Instead, they call for even more hijacking of capital, along with laws that will coerce individuals to "invest" in domestic capital projects, then grab whatever meager profits the investments will create.

This is no solution to our current economic problems; indeed, it commits us to go down the same destructive road that we already have been following. As the Berlin Wall failed to keep productive people inside East Germany, so will an economic "Berlin Wall" here be unsuccessful as well, as such policies ultimately will mean we will have no investment and no goods, either.

To stop the exportation of capital, instead of easing the burden of government upon productive people and capital, the political classes and their allies turn to destructive methods instead.  Punitive tariffs, tax increases and other new regulatory burdens become the weapon of choice for those who make policies.  Louis Uchitelle of the New York Times writes approvingly:
We could also force American companies, through regulations, to stay out of countries that fail to observe minimal labor and environmental standards. Regulation is not popular in America. But it could regain its popularity, if the alternative is a continual loss of jobs in every state.
Keep in mind that such policies, in the end, would not improve the economic conditions here in the USA.  In fact, they would make them worse, but the political classes ultimately do not appeal to good economic sense, but to destructive envy instead.

Some of the most emotional and angry emails I ever have received for an article came after my recent piece on this subject. Many readers I encountered are ready to confiscate the wealth of others and have them imprisoned for the "crime" of investing their dollars outside the USA. Such attitudes, of course, are harmful not only to the cause of freedom, but also to the creation of wealth itself. I can only hope that people at some point will be willing to listen to reason, but right now it seems that the loudest voices belong to those who seek to do us even more harm—all in the name of prosperity.


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