Friedman and NYT confirm Free Trade was sold on false pretenses

So-called ‘free trade,’ which pits high-cost American businesses and workers against low-cost foreign producers, was sold to the American public on the promise that poor people in China and Mexico would soon become middle class consumers of American exports.

We were told that by moving industries and jobs Americans once did to cheap overseas labor markets like Mexico (through Nafta) and China (through PNTR/Permament Normal Trade Relations and WTO accession), wages and living standards in those benighted lands would rise and create One Billion Customers who would dutifully purchase products made by Americans in new enterprises that would spring up in the US to replace the “sunset industry” textile mills and auto parts plants that had moved offshore.

Apart from the fact that those new high wage jobs never materialized (old news), we now learn that Chinese consumers never materialized either.

In a recent column, Tom "Flat Earth" Friedman informs us that

China’s whole system and culture nourish saving, not spending, and changing that will require a huge “cultural and structural” shift, said Fred Hu, chairman for Greater China for Goldman Sachs.

Friedman explains why the Chinese citizen chooses to save rather than spend:

China has no real Social Security, health insurance or unemployment insurance. Without that social safety net, it’s hard to see how Chinese don’t end up saving most of their stimulus. “You open up the newspaper every day and you hear about this factory shutting down or that supplier going belly up,” said Willie Fung, whose company, Top Form International, is the world’s leading bra maker. “You can never be too careful in this financial climate.”

In its news columns, the NY Times reports why a consumer society could not emerge in China, even before the latest downturn:

Shorn of the social safety net of the old Communist state, they [Chinese workers] squirrel away money to pay for hospital visits, housing or retirement.

This may sound like a great revelation, but it’s really a fancy way of saying that workers with few benefits, minimal leisure time and no social protections do not a consumer society make.

Before someone claims hindsight is 20/20, let's remember that the perils of a lack of a social safety net in China (and Mexico) were well known – and often cited by opponents of trade deals. Critics had argued that it's disastrous for a country with a social safety net to open its markets to one without.

Businesses knew that the taxes and costs necessary to support Social Security, unemployment insurance, employee health insurance, pensions and other worker protections placed them at a significant disadvantage to foreign producers who had no such costs.

Organized labor understood that America’s enviable standard of living (read consumer society) springs from social guarantees (unemployment, Social Security etc) that labor had fought for, not just “jobs.”

Proponents of PNTR and Nafta ignored the fact that government-mandated programs (the safety net) played midwife to the birth of consumerism. Consumer society requires people who have money in their pockets - and the disposition to spend it.

Instead of creating Chinese consumers for American exports, Wall Street-biased trade with China resulted in American consumers purchasing Chinese exports - with money borrowed (against their homes) from China.

But the American consumer has reached his credit limit.

What’s the way out?

Who knows. Maybe China will invest its people’s hard-saved export earnings in American industries - in order to create a middle class (here) that has the disposable income to buy China's exports. Turnabout is fair play.

Cross posted at Talking Points Memo Cafe, http://tpmcafe.talkingpointsmemo.com/talk/blogs/curtis_ellis/2009/01/friedman-and-nyt-confirm-china.php