The easiest way for an impoverished country to grow rapidly is to adopt a policy known as “Managed Trade.” This policy is almost the opposite of the “Free Trade” policy the U.S. has followed since World War II. By using managed trade strategies, countries limit their imports from the U.S. and maximize their exports. The result is a huge U.S. trade deficit that destroys manufacturing jobs in the Mid-West and other regions.
Managed Trade has two parts: first, imports are limited through a combination of tariffs and regulations that discriminate against foreign goods. Second, investment capital is directed into export-oriented industries that focus on U.S. markets. The price of these exports are held down by keeping wages for industrial workers artificially low. The outcome usually is rapid industrial growth fueled by a large, profitable trade surplus with the United States. I will address this second aspect of Managed Trade in today’s blog and the first one in my next blog.
In my new book, I show how foreign competitors used these policies to re-build after World War II. Japan, France, Belgium, Italy, and West Germany followed these policies in the 1950s and 60s. For example, in Japan, the Ministry of International Trade and Industry (MITI) regulated major investments, picking out industries that might do well at exporting and directing the country’s major banks to give loans to those companies. The movement of people out of rural areas into the cities in the 1950s and 60s made the cost of labor very low compared to the United States.
Then, in the 1980s, a new wave of export oriented countries, the Asian Tigers, followed the same managed trade investment strategies. In Singapore, strongman Lee Kuan Yew, who ruled the country as prime minister for thirty years, ignited explosive growth through export-oriented, policies.
In Korea, giant conglomerates like Hyundai and Samsung were given preferential access to bank loans and government subsidies to help them successfully export into the U.S. Corporations in these countries were very anti-union and the national governments used every means available to prevent strikes and keep labor costs down.
China’s Managed Trade
A powerhouse in world trade since the late 1990s, China is an extreme example of managed trade. Most of China’s larges banks work closely with government planning agencies. Their loans go primarily to export companies controlled by former Communist Party officials, sons of former party officials, and talented men who join the party. Labor costs are low for two reasons: first, the only legal union is operated by the Community Party. Its’ funding comes from dues paid by the companies where the union has a presence. Finally, and this is a head shaker -it is common for managers from the companies to be the top officials in the local unions.
In addition, there are more than 200 million migrant workers from China’s rural areas who pour into the cities each year. China has a place of origin residential policy which operates much like Apartheid did in South Africa. Residents from rural areas can work in urban industrial areas, but they are ineligible for housing subsidies or to live in locally built public housing. Many of them must live in dreary dorms provided by their employer. In 2007, Chinese industrial workers averaged just $1.14 per hour.
The waves of industrial exports launched, decade after decade, from these Managed Trade economies have flooded the U.S. with inexpensive industrial products – cars, toys, clothing, television sets. Domestic versions of these industries have declined or disappeared in the U.S. – leaving workers who do not possess college degrees with stunted career options and impoverished communities.
Next: Restricting Imports Creates Unbalanced Trade