American Betrayal, Sponsored By Intel

If trade expert Clyde Prestowitz’s latest book, “The Betrayal of American Prosperity,” [1] were a television series, one segment would open with this voiceover: “This episode of ‘The Betrayal of American Prosperity’ is brought to you by Intel.”

A group of Chinese workers in white smocks would smile into the camera and sing, “Bahm-bom-bom-bahmmm.”

Intel is indeed the sponsor of the latest act of the betrayal of American workers, who were told by the apostles of free trade and conservative corporatism that it’s OK if nitty-gritty manufacturing jobs went overseas; our supremacy in technology would create opportunities that would more than make up for the blue-collar jobs that were being rapidly exported.

But later this year Intel will open a $2.5 billion plant in Dalian, China [2] that is just the latest example of how the free-traders’ line has proven false. The plant will serve China’s huge demand for lower-end processors, but there is speculation [3] that if Intel can work around U.S. technology export controls, it would move higher-end production to the new facility as well.

At a presentation at the AFL-CIO headquarters in Washington May 18, Prestowitz used Intel as Exhibit A in how American workers are losing as a result of misplaced faith in free-marked orthodoxy and failed American economic policy. “The Betrayal of American Prosperity” details the history and consequences of this failure and offers policy recommendations for rebuilding the country’s job base.

“We’re in a world in which all of the incentives are such as to facilitate the movement of production of tradable goods and the provision of tradable services out of the United States,” Prestowitz said. “It doesn’t matter if they are low-tech, high-tech or medium-tech, they are all moving out.”

In the case of Intel and its new plant in China, which has plants in New Mexico and Oregon, many of the factors that are often used to explain the outsourcing of jobs to other countries don’t apply.

“Is the labor cost going to be less? Well, it will be less, but the labor cost is insignificant in semiconductor production,” Prestowitz said. “Will the operating costs be less? No, it will probably be higher. Will the quality be higher? No, probably worse. Well, will the productivity be higher? No, probably won’t be as good.”

Even the Chinese government’s currency undervaluation, which gives Chinese manufacturers an effective 40 percent cost advantage for their exported goods, is not a major concern for Intel, given that it has no roughly equal competitor.

“So, what’s going on? The answer is, this is a $6 billion investment, and of that $3 billion are being put up in one way or another by the Chinese government,” Prestowitz said. The government investment benefits Intel's bottom line to the tune of $100 million a year over 10 years.

On the website of the American Chamber of Commerce in China, an article confirms [4] that the Chinese government was “influential in persuading Intel to setup its semiconductor manufacturing plant in Dalian,” and notes that, among other things, the Chinese government is building high-speed rail links, new highways and port facilities that would support new industry in Dalian and surrounding areas.

Prestowitz said that America does not have a policy that matches what China and other Asian countries are doing to encourage American firms to stay in America and produce jobs here at home. Merely cutting taxes and hoping for the best doesn’t count.

Prestowitz encouraged a contrast between how Chinese officials and American officials deal with American business leaders. When an American business leader goes to China to cut a deal, Prestowitz said, “you need to prove that you are a friend of China”—and that means moving a significant share of your production to their country and hiring their workers.

When was the last time an executive of a multinational business was challenged to demonstrate that he or she was a “friend of the United States” in that same way?

The pressure that China exerts on businesses that want access to its market “is a very powerful, subtle, unquantifiable factor that does not exist in the United States,” Prestowitz said.

The United States has the huge trade deficit and weak domestic economy that it has because “there’s been a big scam going on in the United States for the past 40 or 50 years,” Prestowitz said. “The scam is that the economists use the term ‘free trade,’ and they know that the average guy doesn’t understand that when they say ‘free trade,’ they means unilateral.”

In other words, “free trade” is not really fair or reciprocal trade, in which countries agree to abide by shared rules in which both sides gain, but it is effectively unilateral disarmament, in which a country such as China can set its own terms for global trade and industrial policy and the United States acts as if its living in an Adam Smith world.

Prestowitz argues for coming out of that fantasy world and borrow from the playbook of its trade competitors. One of his recommendations is to have a war chest of federal funds that can be used to support businesses that expand production and create jobs in the United States, and aggressively court foreign manufacturers who want greater access to the U.S. market to move some of their manufacturing into the U.S. At the same time, he said, U.S. policymakers should fight for fairer trade rules and insist on enforcement.

“It’s not too late, but it’s getting late,” Prestowitz warned.