Cheap Imports Backfire on America’s Retailers & What’s Left of Our Economy

Summary: Globalization and free-trade, combining to an irresistible force, have reshaped the world since WW2. As that era ends, and we enter a perhaps tumultuous transition to a new and different era, we should examine the calculus of its benefits and costs. Today’s analysis by Alan Tomelson helps us take a first step.

World Trade

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Cheap Imports Backfire on America’s Retailers
& What’s Left of Our Economy

By Alan Tomelson
Posted at RealityChek, 3 May 2014

Reposted with his generous permission.

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It’s really no exaggeration to call this the most spectacular and grimly hilarious irony of the current era of U.S trade and globalization policy:  Wal-Mart is running into big-time trouble because it can’t cut even its rock-bottom prices low enough to make them affordable for its low-income-dominated customer base.

A little skeptical about the irony claim?  Think about how Americans have debated trade and globalization policies since these issues became major news — certainly once the North American Free Trade Agreement (NAFTA) came into the spotlight in the early 1990s, and even back to the late 1970s, when high value imports from Japan began threatening advanced U.S. manufacturing industries like steel and autos.

Perhaps the most effective counter to demands that these imports be curbed somehow was the claim that, whatever harm they inflicted on domestic producer industries and their employees, consumers benefited hugely from lower prices.  And nowhere was the argument made more powerfully than in the case of labor-intensive consumer goods imports like garments offered in abundance to low-income Americans by Big Box retailers like Wal-Mart (which not so coincidentally were powerhouse lobbyists in favor of more import-friendly trade deals).

Trade policy critics tried to point out the limits of this rationale — especially noting that even the lowest prices were scant consolation to those desperately needing any income at all because their jobs had been destroyed by imports, or because their wages had been driven way down as job losses in high-value manufacturing pumped up the labor supply in the rest of the economy and created an ever stronger buyers’ markets for their labor.

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David Ricardo
Ricardo warned us about the risk of free trade (see the March 2009 post)

To no avail, however.  The import- (and offshoring-friendly) trade policies and deals modeled on NAFTA kept coming, and the “cheap imports” claims held sway — largely because so many Americans were able to substitute unnaturally cheap credit for smaller paychecks, especially during the last decade.  The resulting debt explosion of course led directly to the entire world’s near financial and economic meltdown.  Yet the cheap imports argument remains a mainstay of the globalization cheerleaders and the offshoring lobby.  Check out this recent Wall Street Journal op-ed for some evidence: “Five Myths About Imports“, WSJ, 19 May 2014.

And the claim is still swallowed by entirely too many American political leaders and by the Mainstream Media — which has always strongly supported the standard trade liberalization agenda.

But last month, it should have became glaringly obvious that a cheap imports-based economy not only was disastrous for the economy as a whole, but was becoming so for the Big Box retailers themselves.  What other conclusion can be drawn from a May 19 CNBC report: “Wal-Mart’s biggest problem: Its customers

According to correspondent Krystina Gustafson, the world’s Number One retailer has suffered through five straight quarters of declining same-store sales largely because its low- and middle-income customer base is “facing stagnant wage growth and simply can’t afford to spend on discretionary items—or in some cases, food.”

As a result, Wal-Mart’s tried-and-true strategy of repeatedly cutting prices is no longer so effectively squeezing revenues — much less profits –  out of this solidifying stone.

Nor is Wal-Mart succeeding at replacing foreign consumers with U.S. customers in its business model — especially in the super-low-wage countries like China that it’s relied on so heavily for product.  Their incomes still aren’t even remotely adequate, and the Wal-Mart model has rubbed many foreign cultures (and powerful foreign retail interests) the wrong way.

Wal-Mart founder Sam Walton was no saint, but he did attach importance to selling U.S.-made products.  It seems high time for his heirs to recognize that Wal-Mart will keep foundering until it starts valuing a critical mass of its countrymen as decently paid workers as well as customers — and starts lobbying for trade policies that can stop importing so many foreign goods, cheap or otherwise, and start importing much more offshored production and many more  living-wage jobs.

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Alan Tonelson
Alan Tonelson

About the author

Alan Tonelson is a Research Fellow at the U.S. Business & Industrial Council Educational Foundation, a Washington research organization studying U.S. economic, technology, and national security policy.

Tonelson’s articles on American politics, foreign policy, globalization, and technology policy have appeared in numerous publications. He appears often on radio and television networks and programs.  Tonelson has testified before the Senate Commerce Committee, the Congressional Trade Deficit Review Commission, and the Congressional China Security Review Commission.

His previous positions include Fellow at the Economic Strategy Institute and Associate Editor of Foreign Policy. A native of New York City, he currently resides in Washington, D.C.

Books:

  1. Powernomics with Clyde V. Prestowitz and Ronald A. Morse (1991)
  2. The New North American Order with Clyde V. Prestowitz, Robert B. Cohen, and Peter Morici (1991)
  3. The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (2002)

For More Information

About Walmart:

  1. For Thanksgiving, Walmart shows us the New America, 19 November 2013
  2. WalMart Matters For Macro, And Excuses For Macro“, Alhambra Investment Partners, 15 May 2014
  3. Target, Staples and The Same Poor Mess“, Alhambra Investment Partners, 22 May 2014

Other posts about trade:

  1. Globalization and free trade: wonders of a past era, now enemies of America?, 16 March 2009
  2. We’re still blinded by our fetters of the mind and so unable to fix the economic crisis, 13 September 2010

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7 thoughts on “Cheap Imports Backfire on America’s Retailers & What’s Left of Our Economy

  1. While there is no doubt that cheap imports pose some threat to jobs in America; the bigger threat, by far is automation.

    Yesterday I read about a study (I think by the Dallas Federal Reserve, can’t find the article now) that analyzed the job recovery so far. The big losers were people in highly repetitive but well paying positions (factories and low-skill but relatively high paying office positions). The big gainers were high-skill positions and low-skill positions that require the ability to adjust to changing circumstances (like cleaning hotel rooms, every guest leaves a different mess).

    Keynes optimistically predicted that everybody in the future would have to work fewer hours to maintain their lifestyles. It apparently never occurred to him that instead we’d develop a society where:
    – a large number of people who can’t find work at all and have to rely on others for basic needs
    – a large number of people who have to work very hard to make ends meet because wages are depressed by the large pool of unemployed people who want a job
    – a tiny number of people own nearly everything and don’t have to do anything they don’t want to

    I suspect that Keynes would argue that this distribution of labor is an extremely inefficient use of resources that is unsatisfactory to nearly everybody and would lead to an increasingly unstable police state.

  2. Why not just admit that this is the American capitalist version of the holodomor, but with the middle classes instead of kulaks?

  3. By the way I saw a very interesting list of foreign labor in Silicon Valley. Most interesting as top foreign nation was Mexico!

    http://www.businessweek.com/articles/2014-06-05/tech-immigrants-a-map-of-silicon-valleys-imported-talent#r=read

    Tech Immigrants: A Map of Silicon Valley’s Imported Talent

    Mentions automation
    Here’s Dallas Fed study;

    http://www.dallasfed.org/assets/documents/research/eclett/2014/el1405.pdf

    Middle-Skill Jobs Lost in
    U.S. Labor Market Polarization

    http://www.forbes.com/sites/jeffreydorfman/2014/06/07/middle-class-jobs-are-disappearing-and-the-fed-is-the-culprit/
    Middle Class Jobs Are Disappearing And The Fed Is The Culprit
    http://finance.yahoo.com/blogs/daily-ticker/here-s-where-all-those-middle-class-jobs-went-113102720.html
    Here’s where all those middle-class jobs went

  4. Mr. Tonelson is not laying blame at root cause. Information is easy to find online.

    I should mention US outsourced manufacturing after US products became noncompetitive compared to Japan and Germany! The culprit of that cause was defense industry and its effect on machine tool industry as researched by Seymour Melman.

    “In fact deterioration in the production competence of U.S. industries had been well under way since 1960 and was reported in some detail by 1965.”
    http://ejournals.library. vanderbilt.edu/index.php/ ameriquests/article/view/127/ 136
    Chaper 3 – Deindustrializing the US: The War Against American Workers

    “By 1960s it had already weakened dominant US manufacturing industry:
    “We have trained a large part of our workforce —
    more than three million in military industry — to work under a regime where escalating cost is
    acceptable because there will always be a subsidy to offset the cost increase.
    Cost-maximizing has yielded consequences that you might suspect after contemplating the size
    of the resource used on behalf of the military, There has been a disappearance and a depletion of many American industries* ”
    http://globalmakeover.com/ sites/economicreconstruction. com/static/SeymourMelman/ archive/ec/America_new_ economic.pdf
    America’s New Economic Problem
    Seymour Melman at Cape Cod, July

    The aging factory problem also discussed here:
    http://www.nakedcapitalism.com/2014/03/anglo-american-capitalism-run-strategies.html
    Has Anglo-American Capitalism Run Out of Strategies?

    Discusses interesting book. You should hear what he has to say:
    See: Interview
    http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=11641

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