China's new fortune: China seems to be rewriting the laws of economics--a totalitarian country with strict government controls that is out-producing capitalist countries--but really it's no miracle.

The view from the Gerald Desmond Bridge is breathtaking. Maybe not as breathtaking in the scenic sense as, say, the views from the rim of the Grand Canyon, Yosemite's El Capitan, or San Francisco's Golden Gate Bridge. But breathtaking in the historical, economic, and political sense. The Gerald Desmond Bridge marks the trade gateway to America, connecting the twin ports of Los Angeles and Long Beach, the nation's largest and second largest seaports, respectively.

Combined, these two ports receive about 45 percent of all sea containers arriving in the United States. This is one of the most concentrated manifestations of the globalization process that is reshaping the world and, seemingly, inventing new laws of economics. This is ground zero in the global trade war, one that we are currently losing, while our political and business elites cheer each monthly announcement of a new record trade deficit and the continuing relocation of more American manufacturing plants and production facilities overseas.

Commercial activity abounds on every side, as far as the eye can see: huge container ships pass beneath the bridge while hundreds of giant cranes are busy around the clock unloading thousands of containers from vessels already at the docks. The shipping traffic and volume of cargo have been rocketing upward each year for the past decade. Last year the twin ports received 8,000 ships, carrying 14.2 million containers worth $260 billion in cargo --everything from cars, pickup trucks, appliances, and computers to plasma TVs, tools, textiles, toys, and trinkets. Most of those products are stamped with a label containing what has become the most ubiquitous three-word phrase in the English language: Made in China.

Trucks and double-stacked trains continuously fill the Alameda Corridor, the massive truck-rail expressway that connects the ports to the main rail and highway hubs a few miles inland. From there the cargo fans out to all of California, the East Coast, and all points in between. Trucks make 36,000 trips per day to and from the ports, while 60 trains load up each day at the Long Beach-Los Angeles ports with goods for the country's Wal-Marts, Home Depots, Costcos, and other retail outlets. The ports' authorities have been on a building and upgrading binge for the last several years, and are continuing to expand, but they can't keep up with the ever-increasing flood of imports. They have deepened the ports to be able to accept the newer mega-ships, super leviathans longer than three football fields and able to carry 8,200 20-foot cargo containers, which dwarf the standard 5,000-container vessels.

The Gerald Desmond Bridge is scheduled to be raised from the current air draft of 157 feet to 200 feet, and widened from four lanes to six lanes, to accommodate the taller mega-ships. The renovation price tag: $800 million. But there's more on the horizon. More docks. More dockworkers. More cranes. More roads. More rails. Deeper channels. Bigger boats.

Despite these efforts, however, California's twin ports are failing to keep pace with the rising tide of imports. And they are expecting their volume of cargo to triple over the next 20 years. American businesses, dependent on just-in-time delivery of their parts and products, cannot afford to have their cargo delayed. Yet delays have happened too often, as traffic jams at the twin ports cause massive ship back-ups and the diversion of waiting boats to other West Coast ports.

So, a feverish construction spree is underway all up and down the west coast of North America, as existing seaports from Panama to Anchorage, Alaska, are being expanded and new ports are being built to handle the inexorable flood of China-made goods. In October, Panama's voters approved a $5.25 billion plan to double the size of the Panama Canal. On Mexico's west coast, major port expansions are underway at Lazaro Cardenas, Manzanillo, and Ensenada. Oakland, California, the nation's fourth-busiest container port, is spending $1.6 billion for expanding terminals, deepening channels, and other renovations. In Washington state, the ports of Seattle and Tacoma have been increasing capacity over the past couple years to accommodate the California overflow.

Robust Economy?

All of this commercial activity and growth is a good sign of a robust economy and of investor and consumer confidence in the future--right? That is the accepted wisdom of the White House, the Congress, the Federal Reserve, and the Wall Street financial gurus. The problem is the surging cargo traffic from China is largely a one-way deal; the containers arrive brim-full and leave mostly empty. And when the China-bound containers are full, it is either with raw materials or machinery from another plant that is closing shop in the United States and relocating to one of China's new industrial centers.

Yvonne Smith, the communications director at the Port of Long Beach, gets a dockside, waterfront view of the daily U.S.-China trade flow. It's not a pretty picture. As she told reporters in 2004, through Long Beach alone, the United States is importing $36 billion in goods yearly from China and exporting just $3 billion. And the mix of products in the exchange is as telling as the volume and the value. "We export cotton, we import clothing," Smith said. "We export hides, we bring in shoes. We export scrap metal. We bring back machinery. We're exporting waste paper, we bring back cardboard boxes with products inside them." Only a few years ago most of these products were made here in the United States. But, as Yvonne Smith points out, now "China is doing the manufacturing, the United States is buying it."

As a result, America is becoming dangerously dependent for many vital materials and products on one particular foreign supplier which happens to be a communist dictatorship that still refers to us as "enemy number one."

Author-commentator Paul Craig Roberts, who served as assistant secretary of the Treasury in the Reagan administration, is one economist who views this growing dependence with alarm. "Everyone talks about energy independence as if our future depends on it," he wrote in a November 2005 column. "Simultaneously, we are told that globalization is good for us in every other respect. But why is energy independence any better than manufacturing independence, or engineering independence, or innovation independence? US imports of industrial supplies, capital goods, automotive vehicles, and consumer goods all exceed US oil imports."

"In recent years," Roberts continued, "offshore outsourcing has caused the US trade deficit to explode. Offshore outsourcing means that the production of goods and services for the US market is shifted from America to foreign countries. This turns goods formerly produced in the US into imports. Between 1997 and 2004 the US trade deficit increased six fold. Since 1997 the cumulative US trade deficit (including $700 billion estimate for 2005) is $3.5 trillion. The outsourcing of America's economy is a far greater threat to Americans than terrorists."

Nevertheless, notes Roberts, "Economists now declare the trade deficit to be good for us. They mistakenly describe the trade deficit as a mere reflection of the beneficial workings of free trade. Economists have become mouthpieces for the corporate interests who benefit by deserting their American work force and replacing them with foreigners."

America's trade balance with China soared from a negligible deficit of $6 million in 1985 to an incredible $201 billion in 2005. Prominent politicians, business executives, and economists say it's nothing to worry about. Typical of this mindset is a recent blog on the website of the Ludwig von Mises Institute, a free-market think tank, which declared that "trade deficits don't matter, never have, never will." A few years ago, the blogger noted, "economists predicted dire consequences for the US if our trade deficit passed the 5% of GDP red line. That was about 3 years ago. Now it's at 7% and climbing. Some expect it to reach 10% in the next few years. Where are the disasters that everyone predicted? They didn't happen because as Bastiat wrote, trade deficits don't matter, never have, never will."

Tell that to the millions of workers who have lost their jobs at American factories that have moved to China. And those blue-collar manufacturing jobs are now being followed by millions of white-collar jobs in engineering, computers, services, and high-tech research and development. America's manufacturing pre-eminence, built over generations, has been hollowed out in one generation. The same is now happening with our technology lead; our cutting edge is moving to China and other venues. America's middle class is also being hollowed out, as we begin more and more to resemble Third World and communist countries, where the privileged few live in royal splendor, while the masses eke out a squalid existence.

How the Economic Cookie Crumbles

But this is the classical free market and classical free trade at work, is it not? No, in fact, it is not, though it is being fraudulently packaged as such. In fact, much of what we see in our trade relationship with China (as well as other countries) is the opposite of the free market in operation.

China's rise from one of the most impoverished, backward nations to new economic colossus in one generation has been astounding. On the one hand, this would seem to fly in the face of all economic sense. After all, it is one of the few remaining countries that still calls itself communist and is ruled by the Chinese Communist Party. Conventional wisdom is that the Soviet Union and its eastern bloc satellites collapsed because of the inefficiencies inherent in socialism. Why, then, does China flourish? The stock response is that while China still retains most of the political structures of communism, it has enthusiastically embraced free-market capitalism. As Microsoft boss Bill Gates, the world's richest man, commented after a visit to the People's Republic, "China is amazing. It is capitalism, but at an unprecedented speed."

But the form of "capitalism" practiced by Mr. Gates' Beijing business partners is the result of government intervention, not free markets. (See page 18.) The China "miracle," as it is so often called, could not have occurred except for:

* U.S. government policies promoting high-risk business dealings--or "moral hazard"--with China on an unprecedented scale.

* Direct and indirect U.S. government (taxpayer) subsidies to China and to U.S. corporations that relocate there.

* Oppressive government regulation and taxation that drive up costs of domestic producers and often make relocating overseas the only alternative to closing up shop.

* Federal Reserve monetary policies that have made our exports very expensive, China's imports very cheap, and massive investment in China irresistible.

Moral Hazard

"Moral hazard" is not a term most Americans use in everyday conversation. Nevertheless, it is one of the most important factors in the China trade onslaught that is tremendously impacting their everyday lives. Moral hazard is the label given in economics and law to a situation in which individuals, companies, and governments, once insured against a risk, tend to engage in high-risk behavior because the losses will be borne by others. Thus, a financial system that offers "bailouts" to failing corporations encourages other lenders and borrowers to make risky investments and engage in unsound, unwise business practices.

Our trade relationship with China is built on colossal, unparalleled moral hazard. U.S. companies and banks are engaging in transactions that they would never consider if they had to bear the risks associated with them. In a free-market setting, they could never get away with putting their investors' capital into multi-billion dollar projects in unstable developing countries or communist regimes where, history shows, the entire operation may be expropriated. Both situations are too risky for investors. In a free market, the risk premium is an essential part of the cost of capital. But western governments have stepped in to take that vital market factor--risk--out of the equation with regard to China.

The lesser-developed countries always had huge pools of cheap labor. However, because of the political risk associated with these countries, most capital remained in Europe and the United States, providing the wherewithal for our industrial and technological advances. By continually investing in newer and more efficient technologies, we had always been able to compete with the far-cheaper labor costs of the lesser-developed countries.

But that has now been undone. American companies and American workers cannot compete economically against Chinese employees who are still paid but a tiny fraction of the American wage but are now working in brand new plants with the latest technology. This enormous revolution brought about by moral hazard has been made possible and encouraged by the policies of our federal government.

Our government's adoption of the position that communism and socialism are dead has ushered in a profound, historic change in the global flow of capital and technology. It has allowed many technologies that had previously been prohibited from export to communist countries like China to now be transferred, including advanced technologies that are helping the PRC rapidly acquire military superpower status. And it has allowed U.S. government agencies such as the U.S. Export-Import Bank and the Overseas Private Investment Corporation to guarantee huge loans for these technology transfers. Likewise, it opened the way for the UNrelated financial institutions--the World Bank, the IMF, and the Asian Development Bank--which are funded by the U.S. taxpayers, to plow tens of billions of dollars into China and other high-risk countries.

Go to the website of the Asian Development Bank or the World Bank and scroll through the hundreds of grants, loans, and credits to the communist regimes of China, Vietnam, Cambodia, and Laos. Billions of dollars--your tax dollars--ladled out for highways, ports, railroads, dams, power plants, factories, fisheries, agriculture, irrigation, telecommunications, laboratories, shipyards, schools, universities. Little wonder that these dictatorships have experienced "miraculous" growth!

Deadweight on Production

At the same time that our government has been helping these regimes build new regulation-free zones to attract American business, it has also been imposing more and more costly regulation on business here at home. Draconian environmental regulations that prevent us from accessing our abundant oil and gas reserves and keep us dependent on foreign sources for most of our energy have added hundreds of billions of dollars in extra costs to American products and driven many American producers out of business or out of America.

However, the engine that has driven most of the enormous business exodus to China in the past decade is the Federal Reserve. Dr. Hans Sennholz, the eminent free-market economist and author, has noted that when it comes to our foreign-trade deficits, "few economists find primary fault with U.S. Government policies, in particular the Federal Reserve policy of easy money and credit. They charge that Federal Reserve governors habitually ignore the market rate of interest at which the demand for loanable funds tends to match the supply. In order to stimulate economic activity, Fed governors like to keep their rates far below market rates, which causes the stock of money and credit to expand. Goods' prices rise, which induces American businessmen to shop abroad and foreign buyers to reduce their purchases of American goods. Our trade deficits are the inevitable result of Federal Reserve monetary policies."

These Federal Reserve policies have fueled China's fantastic expansion and are the main reason why China's stack of foreign currency reserves (mostly dollars), the world's largest, will soon hit the $1 trillion mark.

The China "miracle" is no miracle at all; it is the result of U.S. government policies that are transferring America's hard-earned industrial and technological bases, along with enormous wealth from middle-class America, to the ruling classes of Communist China and their capitalist comrades among the global financial elites. If we allow these policies to continue, America will be reduced to servile Third World status in a dismal, dystopian political-economic system that these elites frequently refer to as their "new world order." That is not a future that any American should countenance bequeathing to our posterity.

Thinking Big, Too Big

According to the cover story of Business Week's November 20, 2006 issue, "Global forces have taken control of the economy," and that points toward the need for a world central bank. After discussing the enormous impact of China and our massive trade deficits on our economy, Business Week, a faithful retailer of the globalist line for the Council on Foreign Relations (CFR), offers some "Big Idea" solutions. It saved this really big idea for the finale:

   Finally, a Big Big Idea--probably too big to even consider
   right now--would be the creation of global institutions for
   governing the world economy. [Emphasis added.] History tells
   us that market economies are prone to financial crises, to which
   the only solution is a strong central bank. During the Asian
   financial crisis of the 1990s, for example, the Fed played that
   role.

      But with the explosive growth of China and India, that sort
   of role for the Fed is no longer feasible, and no new institution
   has arisen to take its place. As former Treasury Secretary Robert
   E. Rubin [a CFR heavyweight], now a top official at Citigroup,
   recently said: "There's no policy mechanism for bringing together
   the countries that really matter in the global economy."
   The best solution would be some sort of global central bank with
   real powers--but that's not going to happen until there's a big
   enough financial crisis to truly scare people.

That's a prescription fight out of Karl Marx's Communist Manifesto, which calls for "Centralization of credit in the hands of the State" by means of a central bank with "exclusive monopoly." That is what Communist China has now with its People's Bank of China. That is what the Federal Reserve is rapidly becoming.

The late Dan Smoot, constitutional scholar, author and former assistant to FBI chief J. Edgar Hoover, observed in his 1965 book, The Invisible Government: "The ultimate aim of the Council on Foreign Relations is the same as the ultimate aim of international Communism: to create a one world socialist system and make the U.S. an official part of it." The CFR one-worlders who populate the top echelons of our government, the media, and the corporate world are playing their China trade cards to accomplish that very objective. China now holds so many of our dollars in its currency reserves and buys so much of our debt that if it decides (in concert with our Federal Reserve officials) to stop buying our debt or to switch to the euro as its reserve currency, it can cause the financial crisis that Business Week says is necessary to "truly scare people" into accepting absolute control of a global central bank.

--WILLIAM F. JASPER