Profiteers and apologiststest
Profiteers and apologists: EPI responds to flak from the U.S. Chamber of Commerce and others on The China Trade Toll (EPI, July 30, 2008).
Robert E. Scott
Economic Policy Institute
August 27, 2008
Claim: China lost ten times as many manufacturing jobs. Short Answer: So What? China created nearly 10 million manufacturing jobs between 2002 and 2005, when their burgeoning trade surplus was decimating U.S. manufacturing. Judith Banister is the expert on this issue (hired by BLS to write the report) and, she flat-out says that Chinese manufacturing employment has increased in this period. On this issue, the Chamber is using ancient history to hide the truth: China’s illegal subsidies, cheap currency and other unfair trade practices have beggared the U.S. and their other trading partners and are largely responsible for the growth of their own manufacturing industries. These policies have also enriched many of the domestic and foreign companies on the Chamber’s board, firms such as Nike, IBM, CVS, Safeway, Toyota, and Siemens. Employment in China’s manufacturing sector shrank between 1994 and 2002 because its inefficient, state-owned manufacturing firms were privatized and restructured. This restructuring was the product of internal, domestic problems within the Chinese economy and was unrelated to the growth of its trade surplus with the United States.
The growth of China’s exports after it entered the WTO in 2001 was largely responsible for the recent boom in Chinese manufacturing employment, which rose from 101 million in 2002 to 110.6 million in 2005, adding more than 6 million jobs in 2005 alone according to a U.S. Bureau of Labor Statistics-funded study by Conference Board researcher Judith Bannister. In this period, China’s trade surplus with the United States nearly doubled, rising from $104 billion to $204 billion, fueling the growth in its manufacturing sector.
Claim: U.S. manufacturing is strong.
Short Answer: Tell that to workers in Cleveland and Detroit. While US manufacturing workers continue to be the most productive in the world, this productivity hasn’t translated into job-growth or higher wages in this sector, largely because of corporate strategies that have sought to replace American labor with foreign production at every turn. The growth of manufacturing output in this decade has fallen to its lowest level since the great depression, as shown in Figure 1, below. Manufacturing output has increased only 1.4% per year since 2000, 60% less than the average for the preceding five decades.
Manufacturing profits have increased since 2000 because of the use of unfairly cheap, subsidized inputs from China and other low-wage countries, and because companies have used the threat of offshoring to extract massive wage and benefit concessions from domestic manufacturing workers.
Claim: U.S. manufacturing jobs impacted more by productivity than by trade deficit.
Employment growth in any economic sector is essentially the difference between growth in output and productivity (output per hour). Output growth, all else equal, spurs employment while productivity growth dampens it. Figure 2 illustrates why manufacturing employment has fallen so rapidly over the last three years.
Between 1989 and 2000, manufacturing output and productivity growth averaged, respectively, 4.0% and 3.9% per year. As a result, the two largely offset one another and manufacturing employment was relatively stable, as shown in Figure2. Since 2000, productivity growth has remained unchanged at 3.9% per year. Output growth, however, cratered, and has averaged only 1.4% per year since 2000. Employment fell 3.1% per year as a result. In short, it is slow growth in manufacturing output—not an acceleration in productivity—that makes 2000-07 different from the previous decade and explains the steep fall in manufacturing employment.
Rapid growth in the manufacturing trade deficit is responsible for most of the decline in domestic manufacturing output. The U.S. trade deficit in manufactured goods, as a share of manufacturing GDP (value added) has nearly tripled since 1998, as shown in Figure 3. The Chinese share of the manufacturing deficit, meanwhile, has nearly tripled from 5.0% of U.S. manufacturing value added in 1998 to nearly 17% in 2007, when the U.S. manufacturing trade deficit with China was responsible for more than half of the total U.S. deficit in manufacturing goods trade (Figure 3). But for the growth of the manufacturing trade deficit, U.S. manufacturing output would have grown much more rapidly than it has since 2000, and the decline in manufacturing employment would have been much smaller.
Claim: Trade deficit with China is less and less significant.
This is hand-waving. There are two clear metrics to assess this significance: dollar value and measured as a share of GDP. Each of these two (actually relevant) measures shows a sharp increase. The trade deficit with China more than doubled from $82 billion in 2001 to $262 billion in 2007 and increased as a share of GDP by 1.1%. The Chamber attempts to dilute the impacts of China trade by lumping it in with petroleum imports, which more than tripled in value between 2001 and 2007, rising from $93 billion to $293 billion. However, China trade has nothing to do with U.S. petroleum imports and everything to do with the decline in U.S. manufacturing output.
Essentially all (99%) of U.S. imports from China in 2007 were manufactured goods, as were 75% of U.S. exports (scrap paper and metal, used goods, cash grains and other commodities were responsible for most other U.S. exports to China). The EPI study does indeed “neglect the rapidly rising contribution of petroleum imports to the trade deficit,” as claimed by the USCC because these products are simply irrelevant to U.S. China trade.
Claim: China is now the third largest and fastest growing U.S. export market.
The Chamber apparently failed to read my report, which carefully accounted for the effects of both rising exports and growing imports on U.S. employment. Growth in U.S. exports to China between 2001 and 2007 did support an additional 316,000 jobs, but these gains were overwhelmed by the displacement of more than 2.6 million jobs due to rising imports, resulting in the net loss of 2.3 million jobs (The China Trade Toll, Table 1).
U.S. exports to China did grow rapidly in this period, but from a very small base. U.S. imports from China were nearly six times greater than U.S. exports to that country in 2001, so U.S. exports would have had to grow six times faster than imports in order to reduce the trade deficit and prevent further loss of U.S. jobs to China trade. Between 2001 and 2007, exports grew about 23% per year and imports, 21%. Those rates of growth, if continued, would lead to rapidly growing trade deficits for more than a century, to unthinkable levels.
RESPONSES TO OTHER CRITIQUES
Claim: China is diverting trade from other countries.
U.S. China Business Council President John Frisbie claimed that “’The China Trade Toll,’ assumes that every product imported from China would have been made in the US otherwise.” Frisbie’s criticism ignores the fact that much of China’s trade surplus is driven by that country’s illegal system of subsidies, undervalued currency and unfair trade practices. If those were to be eliminated, then the United States would dramatically expand our exports to China and the rest of the world, and the growth of U.S. imports would slow. The key point is that my report estimates the total impact of the China trade deficit on U.S. labor demand; it’s not about replacing imports one for one.
My study was based on the most widely used economic models of the effects of changes in trade flows on U.S. labor demand. As noted by my colleague Josh Bivens, these models have become the “industry standard” used by nearly all serious analysts in the trade debates. Recent examples include studies by the Federal Reserve Bank of New York and Martin N. Baily and Robert Z. Lawrence in the Brookings Papers.
The Cato Institute’s Dan Griswold asserts that “Many of our main imports from China—shoes, clothing, toys, and consumer electronics—were being imported from other countries before China’s emergence as a major supplier… So imports from China do not typically displace U.S. production but instead displace imports from other countries.”
But this statement misses the larger point. China’s primary competitors are other major exporting nations in Asia. The U.S. trade deficit with other Asian nations, including Japan and the newly industrializing countries, have maintained large, stable trade surpluses with the United States, in excess of $100 billion in every year since 1998, as shown in Figure 4. As with China, the vast majority of U.S. trade with these countries is in manufactured products, and their manufacturing trade surpluses (red bars in Figure 4) with the U.S. exceeded their overall trade surpluses, including petroleum products, cash grains and other commodities (green bars).
Furthermore, other Asian nations have directly benefitted from China’s growing world trade surplus. China and its other Asian trading partners have created a regional trade and production system that is generating growing trade surpluses with the rest of the world, both in absolute dollars, and as a share of their GDP, as shown in Figure 5. There is simple no evidence of trade diversion within these data. Rather, there appears to be growing specialization of production taking place with-in Asia
As China has specialized in the manufacture and final assembly of a wide and growing array of components and final products, Japan and other nations in Asia have experienced growing current account surpluses with China and the rest of the world, specializing in producing complementary inputs and higher value-added goods such as machine tools. Taken as a group, these countries have seen their collective current account surplus rise from 2.7% of GDP when China entered the WTO in 2001 to 5.1% in 2007 (Figure 5, estimated data for 2007). Together, the current account balances of these countries have more than doubled, from $153 billion in 2001 to $367 billion in 2007. Meanwhile, China’s global current account surplus soared from 1.3% of to 11.1% of GDP, rising from $17.4 billion to $361 billion. If trade diversion were taking place, other countries would experience falling trade balances with the U.S. or the world, and that simply hasn’t been the case.
The Bottom Line
China has built up its trade surpluses behind a wall of heavy-handed, mercantilist trade practices. The most important of these is currency manipulation. China’s massive reserve purchases and violations of IMF and WTO prohibitions against mercantilist currency manipulation has also pulled along many other Asian nations in its wake - pressuring them to maintain similar currency pegs for fear of being shut out of the US export market. William R. Cline and John Williamson of the Peterson Institute have thoroughly documented the extent of required currency adjustments in their studies and estimates of Fundamental Equilibrium Exchange Rates (FEERs). Their results are shown in Table 1. China needs to revalue its currency by at least 30%, as shown there. If China, the regional linchpin, abandoned its mercantilist exchange policies, this would have a salutary effect on other important U.S. trading partners that also need to substantially raise the value of their currencies, including Japan (19%), Malaysia (30.7%), Singapore (41.2%) and Taiwan (26%). Collectively, the ten Asian countries included in Table 1 need to revalue by an (unweighted) average of almost 25%. China’s refusal to significantly revalue is the single most important barrier to regional currency realignment in Asia. Chinese revaluation is the key first step required to reduce or eliminate the massive U.S. trade deficit in manufactured products with China and its Asian trading partners.
It’s important to note that the total U.S. trade deficit in manufactured goods shrank significantly in 2007, despite the continued growth of the China trade deficit, as shown in Figure 3. This trend reflects the rapid growth in U.S. exports to the rest of the world in the last few years, which were stimulated by the sharp fall in the real, trade-weighted value of the U.S. dollar since 2002, which has declined 24% since February, 2002. The dollar has fallen by a substantially greater amount against freely traded currencies such as the euro and the Canadian dollar. If the Chinese RMB, the yen and other Asian currencies are allowed to rise to their FEER levels, then the U.S. manufacturing exports to the world will continue to rise and the manufacturing trade deficit will be greatly reduced or eliminated. This adjustment is badly needed now as the U.S. enters a recession. It’s time for China and its Asian trading partners to enter the society of responsible, fairly trading nations.
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Figure 3
Figure 4
Figure 5
“Manufacturing Jobs in China Surge Beyond 110 Million”, Manufacturing & Technology News 15(14), July 31, 2008, p. 1.
These data refer to changes in the trade balance net of re-exports, which are excluded from my analysis because they do not support domestic employment.
“EPI Study: Trade deficit with China ruins jobs prospects for millions of manufacturing workers; U.S. China Council disagrees,” Manufacturing Technology News. 15(14), July 31, 2008. p. 4. International Monetary Fund, World Economic Outlook Database, April 2008, estimate for 2007.
