Bull in a China Shop?

MEDFORD, USA: In the search for reasons behind the US economic woes, American politicians and labor leaders have found a new villain - China. Chinese exports to the US have been growing, while US exports to China are only a fifth or so of US imports from China. This trend is said to be linked directly to the loss of US manufacturing jobs, which have been declining sharply for about three years. The view coming out of Congress, many democratic presidential candidates, and even the Bush administration is simple: the Chinese rig the game so that they "win" by exporting, and we Americans "lose" by importing cheap goods. Free trade cannot survive a currency fixed to the dollar, low wage rates, and an export-friendly regime. It is really, then, unfair trade.

Remedies from the Bush administration vary from imposing quotas on textiles and heavy tariffs on televisions to applying anti-dumping legislation and insisting on currency appreciation. As might have been expected, labor leaders and democratic presidential hopefuls are pressing for the imposition of rich nations standards on poor ones- by requiring "fair" labor practices and stringent environmental regulations. Across the political spectrum in the US at the moment, the game of trade is like a seesaw. If Chinese exports rise, US employment falls. The alternative view, argued here, is that the two are not closely related.

The seesaw view has one problem. It ignores magnitudes. It is all but impossible for the increase in Chinese exports to explain more than a very small fraction of the job losses in manufacturing. Past studies have found that technology explains much more than trade in US job shifts. There is no reason to suspect that things have changed much.

US manufacturing shipments (not value added) in 2003 will be about $4000 billion, down over $250 billion from 2000. Chinese export sales to the US will total about $145 billion in 2003. The increase in Chinese exports from 2000, a time of relatively full US employment, is $45 billion. Of course, not all of the $45 billion increase has been at the expense of US production- Mexico, Indonesia, and others have had their market shares taken away by China. (Mexican and Indonesian exports to the US were unchanged from 2000 to 2003, while total imports grew 3 percent and imports from China grew 45 percent.) Half of Chinese exports last year were things like garments, shoes, toys, low-end consumer electronics and parts and furniture. These compete directly and mainly with other developing nations.

The trade deficit with China has grown from $84 billion in 2000 to $120 billion in 2003, an increase of $36 billion. It is this last measure- an increase of less than 1 percent of US manufacturing output over three years- that might have contributed to job losses. (The year 2000 was one of full employment, so is taken as a base year.) Jobs are lost when imports displace US production, but jobs grow when US exports surge. If all imports are assumed to displace US production, then the trade deficit measures the magnitude of the net loss. Naturally, much of the increased US imports have been in labor-intensive goods which would anyway have been produced elsewhere. It was just that China became cheaper, and thus a preferred source for supplies.

US manufacturing employment has been in a slow decline for decades, but has fallen by about 4 million from its cyclical peak of 18.5 million in mid-2000, to 14.5 million in October 2003. This is a severe decline that has hit many localities and families hard. Older workers have trouble finding even nearly comparable jobs or similar wages, and may understandably be unenthusiastic about relocating. The question is: how many of these workers can reasonably blame China? Real output as measured by the Federal Reserve fell from a high of 116.4 in mid-2000 to a low of 110 in mid-2003, a decline of 5.5 percent. Manufacturing jobs have fallen by nearly 22 percent. So, output in 2003 is down only a little from 2000, but employment is down by a lot. This means that output per worker has risen over 20 percent. Roughly speaking, only one-quarter of the decline in jobs has been due to lower output. The rest, by definition, is due to higher productivity per worker, though some of this comes from losing low productivity jobs. But how much of the output decline is due to higher imports?

The decline in manufacturing output had a lot to do with a technology bubble that popped. Many jobs were lost because total sales fell, not because of imports. (Think of fiber optic cable, which was bought excessively and of which there is now a glut.) The import surplus from China is only one-seventh of the output decline, which itself in total accounted for only a quarter of the job losses. So, at a maximum, China accounted for 3 to 4 percent of US manufacturing job losses. If they instead took market share from others exporting to the US, as is very likely, the "China" job loss figure would be even less.

Calls for "fair trade" or bilateral trade balances have no logic aside from populist quick fixes. China may well decide to revalue its currency for its own reasons, but this would have only a very limited impact on displaced US workers. For most goods the US imports, a stronger Yuan- worth 6.0 instead of 8.3 per dollar- would not shift production back to the US, though it might help Vietnam or Mexico. Higher prices in Wal-Mart might also mean fewer domestic purchases of services- the major source of US jobs now.

The fact is manufacturing in the United States is going the way of agriculture. The US produces enormous amounts of food with only 2 percent of the workforce. In the future, rising productivity will allow high and growing manufacturing output with even fewer workers than the 11 percent of the American workforce now employed in factories. Trade might mildly accelerate this trend away from manufacturing jobs, but it certainly won't cause it.

Solutions to the problems caused by the decline in manufacturing work include free job retraining, relocation subsidies, increasing demand at home, and more growth abroad. The US needs to increase its exports to reduce its trade deficit, and growth in other countries helps it to export. A trade war would likely slow growth here and abroad. In policy, identifying the cause of a problem is essential to not making it worse. Both the Democrats and the Republicans seem intent on missing this.