The China Toll is a Tall Tale

by Anna Tucker

In "The China Toll", the Economic Policy Institute (EPI) argues that the U.S. trade imbalance with China is the single biggest cause of job losses in the United States, asserting that 2.3 million U.S. jobs were lost between 2001 and 2007 as a direct result of this bilateral deficit. However, facts do not substantiate EPI’s assertions.

China May Have a Trade Surplus with the U.S. but Lost 10 Times as Many Manufacturing Jobs
The centerpiece of the EPI report is its assertion that the U.S. trade deficit with China is the cause of manufacturing job loss, but this unsupported charge doesn’t square with simple logic. In fact, despite its trade surplus, China shed 25 million manufacturing jobs between 1994 and 2004, a sum ten times the number of jobs lost in the United States in that period. Clearly, factors other than trade are driving the global reduction in manufacturing jobs.

U.S. Manufacturing Is Strong: The U.S. is the still the world’s workshop
In 2005, American factories contributed 21.1% of the world’s manufacturing output, only a slight decline from their 1993 share of 21.4%. The U.S. share of world manufacturing value added is twice that of China. And contrary to popular belief, American industrial production— 78% of which is in the manufacturing sector—actually rose by 57% between 1993 and 2007. Recent years have seen U.S. manufacturers set new records for output, revenues, profits, profit rates, and return on investment.

U.S. Manufacturing Jobs Impacted More by Productivity than Trade Deficit
U.S. manufacturing jobs losses have much less to do with imports than with huge improvements in labor productivity because of technological change, automation, and widespread adoption of information technology. These innovations have shifted the type of labor that defines the U.S. workforce because fewer manufacturing workers are needed.

• Productivity’s Impact Up Close: Improved productivity has resulted in U.S. manufacturers dramatically increasing output even as they have shed jobs. In the 1980s, for instance, General Motors needed 500,000 workers to make 5 million cars and trucks. Now, they can make that same number of vehicles with less than 150,000.

Trade Deficit with China Is Less and Less Significant
According to an analysis by the U.S.-China Business Council, China’s percentage of the total U.S. trade deficit climbed marginally from 24% in 1998 to 32% in 2007.  The portion of the U.S. global trade deficit accounted for by imbalances with Asia, including China, dropped from 75% to 49%. In that same period, the percentage of the U.S. deficit accounted for by non-Asian nations has increased sharply from 25% to 51%.

• EPI Study Neglects the Rapidly Rising Contribution of Petroleum Imports to the Trade Deficit: A U.S. Chamber analysis of Department of Commerce data indicates that imports of petroleum have accounted for 93% of the increase in the U.S. deficit since 2002. Excluding petroleum, the U.S. trade deficit has narrowed by 44% as a share of GDP since the end of 2004 and now stands at its lowest level since 1999.

China Is Now the Third Largest and Fastest Growing U.S. Export Market
Meanwhile, China has been an increasingly important export destination for U.S. goods over the past several years. China became the third-largest export market for the United States in 2007, just behind Canada and Mexico. Exports are currently providing a much-needed boost to the U.S. economy, and were responsible for almost half of U.S. GDP growth between April 2007 and March 2008.

EPI’s flawed study does not change the fact that China must reinvigorate its transition to a market economy. China must eliminate preferential industrial policies for its domestic industries, promote further transparency and domestic legal accountability, strengthen intellectual property protections, and continue to move to a market-based currency. China should also promote further trade liberalization within the Doha Development Round.

Yet there is no basis in fact to conclude that the U.S.-China trade relationship is a net negative for America or that China is the primary cause of job losses in some sectors.

//Updated 1:01pm. Here is a pdf of the post with data cites   

Comments

[Ricky Brooks II]

This article is on point. I remember when I first started seeing self check-out registers at grocery stores and electronic check-in stations at airports. Also, consider the latest harvesting technology and smart military platforms that exist these days. Less and less people are needed to do far more than ever before. But we all know that this is the nature of business.

Increased efficiency is key to economic survival, period. We just need to make sure that our consumers have jobs that pay wages that enable them to continue to fuel the American economic engine.

The ideal scenario would be having enough optimally efficient companies to employ all Americans who are willing to work, that pay wages that enable them to participate in the overall economy, not only for the things they need, but also for the things they want. Us as a community of capitalists cannot function without our collective staffs who are also everyday consumers that keep the economic engine consistently running strongly.

myspace.com/brooksdevelopmentintl "Humanistic Capitalism"

[Pete Murphy]

Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $9 trillion. What will happen when those assets are depleted? Today's recession may be just a preview of what's to come.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China's. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one sixth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface for free, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, "Five Short Blasts"

[Steven Capozzola]

Some of the Chamber's largest members are among the key beneficiaries of the status quo with China, so it's not surprising that they'd want to debunk the new EPI study, "The China Trade Toll." But the American people can simply stroll through Wal-Mart and employ a little common sense to intuit that something is indeed amiss in U.S.-China trade relations.

For starters, the simple issue is YES or NO-- is China cheating at the rules of world trade? The answer is an emphatic YES, with the EU, Japan, and the WTO joining U.S. calls for revaluation of China's illegally manipulated currency. This currency rigging is no doubt adversely affecting U.S. manufacturers and so the Chamber, which professes to represent U.S. companies, should start off any discussion of China by clamoring loudly for Beijing to curb its protectionism.

The Chamber has not done so, and has decided to throw in its lot with China. Funny that they lead their argument with worries abut job losses in China, not the U.S. In doing so, they miss the point that whether increased productivity is or is not responsible for manufacturing job layoffs, the China toll extends much further--to top-wage U.S. jobs, including science and engineering, that were disproportionately hurt by unbalanced trade with China.

For example, more than a quarter of last year’s trade deficit with China ($68 billion) was due to advanced technology products, nearly six times the deficit in 2002. Also, more than half (55.6 percent) of the jobs displaced by trade with China were in the top half of American wage earners. Nearly a third (31 percent) of the jobs lost were among workers with a college degree. A dramatic example is the loss of 200,000 scientists and engineers within the manufacturing sector, a 10.7 percent drop.

There’s also the simple fact of the mushrooming trade deficit itself: $256 billion in 2007. In 1998, it was $56 billion. A $200 billion jump should not be dismissed via convenient assertions that” the total U.S. trade deficit climbed marginally.”

Regardless of what hungover math the Chamber chooses to employ, the bottom line is JOBS. The latest jobs report this morning noted another 35,000 manufacturing jobs lost in June. The Chamber may want to quibble with EPI’s findings, but some very stark truths are staring at them from Main Street America. Too bad they don’t always seem to represent Main Street America’s interests.

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