Tag: trade deficit with china

Media Darken Americans’ Perceptions of Trade

Today’s Wall Street Journal headline screams: “Americans Sour on Trade.” And why shouldn’t they? After all, the public is routinely bombarded with misleading or simplistic trade coverage that too often relies on cliché, innuendo, and regurgitated conventional wisdom: it’s Team America versus the world. Without the war metaphor, trade is just a peaceful, mutually-enriching endeavor between consenting parties. BO-RING!

Dan Griswold attributes the declining sentiment to the business cycle and goes on to suggest that this “collective attitude is more reflective of the complaints people hear in the media than of any hard reality on the ground.” Let me continue with that theme because I’ve made no secret of my concern about media’s inclination to eschew context and fact to pitch a particular narrative about trade.  The polling data at the heart of today’s WSJ article bears out that concern. A nation that has strong misgivings about trade is less likely to stop a conspiracy of politicians and special interests from taking away their right to do so.

The problem is not just limited to one or two newspapers; the problem is endemic. Here are just a few examples of faulty trade reporting that my colleagues and I have criticized over the past year or so (Exhibit A, B, C, D, E, F, G, H, I, …). And here’s a more recent example from the editorial board of USA Today on Friday, October 1:

“From 2000 to 2009, America’s trade deficit with China surged nearly 300%. During that same time, 5.4 million American jobs in manufacturing were eliminated. It’s tough for U.S. manufacturers to compete against China’s lower wages, looser regulations and cheaper currency.”

Yes, the facts about the trade deficit and the American manufacturing jobs are correct. But the point is to imply that trade is responsible for the destruction of U.S. manufacturing. Nowhere does it mention that U.S. manufacturing jobs peaked in 1979 (well before trade with China was more than a statistical rounding error in our total trade figures) and has been trending downward ever since. Nowhere does it mention that China has lost many millions more manufacturing jobs than we have in the United States because of the same phenomenon: productivity growth. Nowhere in the editorial does it mention that U.S. manufacturing has been breaking records year after year during the decade (with the exceptions of recession years 2002 and 2009) with respect to output, value-added, revenues, profits, return on investment, and exports. Nowhere does it mention that U.S. manufactures are the world’s most prolific, accounting for the largest share of global manufacturing value added. Nowhere does it mention that China has been America’s fastest growing export market for a decade and that U.S. goods exports to China are up 36 percent compared to the same period last year, which is a 50 percent faster growth rate than U.S. exports to the rest of the world.  Obviously, that fact would undermine the assertion that “it’s tough for U.S. manufacturers to compete against China’s lower wages, looser regulations and cheaper currency.” Nowhere does it caution that the use of statistics from 2009, the nadir of the recession, might be a bit misleading. Nowhere does it mention that as U.S. manufacturing jobs declined by 3.8 million between 2000 and 2008, a total of 8.8 million new jobs were created in the U.S. economy, for a net gain of 5 million jobs.

Americans have soured on trade largely because of the way media conveys its stories about trade.  There is no alternative explanation for a majority of Americans harboring ill-will toward trade. Most Americans enjoy the fruits of international trade and globalization every day and in countless ways, and less than 3% of U.S. jobs loss is attributable to import competition or outsourcing.  It is simply implausible that the degree of antipathy toward trade reflected in opinion polls is driven by past personal experiences or realistic fears about the future.

Rather than focus so much on shaping public opinion, media should rid itself of the curse of group think and get back to the basics of objectively reporting the facts, challenging the conventional wisdom, and citing multiples sources. The kind of lazy acceptance of unsubstantiated theories of cause and effect that are evident in international trade reporting these days is reminiscent of the media’s passive role in the months leading up to the invasion of Iraq.

China Bill All about Saving Lawmakers’ Jobs

The House is expected to vote today on a bill that would allow U.S. companies to petition the Commerce Department for protective tariffs against imports from countries with “misaligned currencies.” Everybody knows the bill is aimed squarely at China.

Advocates of the legislation say it is about jobs, and they are partly right. The bill is about saving the jobs of incumbent lawmakers who are desperate to appear tough on China trade, which they blame for the loss of U.S. manufacturing jobs.

As my colleague Dan Ikenson and I have argued at length, in blog posts, op-eds, and longer studies,

Let’s hope cooler, wiser heads in the Senate and the White House save us from this election-season folly.

Calling Out Trade’s Myth Makers

Organized labor’s trade “think tank” in Washington, the Economic Policy Institute, claims that currency manipulation is a major cause of the U.S. trade deficit with China, which (along with other unfair trade practices) accounted for 2.4 million American job losses between 2001 and 2008. EPI has been making similar claims for years, getting lots of media attention for its hyperbole, and providing smoke bombs for charlatan politicians to hurl into the discussion to obscure the public’s understanding of trade.   For starters, as conveyed in this new paper, I am skeptical about the relationship between currency undervaluation and the trade account.

EPI’s methodology (to use the term loosely) is not to be taken seriously, though, because it derives from a simple formula that approximates job gains from export value and job losses from import value, as though there were a straight line correlation between the jobs and trade data. It pretends that there are no jobs created when we import, and that import value is somehow an appropriate measure of job loss.

The flaws of those assumptions are many, but perhaps the easiest one to convey is that most of the value embedded in imports from China is not Chinese. (The ensuing discussion is from a forthcoming Cato paper.)

According to the results from a growing field of research, only about one-third to one-half of the value of U.S. imports from China comes from Chinese labor, material and overhead. Official U.S. import statistics—which pay no heed to the constituent value-added elements—therefore overstate the Chinese value in those imports by 100 to 200 percent, on average. The cited job loss figures are based on import values that are unequivocally overstated because one-half to two-thirds of that value are the costs of material, labor, and overhead added in other countries, including the United States.

What is seldom discussed—because they are often portrayed as victims—is that large numbers of American workers are employed precisely because of imports from China. This is the case because the U.S. economy and the Chinese economy are highly complementary. U.S. factories and workers are more likely to be collaborating with Chinese factories and workers in production of the same goods than they are to be competing directly. The proliferation of vertical integration (whereby the production process is carved up and each function performed where it is most efficient to perform that function) and transnational supply chains has joined higher-value-added U.S. manufacturing, design, and R&D activities with lower-value manufacturing and assembly operations in China. The old factory floor has broken through its walls and now spans oceans and borders.

Though the focus is typically on American workers who are displaced by competition from China, legions of American workers and their factories, offices, and laboratories would be idled without access to complementary Chinese workers in Chinese factories. Without access to lower-cost labor in places like Shenzhen, countless ideas hatched in U.S. laboratories, that became viable commercial products and support hundreds of thousands of jobs in engineering, design, marketing, logistics, retailing, finance, accounting, and manufacturing might never have made it beyond conception because the costs of production would have been deemed prohibitive for mass consumption. Just imagine if all of the components in the Apple iPod had to be manufactured and assembled in the United States. Instead of $150 per unit, the cost of production might be double or triple or quadruple that amount.

Consider how many fewer iPods Apple would have sold, how many fewer jobs iPod production, distribution, and sales would have supported, how much lower Apple’s profits (and those of the entities in its supply chains) would have been, how much lower Apple’s research and development expenditures would have been, how much smaller the markets for music and video downloads, car accessories, jogging accessories, and docking stations would be, how many fewer jobs those industries would support and the lower profits those industries would generate. Now multiply that process by the hundreds of other similarly ubiquitous devices and gadgets, computers and Blu-Rays, and every other product that is designed in the United States and assembled in China from components made in the United States and elsewhere.

The Atlantic’s James Fallows characterizes the complementarity of U.S. and Chinese production sharing as following the shape of a “Smiley Curve” plotted on a chart where the production process from start to finish is measured along the horizontal axis and the value of each stage of production is measured on the vertical axis. U.S. value added comes at the early stages—in branding, product conception, engineering, and design. Chinese value added operations occupy the middle stages—some engineering, some manufacturing and assembly, primarily. And more U.S. value added occurs at the end stages in logistics, retailing, and after market servicing. Under this typical production arrangement, collaboration, not competition, is what links U.S. and Chinese workers.

EPI’s work on this subject provides fodder for sensational stump speeches. But it is also a major disservice to a public that is hungering for truth, and not self-serving advocacy masquerading as truth.