Commentary

American Worry-Mongering About China

By Daniel Griswold
This article appeared in the Globalist on August 1, 2006.

While the U.S. Congress continues to pressure China to allow its currency to appreciate, the Cato Institute’s Daniel Griswold takes a closer look at the effects of China’s exports on the U.S. economy. He explains how China’s “currency manipulation” has a lot less to do with U.S. unemployment and decreased output than critics are arguing.

Everyone can agree that imports stamped “Made in China” have soared in the past decade. In 2005, imports from China reached $243.5 billion, a huge increase from the $38.8 billion in goods imported from China in 1994.

During that same period, imports from China as a share of total U.S. imports rose from six to 15%. Since 1994, imports from China have grown more than twice as fast as imports from the rest of the world.

Despite their rapid increase, imports from China have not been a major cause of job losses in the U.S. economy. Chinese manufacturers tend to specialize in lower-tech, labor-intensive goods, in contrast to the higher-tech, capital-intensive goods that are the comparative advantage of U.S. manufacturers.

Already in decline

For example, the apparel and footwear industries in the United States have been in decline for decades, long before China became a major exporter of those goods.

Rising imports from China have not so much replaced domestic production in the United States as they have replaced imports that used to come from other lower-wage countries.

>Displacing other imports

A key to understanding our trade relationship with China is to see China as the final assembly and export platform for a vast and deepening East Asian manufacturing supply chain.

Even in mid-range products such as personal computers, telephones and TVs, rising imports from China have typically displaced imports from other countries rather than domestic U.S. production.

Final products that Americans used to buy directly from Japan, South Korea, Taiwan, Hong Kong, Singapore and Malaysia are increasingly being put together in China with components from throughout the region.

China has deficits, too China’s more economically advanced neighbors typically make the most valuable components at home, ship them to China to be assembled with lower-value-added components, and then export the final product directly from China to the United States and other destinations.

As China imports more and more intermediate components from the region, its growing bilateral trade surplus with the United States has been accompanied by growing bilateral deficits with its East Asian trading partners.

A surprising offset

While imports from China have been growing rapidly compared to overall imports, the relative size of imports from the rest of East Asia has been in decline. In 1994, the year China fixed its currency to the dollar, imports from East Asia accounted for 41% of total U.S. imports.

Today imports from that part of the world, including those from China, account for 34% of total U.S. imports. In other words, the rising share of imports from China has been more than offset by an even steeper fall in the share of imports from the rest of Asia.

The sharp rise in imports from China is not primarily driven by China’s currency regime, but by its emergence as the final link in an increasingly intricate East Asian manufacturing supply chain.

Not a primary cause

What about those three million lost manufacturing jobs? Contrary to the often stated charge, imports from China are not the primary cause of the decline in U.S. manufacturing jobs since 2000.

The primary reason why a net three million manufacturing jobs have disappeared since then is not imports from China, but the U.S. domestic recession of 2001, sluggish demand abroad for U.S. exports — and, most of all, soaring productivity gains by U.S. factories.

Recession

After rising rapidly during the 1990s, U.S. manufacturing output peaked and began to fall in the summer of 2000 as rising interest rates and energy prices began to tip the U.S. economy into recession.

The same recession in 2001 that hurt domestic manufacturing output also caused a 4.7% drop in the volume of imported manufactured goods that year. Meanwhile, sluggish growth abroad has hurt U.S. manufacturing exports.

An analysis by the President’s Council of Economic Advisors determined that trade with China was not the primary cause of manufacturing job losses during the most recent recession.

Productivity’s downside

“With the exception of apparel, the largest job losses have occurred in export-intensive industries for the United States, and job losses in U.S. manufacturing have been mainly industries in which imports from China are small,” the CEA reported in the 2004 Economic Report of the President.

The main reason for declining employment in manufacturing, however, is the dramatic rise in productivity. Despite the painful recession in manufacturing from 2000 to 2003, real output of U.S. factories has still increased by 50% since 1994.

Fewer workers American domestic manufacturers can produce so much more with fewer workers because remaining manufacturing workers are so much more productive.

Trade with China has probably accelerated the decline of more labor-intensive manufacturing sectors in the United States, such as footwear, apparel and other light manufacturing, but it has not caused a decline in total manufacturing output or capacity.

In fact, because of productivity gains, manufacturing employment has been falling in a wide range of countries, including China itself.

Mutual Job loss

According to a 2003 study by Alliance Capital Management LP in New York, while the number of manufacturing workers in the United States dropped by 11% from 1995 through 2002, the number in China dropped even further — by 15% — or a net job loss of 15 million.

While Western companies were opening new factories in China, creating better paying jobs for Chinese workers, even more manufacturing workers were losing their jobs as old, inefficient state-owned enterprises went out of business.

Relatively insignificant

Certainly some U.S. workers have lost their jobs because of America’s expanding trade with China, but the number is not large compared to the total size of the U.S. labor force and the normal, healthy “churn” in the labor market.

Even if one accepts the estimates of the critics of trade with China, the number of jobs eliminated because of Chinese imports would be in the neighborhood of 150,000 a year.

While not insignificant, that number is a small fraction of the number of people involuntarily displaced from their jobs each year in the United States, even during years of expansion and healthy job growth.

A small fraction According to the U.S. Department of Labor, about 15 million jobs in the United States are permanently eliminated each year. In a related indicator, about 300,000 workers apply each week for unemployment insurance. By either measure, job losses caused by trade with China account for only about 1% of overall job displacement in the United States.

Rather than impose trade sanctions in a misguided effort to save a small number of jobs lost each year because of trade with China, policymakers should focus on removing barriers to job creation, retraining and re-location to help those workers find new jobs being created in our dynamic economy.

Excerpted from a trade briefing paper by Daniel Griswold, director of the Cato Institute’s Center for Trade Policy Studies, entitled “Who’s Manipulating Whom? China’s Currency and the U.S. Economy.”

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute and author of the new book, Mad About Trade: Why Main Street America Should Embrace Globalization (Washington: Cato Institute, 2009).