Commentary

Record Profits Finance Manufacturing Group’s Anti-China Trade Campaign

By Daniel Griswold
This article appeared in the Detroit News on May 11, 2007.

The chorus of voices calling for a tougher U.S. trade policy against China has grown even louder with the creation of a new lobbying group called the Alliance for American Manufacturing.

Backed by money from the U.S. steel industry, steel worker unions and other critics of trade, the AAM was launched on April 26 to urge the U.S. government to crack down on allegedly unfair trade practices by China and other U.S. trading partners. On its slick new Web site, the group complains that China’s currency and trade practices “negatively affect the health of our domestically based manufacturers.”

This is an odd time for American manufacturers to be complaining. In many ways, they have never had it so good.

During the past decade, the volume of output at America’s factories has grown 40 percent. American workers are making record amounts of chemicals, pharmaceuticals, semiconductors, aircraft and sophisticated medical and other specialized machinery.

Combined, after-tax profits of American manufacturing companies in 2006 exceeded $400 billion, representing a return on stockholders’ equity of 18 percent. Primary metals manufacturers, including the protectionist-prone steel industry, earned $24 billion of those profits. Ironically, the steel industry’s prosperity is funding a propaganda campaign on its new web site that complains how terrible things are for U.S. manufacturers.

Of course, a more open and competitive U.S. economy has been tough on some U.S. manufacturers. China and other lower-wage countries are especially competitive in more labor-intensive goods such as apparel, footwear, and sporting goods.

China has also become the final assembly platform for a range of consumer electronic products, from iPods to laptops and TVs. Growing imports from China into the United States have typically replaced imports from other countries, not domestic U.S. output.

The AAM and other critics of trade with China harp on the fact that 3 million fewer Americans work in manufacturing than in 2000. That loss of jobs has not been because of declining production, but because of the soaring productivity of American manufacturing workers. As American factories shift to higher-value, capital-intensive goods, they can produce record output with fewer workers.

While some American workers have indeed lost their jobs because of trade with China, the numbers are small compared with the overall size and healthy “churn” of the U.S. labor market. Even critics of trade claim at most about 150,000 jobs lost each year due to imports from China. That compares to the 15 million jobs that disappear annually in the U.S. economy, mostly because of technological change and domestic market competition. Trade with China accounts for a mere 1 percent of annual job displacement in the United States.

Meanwhile, U.S. manufacturers and other U.S. producers have seen their exports to China explode. Since China’s entry into the World Trade Organization in 2001, U.S. exports to China have grown from $19 billion to $55 billion, an annual average growth of 24 percent. America’s leading exports to China are soybeans, cotton, and other agricultural products; plastics, chemicals, wood pulp and other industrial materials; civilian aircraft; and semiconductors, computer accessories, industrial machines and other machinery.

Large multinational companies have not been the only beneficiaries of expanding exports to China. More than one-third of U.S. exports to China are produced by small and medium-sized enterprises in the United States. For the large majority of U.S. manufacturing companies and their workers, China represents a dazzling opportunity, not a threat.

Advocates and critics of U.S. trade with China can agree that the Chinese government needs to accelerate its trade and other economic reforms, including a more flexible exchange rate for the renminbi. But the AAM and other critics exaggerate the negative impact of China’s policies on the U.S. economy.

If the critics succeed in imposing punitive tariffs against Chinese imports to the United States, it would almost certainly violate America’s commitment to the same WTO rules they accuse China of violating. Such tariffs would also impose a direct tax on tens of millions of American families. And punitive tariffs would jeopardize U.S. exports and investment in China that represent the brightest prospects for U.S. multinational companies and their employees.

If the AAM’s new campaign against trade with China succeeds, a large majority of Americans will be the losers.

Daniel Griswold is director of the Cato Institute’s Center for Trade Policy Studies and author of the Cato study, “Who’s Manipulating Whom? China’s Currency and the U.S. Economy.”