Commentary

Toasting China

This week marks the fifth anniversary of China’s accession into the World Trade Organization. To the boisterous anti-trade, anti-China populists in Congress, December 11 is yet another date that will live in infamy. To those more receptive to facts, raise your glasses: China’s embrace of the global economy and its institutions deserves a toast.

Trade detractors and China bashers decry Chinese policies that allegedly have eroded America’s manufacturing base and caused a raging U.S. trade deficit. Contrary to this bluster, the U.S. economy has expanded for 19 consecutive quarters subsequent to China’s joining the WTO. What was a $10.1 trillion economy is the last quarter of 2001 is now a $13.3 trillion economy, and real GDP has expanded by 16 percent over the period.

In December 2001, the U.S. economy comprised 137 million jobs, and the unemployment rate stood of 5.7 percent. Since then, the economy has created 8 million net new jobs and the current unemployment rate is 4.5 percent. Over the same period, U.S. imports from China increased by 70 percent, while U.S. exports to China increased by 180 percent.

Despite the rhetoric of U.S. manufacturing decline, reality is much different. Since the end of 2001, aggregate U.S. manufacturing output has increased by over 18 percent, while revenues have soared by 38 percent. Operating profits for U.S. manufacturing industries have increased at an increasing rate every year since China joined the WTO and are projected to reach $392 billion in 2006, or 7.1 percent of sales. And real hourly compensation for manufacturing employees has increased by 9.6 percent since 2001, outpacing economy-wide compensation growth.

Indeed, there are fewer workers in the manufacturing sector today than in 2001, but that decline is part of longer term trend of rising labor productivity that has been underway for decades. In fact, for the same reason, China has experienced a greater decline in manufacturing employment than has the United States during this decade. But both economies — as well as the global economy — have expanded handsomely during the years of China’s WTO membership.

Of course, the U.S. bilateral trade deficit with China is large and growing. But that is hardly reflective of any underhanded Chinese policies and is more a function of divergent levels of savings and consumption between the two countries. Last year, China’s trade surplus with the United States reached $200 billion and China’s surplus with the world was $100 billion. In other words, China had a $100 billion deficit with the world in 2005, excluding the United States. Like U.S. exporters, other countries’ exporters are having great success entering the Chinese market. Their consumers and governments are simply spending less on Chinese products than is the United States.

While there is agreement among economists and policymakers that the Chinese currency is undervalued, there is no such consensus with respect to the likely impact of revaluation on trade flows. An appreciating Yuan could exacerbate the deficit, as has been the case with almost every other major U.S. trade partner in recent years, as their currencies have strengthened against the dollar.

Complaints about Chinese policies are not entirely without merit though. When it joined the WTO, China agreed to undertake dramatic reforms affecting most of its economy. By and large, China has done a remarkable job making good on many of those commitments, but it is falling short in some areas. Detractors would point to those failures — inept enforcement of intellectual property rights, barriers to competition in certain service sectors, domestic content laws, and others — as a reason to invoke unilateral sanctions or to strip China of its normal trade relations status. But that precisely misses the point. China is a member of the WTO, which means that its policies are subject to the rules. Opening China, keeping it open, and compelling it to play by international rules are all benefits of China’s membership in the WTO.

In five years, only two cases have been brought against China in the WTO dispute settlement system. More are likely to be brought in the not-too-distant future.

The first case was brought by the United States and concerned a Chinese tax that allegedly discriminated against foreign suppliers of semiconductors. Before the case made it into formal adjudication, it was settled after consultation between the United States and China convinced the Chinese to reform their policy. The second case was brought earlier this year by the United States, Europe, and Canada, and concerns a Chinese policy that seemingly dissuades auto producers from using imported auto parts. That case is before a WTO dispute panel, which is expected to publish its opinion in the next few months.

If China were not a WTO member, U.S. semiconductor and auto parts suppliers would have had little hope of overcoming those alleged barriers to competing in China. And U.S. industries complaining about China’s failure to adequately enforce intellectual property rights laws, for example, would have no recourse to constructive resolution of their concerns.

China’s membership in the WTO is a blessing. It provides an extra degree of certainty that the world’s most populous country will remain a reliable source of and destination for goods, services, and capital. Here, here.

Daniel Ikenson is associate director of the Center for Trade Policy Studies and coauthor of Antidumping Exposed: The Devilish Details of Unfair Trade Law (Cato Institute, 2003).