International Trade with China: Jobs, Currency, and US Policy

Introduction: Globalization and the Supply Chain

Because of the increasingly globalized nature of the economy, manufacturers, retailers, and service providers have more options to locate sources of supply and labor where overall costs are lower than in their home markets. In industry today, parts and supplies frequently come from many different countries. The Boeing 787, for example, has 65% of its components outsourced to foreign companies (Hill, 2011). Another example is flat-screen TVs, which have their components manufactured in Asia, assembled in Mexico, and then shipped to distributors in the United States. Vizio maintains a small office in California with fewer than 100 employees to handle sales and service, while all design, manufacturing, and assembly is done overseas. Even though American companies originally developed this technology in the 1960s, they did not continue with it and forfeited this market to Asian countries (Hill, 2011).

This pattern has recurred time and again in American industry, which has been devastated by Asian imports since the 1970s. In the case of China — which has become the largest exporter among developing nations — wage costs and currency values have been held artificially low to stimulate exports, while the state subsidizes export industries far more than the United States does. Economists who once believed in the comparative advantage theory of David Ricardo have changed their minds when it comes to the China trade, arguing that its unfair advantages have cost the U.S. economy millions of manufacturing jobs, increased unemployment, lowered incomes, and raised adjustment costs for the U.S. government.

Comparative Advantage Theory and Its Limits

Two centuries ago, the classical political economist David Ricardo put forward the comparative advantage theory, which holds that under free trade conditions each nation would gravitate toward those exports it produced most efficiently, yielding maximum benefits for all. Over 90% of U.S. firms that export are small businesses with fewer than 100 employees, although these account for only 20% of total exports. National markets have not yet broken down completely, particularly in consumer goods, and there are still major distinctions in legal regulations, trade barriers, culture, traditions, and consumer tastes among nations, which "frequently require companies to customize marketing strategies, product features, and operating practices to best match conditions in a particular country" (Hill, 2011). Most globalized markets today involve raw materials such as oil, rubber, aluminum, and iron ore, as well as manufactured goods like computers and aircraft. Rival firms in this globalized trade include General Electric and Rolls Royce in aircraft engines, Boeing and Airbus in aircraft, and Ford and Toyota in vehicles.

In recent years, economists such as Paul Samuelson have challenged classical Ricardian theory on the grounds that the type of trade practiced with China has devastated blue-collar jobs in America. Alan Blinder, who once supported free trade policies, has changed his position because "outsourcing to lower-wage countries puts millions of American jobs at risk." American economists who once believed that trade with China would have only minimal impact on manufacturing and blue-collar jobs have been revising their views. Those who argued that the benefits of the China trade would outweigh the costs now acknowledge that the "damage to the U.S. economy has been deeper" than originally predicted (Lahart, 2011).

The China Trade and American Job Losses

Regions most exposed to Chinese exports have suffered the highest losses of manufacturing jobs and the sharpest declines in overall employment, as well as higher costs to government in the form of unemployment insurance and food stamps. Costs to the government alone wiped out one-third to two-thirds of the gains from trade with China, and these adjustment costs were far higher than economists and politicians had asserted in 1999 (Lahart, 2011).

China's growth has been so unexpectedly rapid that its exports have swamped those from other developing nations. American counties where manufacturing faces the heaviest competition from Chinese imports — such as in appliances — have suffered higher job losses, reduced incomes, and the largest declines in manufacturing employment (Lahart, 2011). All fifty states experienced net job losses from trade with China between 2001 and 2010, for a total of approximately 2.8 million jobs, while the trade deficit grew from $84 billion to $278 billion. During the entire period of China's WTO membership, this deficit decreased temporarily only once, due mostly to the recent recession and declining consumption in the United States.

About 1.9 million of the 2.8 million jobs lost were in manufacturing: 32% in computer and electronic parts, with additional losses in plastics, rubber, motor vehicle parts, textiles, and apparel — all familiar, low-cost export categories from China and other Asian countries. Government repression in China ensures that labor costs there are 40–80% lower than they would be in a free economy, while the Chinese government also keeps the national currency artificially undervalued by 40–50% (Scott, 2011).

Conclusion: Asymmetric Trade and American Decline

China's strategy of using any means necessary to increase its exports and purchase sources of raw materials around the world has been very successful, at least for its emerging middle and upper classes. These benefits have not been widely shared with the labor and peasant classes, however, or with the inland regions far removed from the coastal cities where manufacturing and export activities are concentrated. Chinese planners are very likely pleased that the overall U.S. economy has weakened while China gradually replaces it as the world's leading economic power — and they have been aided by certain elements within the American elite as well. The asymmetry between China's state-directed mercantilism and America's passive free market approach represents the central challenge facing U.S. trade policy in the decades ahead.

References

Economist Online (2011). "Is China a Currency Manipulator?" October 11, 2011. http://www.economist.com/blogs/dailychart/2011/10/america-and-china

Hill, C. (2011). International Business: Competing in the Global Marketplace (8th ed.). New York: McGraw-Hill.

Lahart, J. (2011). "Tallying the Toll of U.S.-China Trade." Wall Street Journal, September 27, 2011. http://online.wsj.com/article/SB10001424052970204010604576595002230403020.html

Scott, R. E. (2011). "Growing U.S. Trade Deficit with China Cost 2.8 Million Jobs between 2001 and 2010." Economic Policy Institute, September 20, 2011. http://www.epi.org/publication/growing-trade-deficit-china-cost-2-8-million/