U.S.-China Trade: An Adult Conversation

February 3, 2012

Chrystia Freeland of Reuters has a highly recommended article on U.S.-China trade and worker dislocation. While this might appear to be your standard American screed against Chinese competition, it falls quite short of calling for any sort of protectionism.

Freeland’s approach should be lauded, because although she presents information from a recent study about the negative effects on the U.S. from China trade, she does not wrap up the article, as so many do, with a unworkable or illegal policy suggestion.

While I tend to criticize protectionists more often than free traders, I have problems with anyone who does not admit the reality of globalization and international trade. While protectionists come at the problem with bad solutions, some free traders do not even acknowledge the negative aspects of trade. I think that this position is becoming more and more difficult as time goes on and more information comes to light.

Freeland references a recent paper:

In the debate about the causes of growing income inequality, U.S. economists have tended to opt for technology as the driving force. Indeed, in his remarks, Mr. Krueger referred to a survey he did of those economists, who overwhelmingly cited technological change as the most important factor.

But, drawing on detailed data from local labor markets in the United States, the authors of the “The China Syndrome” argue that globalization, and in particular trade with China, is having a huge impact on blue-collar U.S. workers: “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”

Free traders tend to downplay this sort of thing, while protectionists like to think that raising tariffs is a quick fix.

Here’s the thing. International trade is generally beneficial to nations. At the same time, there are winners and losers within sectors. U.S. blue collar workers have taken a series of hits, from productivity gains to competition from abroad. It is not surprising that new evidence shows that China trade has led to job losses and wage decreases in the U.S.

Freeland quotes economist Joseph Stiglitz on this issue:

What happens when you bring together countries which are very different like the United States and China, what happens is that the wages in the high-wage country get depressed down. This was predictable.

At the same time, we should admit that if it wasn’t China, that dynamic would still have occurred but with competition from other low-wage nations. China just happened to be in the right place at the right time with hundreds of millions of workers. I’m not quite sure that protectionists understand this, since many of them believe that China’s “cheating” is the source of these ills, not the obvious wage differential.

And this thinking makes a big difference. If you believe that China’s trade policies are to blame, then it follows that some sort of punishment may force China to stop what it is doing, level the proverbial playing field, and bring everything back to the status quo. In other words, all those jobs will simply come back.

This brings us back to a familiar refrain, though. Those jobs aren’t coming back. Even if China were somehow taken out of the picture, those manufacturers are going to move to Vietnam, Indonesia, or another low-wage nation. You can’t put the trade genie back in the bottle.

If the international trade conversation could be dominated by realists, folks who on the one hand admit that trade dislocation is a huge problem, but on the other hand acknowledge that protectionist quick fixes are fantasies, then we could get down to real solutions.

How might the U.S. attract more jobs in the future? That’s a difficult question, but at the very least, it wouldn’t hurt to start spending more money on education and infrastructure.