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.

7 thoughts on “U.S.-China Trade: An Adult Conversation

  1. Sam Bleicher

    It isn’t clear that either education or improved infrastructure will do the trick either (though a massive infrastructure improvement program would create a lot of construction and related jobs in itself).

    Technological change is accelerating, and it is displacing educated workers as well as blue collar workers, not by moving jobs overseas, but by displacing workers with computers and automated processes. Take a look at the arguments in The Lights in the Tunnel, by Martin Ford – although his metaphor is a little strange, his data and analysis seem correct.

    while i agree that the China-bashing is unjustified, I think we are still rehashing 20th Century arguments, rather than looking at what’s ahead in the 21st Century

    1. Stan Post author

      Education is a must. Infrastructure is more complicated. But once the place starts crumbling around you, it’s hard to generate investment, whether it’s manufacturing or anything else. Also, it’s not just bridges and roads, but high-speed Internet, smart grid, etc.

  2. slim

    Spot on. In about 2005, I toured North Carolina looking for examples of China displacing textile factories and jobs, and what I found was lots of people saying “no, our jobs went to Mexico years before China became a factor.”

    The smartest economists I talk to (in Washington) stress that, while there are plenty of Chinese trade practices that are not kosher and need to be addressed, the US economy is still 2-3 times the size of China’s (depending on measurements, PPP or nominal) and thus the fate of the US is still mainly in US hands and it is up to the US to get its house in order first and foremost. The worst thing the US could do is match Chinese mercantilism with US mercantilism.

  3. S.K. Cheung

    Well said. Far too oversimplistic and naive to say “trade bad” and “tariffs good”. It all depends on the unique circumstances of individual industries. Besides, as you say, some of the jobs that left the US were going elsewhere no matter what. If it wasn’t to Chna, it would’ve been to another country. It’s paradoxical for the US to covet jobs that Americans themselves don’t want to work at.

    I also agree with the need for investment, although that is again a general statement that may have variable effects on different industries.

    WIth that in mind, what is your view of “precision tariffs”? Americans do that now with softwood lumber from Canada, for instance.

    1. Stan Post author

      The WTO system allows for limited tariffs, and each Member State has “locked in” a certain window within which it can operate. As long as those parameters are maintained, then there’s no problem.

    2. Marius Schutz

      Nice point about Canada and it shows the failure of US policies.

      Canada gets punished because it has lots of softwood. That wood is not there because of some policy to produce softwood. The wood is just there. Nature put it there and the Canadians like to take advantage of it by processing it into paper, tissue, timber etc. But some in the US, the protectionists who historically have had the say in these matters, find this offensive.

      China has lots of labour. Not because of some perverse government policiy to produce workers but because historically the Chinese like large families. The Chinese have taken the legitimate liberty to take advantage of this resource by becoming one of the the world’s premier manufacturers of goods. But some in the US, the protectionists who historically have had the say in these matters, find this offensive.

      In Israel it is scientists who produce patents. And no doubt, some in the US, the protectionists who historically have had the say in these matters, find this offensive.

      Softwood in Canada, labour in China and geniouses in Israel have caused each of these countries to enjoy comparative advantages. And as we know, there is not a country in the world that does not have comparative advantages.

      The US has and had its own advantages. The biggest historcally is that it only started using its resources after 1492. The colonists who came had paradise for the taking as the native population had a very liberal immigration policy. That lede to an overdependence on cheap resources.

      This advantage has run its course. It is now depleted and the US will have to search for alternatives inside itself and not by punishing those who have advantages of their own.

  4. allroads

    Stan.

    I have always been middle of the road on this issue. One the one hand, you cannot deny that jobs moved, but putting it al on cheating and currency manipulation was always a bit too much. Particularly given the facts ont he manufacturing floor were presenting very different stories. Additionally, I have always had a bit of a knee jerk reaction to the American side of the debate because those often lamenting the situation work very hard to keep their eyes closed tot he jobs that were CREATED by trade with China. Good jobs.

    That being said, the last week or so I was looking into your last question. How is the US going to create jobs, specifically from reshoring firms who had gone overseas… and what I have found is pretty depressing. Particularly when you consider the amazing machine that China built to bring investment into China.

    I’m in the process of build a few posts on it, but one article that I found interesting was Bloomberg’s recent piece called America’s Dirty War on Manufacturing…. well worth the read… http://www.bloomberg.com/news/2012-01-18/america-s-dirty-war-against-manufacturing-part-1-carl-pope.html

    R