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US China Trade Imbalance (Part III)

 

If so many Americans have benefited from China's huge trade surplus, why are critics still blaming China for the huge trade imbalance with the U.S.?

us trade balance 3Displaced American Workers: Because there is one big and politically powerful group of Americans that have been negatively impacted in China's trade surplus: American workers who have lost their jobs as a direct result of American companies relocating or outsourcing to China. The United States has lost 3.4 million manufacturing jobs lost since 1998, of which the AFL-CIO estimates about 1.3 million were tied to China. While many economists believe that on balance the low-cost of Chinese-made goods outweighs the loss of American manufacturing jobs, the difficulty is that the benefits of outsourcing (cheaper goods) are more widely distributed, while the negative toll, which although very real for those out of work, is more sector and region-specific, and tends to affect select groups of U.S. workers. These workers can often and do form a strong political bloc to apply pressure on politicians, or are often in "swing states" such as Pennsylvania, Michigan and Ohio that are important to politicians' electoral success. For these displaced workers and politicians, blaming China can be easier than blaming the companies that chose to move their operations to China, and from whom they may be buying cheap goods from at the same time!

Easier than Addressing Domestic Problems: For politicians, blaming China, with its large trade surplus and consistently high growth rates around 10% a year, is easier to do than to address the underlying systemic causes for job loss and to look for ways in which the United States might be more competitive. For example, experts fear that America's global competitiveness may already be undermined by the erosion of its education system, especially in the maths and sciences.

Chinese Government's Response

Reduced Incentives for Exporters: After years of complaints from the U.S. and other countries about its growing trade surplus, China has removed or reduced tax rebates on hundreds of items for export including toys, clothing, wood, leather and other goods, which is effectively a tax on these exports, making them more expensive. At the same time, the Chinese say that they cannot be blamed for American's voracious appetite for inexpensive goods.

Looking Ahead

Decrease of China Exports: As of mid-2008, as the United States appears be heading into, if it isn't already in, some kind of recession, demand for Chinese exports will likely decrease. In China, a confluence of factors (including high domestic inflation, more stringent labor laws, the scrapping of export tax rebates, and the stronger value of the yuan) has led to an increase in the cost of doing business in China. Whether and how much those rising costs are passed onto American consumers will likely vary as given today's long and complex supply chains, there are a number of places along the way where Chinese manufacturers and/or the American importers/companies can take on more of the financial burden by cutting into their own profit margins in order to maintain market share. Assuming some increased cost is passed on to American consumers, expect the number of exports from China to the U.S. to decrease as recession-hit Americans reduce their consumption, all of which will certainly lead to some reduction in the trade imbalance (assuming U.S. exports to China remains more or less at the same level).

In the end, the only significant way in which the U.S. trade deficit with China, and with the rest of the world, will decrease is if the U.S. consumes less. Americans' low savings rate means that even if the yuan were to rise appreciably, the U.S. trade deficit will just shift to other countries.

The Battle over Free Trade: It is commonly accepted that most economists, including the many experts cited in these pages, are advocates of free trade. Economists at the Institute for International Economics and the Center for Strategic and International Studies, for example, argue that over the last 60 years, the U.S. economy is "about a $1 trillion per year richer as a result of the expansion of international trade...and could gain another $500 billion annually if the world were to move to totally free trade." There would, however, also be losses of around $50 billion per year in the form of lost jobs, and lower wages for some. It is likely that most of these same economists advocating for free trade are highly skilled and will not have to worry about losing their jobs to another economist in China or India. But for the majority of American workers, the pain of job losses is very real. Little wonder, then, that there is much ambivalence in the U.S. about free trade, as is reflected in the fact that major trade legislation in Congress in the last decade has had about equal numbers of supporters and detractors. For better or worse, China has become the face of globalization, and rightly or wrongly, has become an easy target for many Americans' anxieties. Ultimately, politicians need to know that the attitude of Americans towards global trade will depend in large part on the degree to which the U.S. can provide the proper education and (re)training programs to move displaced workers into new jobs that can take advantage of globalization.

Growing Interdependencep

American politicians arguing for tariffs on China exports or worse, an outright ban on certain products, will hurt not only American consumers, but also many American businesses with operations in China. This could in turn lead to greater unemployment back home as these same affected American businesses start to lay off workers here. Also hurt will be Americans who may be shareholders in any of these businesses.