China Trade: Hollowing Out or Filling In the U.S. Economy?

The Wall Street Journal’s Aug. 11, 2016 front-page story How the China Shock, Deep and Swift, Spurred the Rise of Trump tries to explain the “Rise of Trump” and the popularity of candidates attacks on trade with China and Mexico. The article blames reduced trade barriers, especially with China, for millions of lost American manufacturing jobs.

HICKORY, N.C.—In the late 1990s, this furniture-making hub seemed sheltered from the disruptive forces of globalization. Laid-off steelworkers from West Virginia, Tennessee and beyond streamed here for new jobs building beds, tables and chairs for American homes. The unemployment rate fell below 2%.

Then came a flood of inexpensive furniture from China driving Hickory furniture firms out of business and unemployment up to 15% by 2010. The WSJ authors, Bob Davis and Jon Hilsenrath, write:

What happened with Chinese imports is an example of how much of the conventional wisdom about economics that held sway in the late 1990s, including the role of trade, technology and central banking, has since slowly unraveled.

The aftershocks are sowing deep-seated political discontent this election year. Disillusionment with globalization has fed one of the most unconventional political seasons in modern history, with Bernie Sanders and especially Donald Trump tapping into potent anti-free-trade sentiment.

The authors cite recent research on the costs of open trade with China:

David Autor, a Massachusetts Institute of Technology economist who has studied trade, labor markets and technological change, calls China’s economy a “500-ton boulder perched on a ledge.” At some point, it would tumble and splatter what was below, but “you just didn’t know when,” he says.

International trade has always been hard on domestic firms facing direct competition from overseas. But consumers benefit from wider choices and lower prices. Autor argues that the immense size of China’s emerging economy made these international impacts wider and deeper than imports in past decades from emerging Japan, Taiwan, and South Korea.

China’s middle class is now larger than the entire U.S. population. Taiwan’s 23 million plus South Korea’s 50 million and Japan’s 126 million add to 200 million in these advanced economies. But the bigger story is that these Asian economies, along with Singapore (5.5 million), are more and more integrated with China’s economy. The Economist, in A Bridge over troubled waters (Nov 8th 2014), subtitled “Taiwan, Japan and South Korea employ huge numbers of mainland Chinese,” notes:

At the latest count 88,000 firms from Taiwan employ 15.6m Chinese workers. About 11m are employed at 23,000 Japanese firms or their suppliers. Throw in 2m more workers for South Korean enterprises, and companies from around the troubled East China Sea have approaching 30m Chinese on their payrolls.

Any U.S. policy changes that raise tariffs or otherwise restrict imports from China will hurt to the economies of Japan, South Korea, and Taiwan. New U.S./China trade restrictions would also hurt U.S. firms. General motors in 2015 sold 3 million cars and trucks in the U.S., but sold 3.6 million in China. Other U.S. firms, from Yum!, Starbuck’s, and McDonalds, to Apple, Intel, and other technology firms, have huge sales in China. Yum! Brands’ Kentucky Fried Chicken (KFC) has 7,200 restaurants in 1,100 Chinese cities, and Yum!’s Pizza Hut runs 1,600 restaurants in 400 Chinese cities. Yum! expects China’s middle class to grow from 300 million to 600 million and plans to have 20,000 locations in China.

Back to Economic Research and Hickory, North Carolina…

The U.S./China trade debate continues in economic journals, and MIT’s David Autor seems the most highly-respected China trade skeptic. For an overview, see MIT’s March 2016 Press Release: Trading places: Economists take a new look at the evidence that the U.S. has lost millions of jobs to China:

As some economists now recognize, the formal trade relationship between the U.S. and China, established in the 1990s and solidified with a World Trade Organization agreement in 2001, dramatically affected a large number of labor-intensive industries in the U.S. In those fields, jobs moved en masse to China, where workers are available at even lower wages.

Skeptical of Autor’s claims is Phil Levy in Foreign Policy, May 8, 2016, Did China Trade Cost the United States 2.4 Million Jobs?, which begins:

The question of whether trade with China has inflicted lasting harm on the United States is the subject of some much-celebrated research by three distinguished economists: David Autor, David Dorn, and Gordon Hanson. They argue that import growth from China cost the United States about 2.4 million jobs over a dozen years. To give an idea of this work’s reception, economist Tyler Cowen referred to it as “some of the most important work done by economists in the last twenty years.”

Levy’s next paragraph begins: “I strongly disagree.” (See story for why.)

An April 18, 2016 NPR segment, China Killed 1 Million U.S. Jobs, But Don’t Blame Trade Deals, discusses the debate, and quotes Autor:

If you look at NAFTA and trade with Mexico, Autor says, not that many U.S. workers have been harmed. But China, his research shows, is a different story. “China’s rise is really a kind of a world historical event,” Autor says. “This is the largest country in the world. It has caused a wholesale substantial contraction of U.S. manufacturing employment.”

Autor says from 2000 to 2007, trade with China destroyed nearly 1 million U.S. manufacturing jobs. That’s apart from other job losses due to technology and productivity gains and automation.

For more on the role of technology advances causing changes in U.S. manufacturing, see Mercatus Center’s Dan Griswold’s August 1, 2016 Los Angeles Times Op-Ed, Globalization isn’t killing factory jobs. Trade is actually why manufacturing is up 40%:

American factories and American workers are making a greater volume of stuff than ever — high-tech, high-value products that are competitive in markets around the world. In the last 20 years, which include enactment of the North American Free Trade Agreement and China’s entry into the World Trade Organization, real, inflation-adjusted U.S. manufacturing output has increased by almost 40%. Annual value added by U.S. factories has reached a record $2.4 trillion.

Griswold explains that manufacturing jobs lost to international trade are much smaller:

According to a recent study by the Center for Business and Economic Research at Ball State University, productivity growth caused 85% of the job losses in manufacturing from 2000 to 2010, a period that saw 5.6 million factory jobs disappear. In that same period, trade accounted for a mere 13% of job losses.

Griswold says half of imports are related to production rather than consumption. Leading U.S. firms employ complex global supply chains to manufacture high-value products that are in turn sold around the world. Plus, Griswold says U.S. jobs in trade industries pay nearly 20% higher wages:

In fact, globalization and trade agreements have made a huge contribution to the ongoing success of American manufacturing. Access to expanding global markets allows U.S. manufacturers to enjoy economies of scale, reducing their per-unit production costs and enhancing their competitiveness. The additional revenue can be reinvested in research and development, leading to new products and expanding market share. This is why U.S. jobs in trade-oriented industries typically pay 18% more than non-trade-connected jobs.

Increasing U.S. manufacturing productivity plays a role in Hickory, NC as well.  Eric Cunningham, irked by the WSJ cover story, counters No, Wall Street Journal, Chinese Imports Didn’t Kill My Hometown (August 16, 2016, The Federalist). Alongside the decline of Hickory’s furniture industry, trade-dependent manufacturing, surged:

At the height of Hickory’s furniture boom in the 1990s, another boom was beginning: technology. The rising popularity of the Internet led to rising demand for access. Even as the dot-com bubble imploded, telecommunications kept flourishing, and Hickory had become a hub for it. By 2000, Hickory produced 40 percent of fiber-optic cable in the world. Rather than being content with furniture and textiles, the region had—wisely, in retrospect—expanded its reach and diversified into fiber optics.

Today, two multinational fiber-optic cable corporations, both reliant on trade and globalization, call Hickory their home: CommScope and Corning Optical Communications. Although Corning is set to move its headquarters to a new building in Charlotte, this won’t affect the hundreds of jobs at their manufacturing plant.

Productivity increases reduced furniture employment, and North Carolina manufacturing has been seen healthy expansion:

In fact, the U.S. Bureau of Economic Analysis estimates that my state’s manufacturing output rose from about $63.5 billion in 1997 to more than $100 billion in 2015, with top industries no longer being textiles or furniture, but computers, chemicals, and food products. 

And Cunningham offers more to suggest the Wall Street Journal‘s reported death of Hickory is greatly exaggerated:

Certainly, manufacturing jobs have declined here (as they have nationally and around the world), but the state’s unemployment rate is now at or below the national average and our labor force participation has bucked the national trend by actually adding 100,000 workers in the last year. Remarkably, the Hickory region now boasts a 4.6 percent unemployment rate—lower than the state unemployment rate of 4.9 percent and lower than in some of the state’s larger cities like Fayetteville and Greensboro.

On the manufacturing and employment side, international trade has winners and losers. On the consumer side though, are mostly winners who gain from access to lower-cost furniture as well as other goods and services. Firms hurt by imports join trade associations and lobby legislators. Political pressure for protectionist policies is explained by Public Choice theory: gains to consumers from trade with China are disbursed but costs are concentrated in specific firms, industries, unions, and trade associations, which actively lobby for higher trade barriers.

High school debate students researching this year’s U.S./China debate topic have an opportunity to gain deeper understanding of key issues surrounding this important and controversial topic, one that’s front and center in national politics.

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