Reality wins over rhetoric in heated debate about America's trade deficit with China

Yang Meiping
Taking into account the effect on the value-added chain in the US, the overall impact of China-US trade will increase jobs and incomes for American workers.
Yang Meiping

ANTI-GLOBALIZATION has become a prominent phenomenon worldwide, which critics say adversely impacts growth, politics and the governance of global trade.

An example is the trade approach of many US politicians, who often claim that the trade deficit with China had caused serious job losses in American manufacturing. Many authoritative researchers in America also regard imports from China as a major reason for increasing unemployment in manufacturing in the US.

They blame increasing imports from China for high unemployment and low labor participation in America and attribute the nearly 25 percent drop in employment in manufacturing to competition from China. Some also connect the decline of employment in manufacturing since 2000 with the fact that America formally normalized trading relations with China that year. Some even say import competition from China caused 2-2.4 million job losses in America between 1999 and 2011.

Such analysis is wrong or unbalanced, although they are mainstream views in America, said Shang-Jin Wei, chair of the academic council of Fanhai International School of Finance at Fudan University. There are plenty of American politicians and academics arguing exactly the point Wei is making.

He believes that academics and politicians should review the impact of Sino-US trade on American employment from the more in-depth angle of the industrial chain. He points out that macroeconomic realities did not support those mainstream conclusions. In his research, he found the unemployment rate was low in America when the trade deficit was high. But when the deficit was low, unemployment was high in the US. Existing research focused on the adverse impact on the American job market by Chinese imports, but neglected the positive effect brought by importing intermediate input products from China, Wei said.

“After introducing the angle of industrial chain when researching on China-US trade, we can see the downstream effects of the supply chain,” he said. “A considerable proportion of the American imports from China are intermediate input products, which are used by downstream companies in America later. It helps to improve their production efficiency and create new jobs.”

Statistics show America imported US$14.8 billion of intermediate input products in 2000, accounting for 28.6 percent of its total imports from China that year. That quadrupled to US$63.2 billion in 2007 and accounted for 27.4 percent of the total. By 2014, it had doubled again to more than US$130 billion and the share also grew to 37.5 percent. Meanwhile, American exports to China also created jobs. About 70 percent of American exports to China are intermediate input products and most of them are used in producing exports or domestic commodities in China.

Among the manufactures exported from China to America, about four percent are actually value-added goods attributable to American producers.

Between 2000 and 2014, the direct impact of imports from China decreased employment in the US manufacturing industry by 0.17 percent a year.

But it also boosted the employment in non-manufacturing industries by 1.51 percent every year, Wei said. Overall employment in the US increased 1.8 percent a year over that time.

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Structural adjustment

“It shows that China-US trade has not caused rising unemployment in America, but facilitated its industrial structure adjustment and helped it transform its working population from manufacturing to non-manufacturing industries,” said Wei. “But as the job loss in manufacturing is direct and easier to see, many Americans see a problem with trade with China although most Americans benefit from it. They only focus on the direct effect brought by the trade, but neglect the indirect impact via the value chain conduction channel. It creates an illusion that ‘we got hurt in the trade’.”

It is China-US trade that has created enough downstream effects to hedge against the negative effect of other factors on employment.

“Anti-globalization is no good for any country and will have a bigger impact on China because globalization has made great contribution to China’s economic growth,” said Wei. “The trade-to-GDP ratio in China is 50 percent higher than in America, so anti-globalization will have more negative impact on economic growth in China than in other countries.”

The immediate urgency in public policy now is to chart out all the positive impacts of globalization and China-US trade to create a political force that could keep supporting globalization and strive for a win-win situation for global economy, Wei said.

“Generally speaking, although the direct impact of Chinese tradables brought down employment in manufacturing in America, China-US trade has positive impact if we consider the indirect influence, especially the influence on the costs for the downstream companies.”

Taking into account the effect on the value-added chain in the US, the overall impact of China-US trade will increase jobs and incomes for American workers.


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