The
Chinese Connection
By PAUL KRUGMAN, May 20, 2005
Stories about the new Treasury report condemning China's currency
policy probably had most readers going, "Huh?" Frankly, this is
an
issue that confuses professional economists, too. But let me try to
explain what's going on.
Over
the last few years China, for its own reasons, has acted as an
enabler both of U.S. fiscal irresponsibility and of a return to
Nasdaq-style speculative mania, this time in the housing market. Now
the U.S. government is finally admitting that there's a problem - but
it's asserting that the problem is China's, not ours.
And
there's no sign that anyone in the administration has faced up to
an unpleasant reality: the U.S. economy has become dependent on
low-interest loans from China and other foreign governments, and it's
likely to have major problems when those loans are no longer
forthcoming.
Here's
how the U.S.-China economic relationship currently works:
Money
is pouring into China, both because of its rapidly rising trade
surplus and because of investments by Western and Japanese companies.
Normally, this inflow of funds would be self-correcting: both China's
trade surplus and the foreign investment pouring in would push up the
value of the yuan, China's currency, making China's exports less
competitive and shrinking its trade surplus.
But
the Chinese government, unwilling to let that happen, has kept the
yuan down by shipping the incoming funds right back out again, buying
huge quantities of dollar assets - about $200 billion worth in 2004,
and possibly as much as $300 billion worth this year. This is
economically perverse: China, a poor country where capital is still
scarce by Western standards, is lending vast sums at low interest rates
to the United States.
Yet
the U.S. has become dependent on this perverse behavior. Dollar
purchases by China and other foreign governments have temporarily
insulated the U.S. economy from the effects of huge budget deficits.
This money flowing in from abroad has kept U.S. interest rates low
despite the enormous government borrowing required to cover the budget
deficit.
Low
interest rates, in turn, have been crucial to America's housing
boom. And soaring house prices don't just create construction jobs;
they also support consumer spending because many homeowners have
converted rising house values into cash by refinancing their mortgages.
So
why is the U.S. government complaining? The Treasury report says
nothing at all about how China's currency policy affects the United
States - all it offers on the domestic side is the usual sycophantic
praise for administration policy. Instead, it focuses on the
disadvantages of Chinese policy for the Chinese themselves. Since when
is that a major U.S. concern?
In
reality, of course, the administration doesn't care about the
Chinese economy. It's complaining about the yuan because of political
pressure from U.S. manufacturers, which are angry about those Chinese
trade surpluses. So it's all politics. And that's the problem: when
policy decisions are made on purely political grounds, nobody thinks
through their real-world consequences.
Here's
what I think will happen if and when China changes its currency
policy, and those cheap loans are no longer available. U.S. interest
rates will rise; the housing bubble will probably burst; construction
employment and consumer spending will both fall; falling home prices
may lead to a wave of bankruptcies. And we'll suddenly wonder why
anyone thought financing the budget deficit was easy.
In
other words, we've developed an addiction to Chinese dollar
purchases, and will suffer painful withdrawal symptoms when they come
to an end.
I'm
not saying we should try to maintain the status quo. Addictions
must be broken, and the sooner the better. After all, one of these days
China will stop buying dollars of its own accord. And the housing
bubble will eventually burst whatever we do. Besides, in the long run,
ending our dependence on foreign dollar purchases will give us a
healthier economy. In particular, a rise in the yuan and other Asian
currencies will eventually make U.S. manufacturing, which has lost
three million jobs since 2000, more competitive.
But
the negative effects of a change in Chinese currency policy will
probably be immediate, while the positive effects may take years to
materialize. And as far as I can tell, nobody in a position of power is
thinking about how we'll deal with the consequences if China actually
gives in to U.S. demands, and lets the yuan rise.
......
Paul Krugman is professor of Economics and International Affairs at
Princeton University and winner of the 1992 John Bates Clark Medal.
Chinese
factories said to violate labor laws - Group cites contractors for U.S.
brands
original article - http://www.iht.com/articles/98618.html
Michael Forsythe Bloomberg News Thursday, June 5, 2003
WASHINGTON Factories making products in China and
elsewhere for Nike Inc., Liz Claiborne Inc. and five other companies have
violated labor laws, with some contractors paying below minimum wage and
some illegally employing juvenile workers, an industry-supported group
said.
A contractor for Nike in China paid its workers 2.05
yuan (25 cents) an hour, less than the minimum wage of 2.57 yuan, and one
for Liz Claiborne in China failed to register workers ages 16 to 18, the
Fair Labor Association said in a report released Wednesday in Washington.
U.S. clothing and footwear companies have come under
fire from human rights advocates, unions and universities for relying on
factories in places such as China, Central America and Indonesia that do
not follow internationally accepted labor standards. That has led to some
consumer boycotts.
"We want conditions to be good in the
factories," said Roberta Karp, general counsel for Liz Claiborne.
"Consumers demand it and we demand it of ourselves."
Nike, Liz Claiborne, Reebok International Ltd., Levi
Strauss Co., Adidas-Salomon AG, Eddie Bauer Inc. and Phillips-Van Heusen
Corp. require factories that make products for them under contract to
submit to inspections by the association. The group's first annual report,
released Wednesday, includes the detailed results of inspections in 48
factories around the world. China accounted for more audits than any other
country.
The 48 inspections were from among 185 conducted in
30 countries from August 2001 through July 2002. Violations found in the
reports ranged from inadequate pay to failure to provide proper hearing
protection.
In all, the seven companies agreeing to the
inspections have at least 3,000 subcontractors, with about 600 of those in
China. Worldwide, as many as 80,000 factories export apparel to the United
States, said Auret van Heerden, executive director of the association.
"We have the power to go into factories
unannounced," van Heerden said. "That's a power that many labor
inspectors would die for."
In many instances, factories have corrected faults
found by inspectors, according to the association's audit reports. A
Chinese factory making goods for Levi Strauss and Eddie Bauer raised
salaries after inspectors found some workers making less than minimum
wage, the report said. An Adidas factory in El Salvador switched to a
voluntary overtime program after inspectors found it was forcing employees
to work more than eight hours a day, it said.
The audits do not show the name and location of the
factories, because some member companies argued that doing so would punish
factory owners who had agreed to inspections and reward those not under
the program, van Heerden said. Others say public release would pressure
factories to comply.
"I think it's baloney," said Michael
Posner, a Fair Labor Association board member and executive director of
the Lawyer's Committee for Human Rights, in New York. "We will fight
for more disclosure on factory locations."
Some large U.S. retailers, including Wal-Mart Stores
Inc., have declined to join the association, van Heerden and Posner said.
The Fair Labor Association grew out of a White House task force set up in
1996.
"This is the first collaborative effort of
companies, human rights groups and consumer groups to improve factory
conditions," said a Nike spokesman, Vada Manager. "We've got to
crawl before we can walk."
Nike, the world's largest maker of athletic shoes,
could not detail steps it had taken to improve conditions at its
contractors' factories because of a pending case at the U.S. Supreme
Court, Manager said. The court is considering a false-advertising lawsuit
that alleges Nike misrepresented labor conditions at its overseas
factories.
Labor rights groups have said that many violations
occur at contractors, rather than at plants owned by the multinational
corporations.
"We welcome anything they can do," said
Michael Keats, a spokesman for the United Nations International Labor
Organization in Washington, commenting on the Fair Labor Association.
"When it comes to subcontracting, we would hope that the same
standards apply to everyone involved."
China's domestic spending boom leads to deficit
By Nic Hopkins, London Times, April 12, 2003
CHINA yesterday reported its first quarterly trade deficit in seven
years as soaring domestic demand and the rising cost of crude oil
outpaced a strong surge in exports.
Official figures provided by the state-owned Xinhua news agency showed
that China recorded a deficit of $1 billion (£636 million) as imports
outpaced exports in the first three months of 2003.
Xinhua quoted official Customs figures that showed that exports in the
three months to March 31 were $86.3 billion, while imports were $87.3
billion. The deficit compared with a surplus of more than $7.3 billion
in the first quarter of 2002.
Economists said that China was buying more raw materials, components
and machinery to fuel its continued strong economic growth, which is
expected to exceed 7 per cent in 2003 despite the slowing effect of
the outbreak of severe acute respiratory syndrome (Sars).
Andy Xie, chief economist for China at Morgan Stanley, said that
Chinese domestic demand was being fuelled by a shift in the population
from rural areas to the big cities.
Mr Xie said: "To live in an urban area, they need to consume a lot
more. They need houses to live in, which requires concrete and steel.
They need electricity, which creates demand for coal and copper for
cables. It's all part of China's industrialisation."
The expansion is also being driven by foreign companies rushing to
invest in China. Carmakers, such as General Motors of the US and
Germany's Volkswagen, are investing heavily in China.
Within the next decade, China's auto market is expected to surpass
Germany to become the third largest behind the US and Japan.
Tim Condon, chief economist for Asia at ING Barings, said that China's
economy was "in full bloom" because of a leap in lending by China's
state-controlled banks. Bank borrowings rose by almost 30 per cent in
2002, more than double the previous year's growth, as people sought
cash to buy houses and consumer goods.
Mr Condon said: "When you're growing loans by 30 per cent, you're
putting a lot of purchasing power into the hands of people, who are
showing a strong willingness to use it."
Although no economist disputed China's official view of its economy,
many analysts read the data with a slight degree of scepticism because
much of it is produced by state bureaucracies with little or no
transparency.
One foreign trade official in Beijing told The Times: "There is always
a question mark over some of the statistics we see. There is a fudge
factor that you have to take into account. I wouldn't put my hand in
the fire and say the numbers are exactly right."
However, the official added: "There is no disputing that exports are
falling because of difficult foreign markets while imports are rising
because more money is being freed up. That is clearly visible to
anyone on the ground here."
Mr Condon believes the effect of boosting the spending power of
China's people has had a bigger impact on demand than the nation's
entry to the World Trade Organisation (WTO) in late 2001.
However, Qu Hongbin, a senior economist at HSBC in Hong Kong, said
that entry into the WTO had fed China's hunger for imports by lowering
tariffs on goods ranging from cars to machinery.
...and this is how the Uk fares
TOP FIVE EXPORTS TO CHINA IN 2002
1 Petroleum and related materials, £150m
2 Specialised industrial machinery, £120.7m
3 Telecommunications and sound recording equipment, £120.2m
4 Power-generating machinery and equipment, £119.7m
5 Industrial machinery and equipment, £107.5m
TOTAL EXPORTS TO CHINA: £1,505m
TOP FIVE IMPORTS FROM CHINA
1 Miscellaneous manufactured goods, £1,208.2m
2 Electrical goods, £788.7m
3 Office machines, £775.5m
4 Apparel and clothing accessories, £740.4m
5 Telecommunications and sound recording equipment, £504.5m
TOTAL IMPORTS FROM CHINA: £6,973m
China and the States
Booming trade deficit with China will accelerate job destruction in next decade with losses in every state
May 2000 Briefing Paper
by Robert E. Scott
In April, the Clinton Administration published several hundred pages of state-by-state “opportunity reports” purporting to show that “the passage of PNTR [Permanent Normal Trade Relations with China]…would open new export and employment opportunities in all 50 states” (White House 2000). These reports were issued in an attempt to persuade Congress to approve a recently negotiated trade deal with China to ease its entry into the World Trade Organization
(WTO). These state reports, however, are embarrassingly shallow—they offer no serious analysis and were obviously put together cookie-cutter fashion, with much of the information and claims of great benefits repeated word for word from one state report to the next (China Trade Relations Working Group 2000). These reports not only fail to provide a single estimate of the jobs to be gained in any of the states, they also totally disregard the role of imports in trade.
It should go without saying that exports and imports are the two fundamental components of trade. In order to discern whether trade has contributed to economic growth or detracted from it, it is necessary to look at both of these components. Ignoring the impact of imports is like trying to balance a checkbook by counting only the deposits and ignoring the withdrawals.
If PNTR for China is approved by Congress, a projection of trade trends over the next decade shows that the trade deficit will expand, resulting in sizeable job losses in every state and in virtually every sector of the economy. These projections are based on the U.S. International Trade Commission’s
(USITC) own China-U.S. trade model and clearly demonstrate that if PNTR passes, the already huge trade deficit with China will only get worse.
The existing trade deficit with China is the product of current U.S. trade policies: while China runs a huge trade surplus with the United States, it has a sizeable trade deficit with the rest of the world, and with the European Union and Japan in particular. By giving China PNTR status, Congress will be giving up America’s most effective tool for changing those policies—bilateral trade negotiations designed to address the unique trade problems with China. Without the ability to negotiate in this way, the deficit with China will surely grow.
As the trade deficit grows, job losses will continue to mount. The job loss forecasts in this report are actually conservative and understated, as they were arrived at using the USITC’s methodology. In fact, the USITC’s analysis makes some optimistic assumptions: (1) that China will comply with all the terms of the agreement; (2) that China will not devalue its currency; and (3) that the inevitable increase in U.S. foreign investment will not lead to an increase in U.S. imports from China. Under the protections offered by this proposed trade agreement, U.S. firms clearly intend to greatly expand foreign direct investments in China, just as they did in Mexico after the NAFTA agreement was completed. U.S. affiliate plants in China will rapidly expand their exports to the United States and reduce U.S. exports to China, which will worsen the U.S. trade deficit, as was the case with Mexico after NAFTA took effect (Burke 2000).
If Congress approves this trade pact and grants China PNTR:
The absolute level of the U.S. trade deficit with China will increase by at least 80% between 1999 and 2010, resulting in the elimination of 872,091 jobs during the next decade, even if U.S. exports to China grow more rapidly than imports from that country.
Every state will suffer significant net job losses over the next decade, as U.S. trade deficits expand. Major losses will be experienced in California (84,294 jobs lost), Texas (50,409 lost), and Pennsylvania (45,824 lost). Eleven states will lose more than 28,500 jobs in this period.
Every industry in the United States will lose jobs due to increased trade deficits, including agriculture and other natural resources (5,095 jobs lost), services (58,391 lost), and most of all manufacturing (742,201 lost, representing 85% of total jobs destroyed).
Rising trade deficits with China will lead to more job losses
U.S. imports from China more than tripled in real terms between 1992 and 1999 (increasing 202%), while U.S. exports to China increased by only 69% in the same period, as shown in the top half of Table 1. The U.S. trade deficit of $16.5 billion with China in 1992 increased 256% to $58.7 billion in 1999 (all trade flows are reported in inflation-adjusted 1987 dollars). [1]
The USITC estimated that the China-WTO deal will increase U.S. exports to China by an average of 10.1% and U.S. imports from China by 6.4%
(USITC 1999, Table ES-4, xix). [2] A central weakness of the USITC study is that it fails to consider the underlying dynamic trends in U.S.-China trade or to state how those trends will be affected by China’s entry into the
WTO. Job losses caused by growing trade deficits with China are reported in the last column of Table 1. The United States lost 683,231 jobs due to growing trade deficits with China between 1992 and 1999. The
China-WTO deal under consideration will eliminate at least 872,091 jobs between 1999 and 2010, even with the USITC’s highly optimistic assumptions. If China devalues its currency or fails to live up to the terms of the agreement, job losses will be even larger.
The net total for jobs lost to growing trade deficits under the China-WTO deal reflects even higher levels of job turnover in exporting and import-competing industries (bottom half of Table 1). The expansion of exports to China is forecast to create 276,221 jobs between 1999 and 2010, while the growth in imports will eliminate 1,148,313 domestic jobs. All workers losing jobs, and most of those who move from one job to another, will experience substantial costs that usually include temporary and permanent reductions in wages and benefits.
When the economy is at or near full employment, as it was in 1999, then jobs destroyed by trade deficits will not always result in an increase in the overall level of unemployment. In this case, the most important effect of trade on the economy may be its role in moving labor out of one industry and into another. A total of 11.3 million workers — about 8.8% of the labor force — have either gained or lost a job opportunity due to trade between 1992 and 1999 (Scott 2000c). Thus, a significant share of the labor force was exposed to trade-related adjustment in the past seven years, which helps explain the rise in economic insecurity expressed by workers in this era, despite high levels of economic growth and historically low levels of unemployment.
Every state will suffer job losses
State-level employment in each of the 183 industries is used to estimate the job gains or losses of the
China-WTO deal in each of the 50 states. Every state in the United States will suffer significant job losses from the
China-WTO deal over the next decade, as shown in Figure 1.
Job losses for each state are reported in Table 2. Major losses will be experienced over the next decade in California (84,294 jobs lost), Texas (50,409 lost), and Pennsylvania (45,824 lost). Eleven states will lose more than 28,500 jobs in this period. Other states that will experience significant job losses include New York (58,699 jobs lost), North Carolina (47,151 lost), Tennessee (38,098 lost), Ohio (34,687 lost), and Massachusetts (28,501 lost). A number of farm states will also be hard hit, including Illinois (38,082 jobs lost), Indiana (30,324 lost), Minnesota (17,833 lost), and Kansas (2,573 lost).
Job losses will be felt in every sector of the economy
The China-WTO deal will eliminate jobs in every sector of the economy over the next decade, as shown in Table 3. These results include both the direct effects of trade on an industry, as well as the indirect effects on workers in industries that provide goods and services to exporting and import-competing industries (see Appendix 1). Thus, jobs will be lost in agriculture, mining, and manufacturing, all of which are sectors that directly compete with imports from China. However, large numbers of jobs will also be lost in construction, transportation, finance, and other services. Each of these sectors provides goods or services that are used in the production of traded goods.
The largest effects of China’s accession to the WTO will be felt in the manufacturing sector, with 85.1% of the total jobs lost due to rising trade deficits. The rise in imports from China will be responsible for 81.2% of the jobs lost in manufacturing. Interestingly, only 68.7% of the jobs gained through increased exports will be located in manufacturing. This is not, however, the result of higher wages paid in export-related industries (see Appendix 2). Rather, services production requires much higher levels of non-labor input than the manufacturing sector.
The surprising loss of jobs in agricultural industries
Overall employment in agriculture, forestry, and fishery industries is estimated to decline by about 5,000 jobs (as shown in Table 3), despite the USITC’s forecast of an improved trade balance for this sector.
The indirect effects of the massive $47 billion growth in the total U.S. trade deficit with China between 1999 and 2010 will offset the direct gains from the $440 million increase in agricultural exports to China. Thus, farmers will be hurt by the
China-WTO deal as well. Agri-business interests are the only sectors of the farm community that are sure to benefit from the
China-WTO deal, since they profit from the growth in both exports to and imports of farm products from China. Furthermore, if the actual impacts of the deal are worse than forecast by the
USITC, then job losses in the agricultural sector could accelerate, as they did following the completion of the NAFTA agreement.
Conclusion
The United States deserves a better deal. This proposed trade pact does not solve the current U.S. trade problem with China and will, in fact, make matters worse. By abandoning Congress’ annual review of trade relations with China, the United States is forever sacrificing all other means for dealing with this problem, leaving the weak WTO dispute resolution system as the only mechanism for addressing trade problems. The Clinton Administration’s proposal will eliminate the opportunity for direct, bilateral negotiations over trade. It should be clear that the United States would be better served by a deal that doesn’t trade away the best means of shaping a balanced trade relationship with China.
May 2000
The author thanks Jung Wook Lee and Nick Trebat for administrative and research assistance, and Jeff Faux and Christian Weller for comments on earlier drafts.
--------------------------------------------------------------------------------
Appendix 1
Methodology
This study uses the model developed in Rothstein and Scott (1997a and 1997b), which solves at least three problems prevalent in previous research on the employment impacts of trade, including:
the tendency to look only at the effects of exports and ignore imports;
the failure to adjust trade data for inflation;
the application of a single employment multiplier to all industries, despite differences in labor productivity and utilization.
The model developed here assumes that real U.S. imports in 1999 grow at the rates estimated by the
USITC, with exports increasing 10.1% per year and imports growing 6.4% per year
(USITC 1999, Table ES-4, xix). [3] These estimates do not take into account the rapid underlying expansion of U.S. imports, exports, and the bilateral trade deficit with China.
The USITC model assumes that the two economies were in equilibrium prior to the accession agreement, and that they will move to a new equilibrium in a short period of time after China joins the
WTO. This report, however, places the USITC forecast in a dynamic context by assuming that exports and imports continue to grow each year at the rates estimated, indefinitely, or until this new equilibrium growth path is disturbed by some other economic “event,” such as a currency crisis in China or the United States. This approach has been criticized by some academics, but these critics often have simply made up new estimates of the U.S.-China trade deficit that have no relationship to official U.S. government statistics. In fact, the dynamic model used in this report is extremely favorable to the government’s case, [4] illustrated by comparing the growth rates shown in the fourth column of Table 1.
This study assumes that U.S. trade with China increases each year at the overall rates forecast by the USITC in each of 183 industries. The resulting trade flows in 1999 and 2010 are shown in the bottom half of Table 1. Exports would increase by 188% in the next decade, as shown in the fourth column, an expansion that is 2.7 times larger than the increase that actually occurred between 1992 and 1999.
U.S. imports from China will expand by only 98% in the next decade (see the bottom half of Table 1), after increasing 202% in the past seven years alone. Thus, the USITC’s forecast assumes that the growth rate of exports will nearly triple, while import growth will fall by more than half. If these results were to be achieved, the
China-WTO agreement might be viewed as a truly remarkable milestone. Unfortunately, recent U.S. history with the NAFTA and WTO agreements suggests that these estimates widely overstate the actual benefits of the accession agreement.
For example, the United States had a small surplus in its trade with Mexico in 1993, the year before NAFTA took effect. This surplus turned into a deficit of $22.8 billion last year, which has resulted in the closure of thousands of U.S. factories and the loss of hundreds of thousands of jobs in this country (Scott 1999b and 2000b).
The NAFTA experience notwithstanding, this report uses the USITC’s estimates of the effects of the WTO agreement on U.S.-China trade to estimate the employment effects of that agreement, which is effectively a best-case scenario for the trade proposal. [5]
The model used here is based on the Bureau of Labor Statistics’ 183-sector employment requirements table, which was derived from the 1987 U.S. input-output table and adjusted to 1993 price and productivity levels (BLS 1996). A three-step process was used to estimate the effects of trade on the United States, by industry, and then to allocate those job losses to each of the 50 states.
Step 1: Conversion of trade data to constant dollars
We used three-digit-industry, SIC-based trade data (Bureau of the Census 2000). These were deflated to constant, 1987 dollars with industry-specific, chain-weighted price indices (BLS Office of Employment Projections 1999) that are based on the BLS producer price index (PPI). The BLS price indices for 1999 will not be released until sometime in the summer of 2000. 1998 and 1999 estimates for the annual rates of growth of the PPI (BLS 2000) at the three-digit SIC level were combined with a concordance of SIC and BLS three-digit industries, and used to construct an estimate of the PPI for each BLS industry in 1999. [6] The constructed BLS series was then used to deflate current dollar trade flows with China for 1992 and 1999.
Step 2: Estimating the national employment impacts of changing trade flows
The BLS 183-sector employment requirements table was used to estimate the employment impacts of trade for each of the 183 industries in the BLS model, and for groups of one-digit industries. [7] Results of these estimates are presented in Tables 1 and 3. Specifically, we defined E as the employment-requirements [183 x 183] matrix and let T be a [9 x 183] matrix of trade flows. The columns of T represent exports, imports, and the trade balance in period 1, period 2, and the changes in each of these variables over the period. Then job gains or losses for all industries, for each period and trade flow, matrix J, are determined by the following equation:
J = ET
J is also a [9 x 183] matrix, and the elements of each column are the sum of the direct and indirect job losses or gains in that industry. Thus, for example, element J1, 1 is the employment loss or gain in industry 1 due to exports in all 183 industries in period 1. Trade flows in 2010 were estimated, as described in the text, by assuming that exports increase by 10.1% per year and that imports expand by 6.4% per year, given real trade flows in each of the 183 BLS industries in 1999.
Step 3: Estimating the employment effects of trade at the state level
State-level employment effects were calculated by allocating imports and exports to the states on the basis of their shares of three-digit, industry-level employment (BLS 1997). [8] Results of these estimates are presented in Figure 1 and Table 2. An ES202 file (UI data) was used to construct S, a [50 x 183] matrix, the elements of which are the U.S. employment shares of each of the 183 BLS industries in each of the 50 states. Job gains or losses for each state, for each period, and flow, L are determined by the following equation:
L = SJ
In other words, job losses in each state L are estimated by allocating job losses in each industry, at the national level J, to the respective industries in each state S. The elements of L, which is a [50 x 9] matrix, are thus the sum of the job losses in each of the 50 states in all industries, for each of the nine trade flows in Table 1 (e.g., exports, imports, and the trade balance in 1992 and 1999 and the change in each variable in this period). The results of L for the change in the trade balance between 1999 and 2010, for each state, are summarized in Figure 1 and Table 2. This is the last column of matrix L — the others are not reported here but are available from the author upon request to rscott@epinet.org.
--------------------------------------------------------------------------------
Appendix 2
The dispute over trade and job creation
A prior EPI study of the effects of the WTO-deal on U.S. employment (Scott 2000a) used a “multiplier” relationship that assumed that $1 billion of U.S. exports would generate 13,000 jobs in the United States, following the earlier work of Gary Hufbauer at the Institute for International Economics. [9] Hufbauer has retracted his earlier private forecast and now claims that only 6,800 U.S. manufacturing jobs are created “per billion dollars of additional output” (Hufbauer and Rosen 2000, 7). [10]
Hufbauer’s new estimate of the employment multiplier is directly contradicted by the “domestic employment requirement matrix” published each year by the U.S. Bureau of Labor Statistics (Tables 1, 2, and 3 in this report are based on actual U.S. trade data for 1999 and the BLS employment-requirements matrix). These calculations, as described in Appendix 1, also show that U.S. exports generated 11,200 jobs per billion dollars of exports (measured in current 1999 dollars), including 7,700 manufacturing jobs. However, imports that are displaced by goods from China displaced 14,300 jobs per billion dollars, and the overall trade deficit resulted in a net loss of 15,000 jobs per billion.
Employment multipliers for exports are smaller than those for imports because manufacturing made up only 69% of U.S. jobs supported by exports to China in 1999, and 81% of U.S. import-jobs from that country. Services are the next largest source of employment from both exports and imports. Employment multipliers for exports are not lower because wages are higher in services (see Mishel et al. 1999, 129). Rather, the labor content of services is lower simply because profits, interest, and rent payments are a larger share of the costs of doing business in these sectors. Simply put, on average, exports generate less employment than competing imports, and the wages paid in those export industries are no better than in the more numerous import jobs that are displaced. This is especially true at the margin in those industries where exports and imports are expanding most rapidly (Scott, Schmitt, and Lee 1999) and where wages in import-competing industries (such as motor vehicles and electronics) are actually higher than in rapidly growing export sectors (such as agricultural products).
Hufbauer and Rosen (2000, 10) claim that the actual trade deficit in 1999 was $43 billion rather than $68 billion and that “the deficit numbers used by the opponents...are distorted because they miscount Chinese trade routed through Hong Kong” and because trade in services is not included in the deficit figures used. Hufbauer and Rosen’s claims, however, are simply inconsistent with the facts. In 1999 the United States had a surplus of $2.1 billion in goods trade with Hong Kong (Bureau of the Census 2000), and a surplus of $1.6 billion in services trade with China. These figures explain less than $4 billion of the claimed $25 billion “miscount” of China’s trade.
Hufbauer and Rosen’s claim that official U.S. trade data are “distorted” is particularly suspect. If the Clinton Administration’s own trade estimates are unreliable, then why are its estimates of the benefits of the China-WTO deal any more reliable? This report continues to rely on official, government estimates of U.S.-China trade flows. Inclusion of trade with Hong Kong and services trade with China would not significantly affect the results of this study.
--------------------------------------------------------------------------------
Endnotes
1. U.S. exports to China in current 1999 dollars were $13.1 billion, and imports from China were $81.8 billion, resulting in a trade deficit of $68.7 billion in 1999. [RETURN TO TEXT]
2. These results include all static and dynamic effects on U.S.-China trade only. [RETURN TO TEXT]
3. The USITC report also includes forecasts of export growth for selected 2-, 3-, and 4-digit industries. However, these estimates are incomplete, for the purposes of this study, which requires 3-digit growth forecasts for all components of U.S. trade. Furthermore, no forecast is presented of the expected growth of imports by industry from China. Therefore, the average rates of growth of exports and imports that were forecast by the USITC are applied to each 3-digit industry for consistency of treatment. [RETURN TO TEXT]
4. Hufbauer and Rosen (2000, 7) claim that “the EPI calculations are built on an absurd extrapolation of an exaggerated bilateral deficit.” This rather hyperbolic charge is based on numerous assertions that are at odds with official U.S. government trade statistics. See Appendix 2 for further discussion of the Hufbauer and Rosen critique of Scott (2000a). [RETURN TO TEXT]
5. See Scott (2000a) for a further discussion of three major reasons why the USITC has probably overestimated the benefits of the China Accession Agreement, including: (1) China’s history of violating the letter and spirit of every trade agreement it has signed with the United States for at least the past two decades; (2) exclusion of services from these estimates, especially since services are likely to facilitate foreign direct investment in China that will further increase the U.S. trade deficit (see Burke 2000); and (3) the implicit assumption that China will not devalue its currency, notwithstanding the fact that a 30% devaluation by China (last done in 1994) would more than offset the value of any and all tariff reductions included in the agreement (see forthcoming paper by Palley, AFL-CIO). [RETURN TO TEXT]
6. Three-digit PPI estimates were unavailable for a number of commodities, including farm products; lumber and wood products; metal mining; coal, oil, and natural gas; and non-metallic minerals. Two-digit PPI data were used to approximate price changes in these industries, and for a few manufacturing industries for which 3-digit PPI date were not available. [RETURN TO TEXT]
7. The most recent version of the BLS employment requirements table is available from the Bureau of Labor Statistics (1999). The documentation file for this matrix, “BLS 1998 Domestic Employment Requirements Matrix (DOMREQ98.DAT),” notes that “the entries in each row of the 1998 domestic employment requirements table show industry employment supported directly and indirectly per $1 million (1992 prices) of sales of goods to final users for the commodity shown at the head of each column.” An earlier version of this matrix (based on 1987 prices) is used here to maintain comparability with state employment shares (see Appendix 1). [RETURN TO TEXT]
8. Other studies (see California State World Trade Commission, 1996, which found 47,600 jobs created in California from increased trade with Canada alone) have allocated all employment effects to the state of the exporting company. This is problematic because the production—along with any attendant job effects—need not have taken place in the exporter’s state. If a California dealer buys cars from Chrysler and sells them to Mexico, these studies will find job creation in California. However, the cars are not made in California; the employment effects should instead be attributed to Michigan and other states with high levels of auto industry production. Likewise, if the same firm buys auto parts from Mexico, the loss of employment will occur in auto industry states, not in California. [RETURN TO TEXT]
9. These employment estimates assume that each $1 billion of exports generates 13,000 jobs in the domestic economy, following Hufbauer (1999), and that $1 billion of imports eliminates 13,000 jobs. [RETURN TO TEXT]
10. Hufbauer and Rosen do not provide input-output based evidence in support of this assertion (Hufbauer and Rosen 2000, 7). Rather, they present a completely ad hoc regression model (Hufbauer and Rosen 2000, Appendix C), based on aggregate data for U.S. manufacturing exports for 39 quarters between 1992 and 1999. The BLS employment-requirement matrix used in this study, which is based on long-established procedures and widely accepted national accounting frameworks, uses data for U.S. trade in 183 3-digit industries (based on the 1992 SIC classification). Given these differences in technique, it is somewhat surprising to find that Hufbauer and Rosen’s estimate falls within 13% of the BLS estimate for 1999 cited here. The Institute for International Economics ignored the non-manufacturing jobs associated with exports in its recent study; correcting for this would add another 3,500 jobs per billion of 1999 dollars to the manufacturing total derived here. [RETURN TO TEXT]
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References
Bronfenbrenner, Kate. 1997. “We’ll Close! Plant Closings, Plant-Closing Threats, Union Organizing and NAFTA.” Multinational Monitor. March, pp. 8-13.
Bureau of the Census. 2000. Unpublished data from “Special Compilation of U.S. Trade Statistics.” Available in machine readable form. Washington, D.C.: U.S. Department of Commerce.
Bureau of Labor Statistics. 2000. Selective Access link to Producer Price Index Revision-Current Series. < http://stats.bls.gov/sahome.html >
Bureau of Labor Statistics. 1999. Domestic Employment Requirement Matrix. < ftp://ftp.bls.gov/pub/special.requests/ep/ >
Bureau of Labor Statistics. 1997. ES202 Establishment Census. Washington, D.C.: U.S. Department of Labor.
Bureau of Labor Statistics, Office of Employment Projections. 1996. Employment Outlook: 1994-2005 Macroeconomic Data, Demand Time Series and Input Output Tables. Washington, D.C.: U.S. Department of Labor.
Bureau of Labor Statistics, Office of Employment Projections. 1999. Unpublished data from upcoming Employment Projections. Washington, D.C.: U.S. Department of Labor.
Burke, James. 2000. China, U.S. Multinationals, and the Trade Deficit: U.S. Firms Build Export-oriented Production Base in China’s Low-wage, Low Labor-protection Economy. Briefing Paper. Washington, D.C.: Economic Policy Institute.
California State World Trade Commission. 1996. “A Preliminary Assessment of the Agreement’s Impact on California.” Sacramento, Calif.: California State World Trade Commission.
China Trade Relations Working Group. 2000. “State by State Opportunity Reports.” < http://www.chinapntr.gov./statebystate8.htm >
Hufbauer, Gary. 1999. Personal correspondence regarding “Analysis on Implications of WTO Entry for China’s Economy” from the China Business Council (May 13).
Hufbauer, Gary, and Daniel H. Rosen. 2000. American Access to China’s Market: The Congressional Vote on PNTR. International Economics Policy Briefs. Washington, D.C.: Institute for International Economics.
Mishel, Lawrence, Jared Bernstein, and John Schmitt. 1999. The State of Working America: 1998-99. Ithaca, N.Y.: ILR Press, an imprint of Cornell University Press.
Rothstein, Jesse, and Robert E. Scott. 1997a. NAFTA’s Casualties: Employment Effects on Men, Women, and Minorities. Issue Brief #120. Washington, D.C.: Economic Policy Institute.
Rothstein, Jesse, and Robert E. Scott. 1997b. NAFTA and the States: Job Destruction Is Widespread. Issue Brief #119. Washington, D.C.: Economic Policy Institute.
Scott, Robert E, Thea Lee, and John Schmitt. 1997. Trading away good jobs:An Examination of Employment and Wages in the U.S., 1979-94. Briefing Paper. Washington, D.C.: Economic Policy Institute.
Scott, Robert E. 1999. NAFTA’s Pain Deepens: Job Destruction Accelerates in 1999 With Losses in Every State. Briefing Paper. Washington, D.C.: Economic Policy Institute.
Scott, Robert. E. 2000a. The High Cost of the China-WTO Deal: Administration’s Own Analysis Suggests Spiraling Deficit, Job Losses. Issue Brief #137. Washington, D.C.: Economic Policy Institute.
Scott, Robert E. 2000b. NAFTA Imports Lead Growth in U.S. Trade Deficit. Trade Fax. Washington, D.C.: Economic Policy Institute (February 18).
Scott, Robert E. 2000c. The Facts About Trade and Job Creation. Issue Brief #139. Washington, D.C.: Economic Policy Institute (March 24).
U.S. International Trade Commission (USITC). 1999. Assessment of the Economic Effects on the United States of China’s Accession to the WTO. Investigation No.332-403, Publication 3229. Washington, D.C: USITC.
The White House. 2000. “Commerce Secretary Daley Releases State Export Opportunity Reports Highlighting Benefits of Expanded Trade with China.” Press Release (April 12).
<http://www.whitehouse.gov. >
US
Textile Industry Calls on White House, Congress for Protection against
Asian Imports
(Original
article taken from website of Hong Kong Trade Development council at http://www.tdctrade.com/alert/us0112.htm)
On
6 June 2001, in a meeting with the Congressional Textile Caucus, the US
textile industry called for help against cheap foreign imports,
particularly those from East Asia. The meeting was chaired by
Representatives Howard Coble (Republican-North Carolina) and John Spratt
(Democrat-South Carolina), and was well attended by members of Congress
from southern textile producing states. In an attempt to emulate the
recent success of the US steel industry (story on Pg.6), US textile
producers would like to see the US government take a number of actions
that would protect the industry against low-cost imports and customs
fraud.
The US textile industry has suffered through a number
of turbulent years, and it continues to face, what may be euphemistically
called, "a challenging economic environment". According to the
industry, the combination of a strong dollar and the devaluation of many
Asian and other currencies as the result of the 1997 financial crisis has
resulted in a tidal wave of Asian textile and apparel imports, driving
down prices in the US market and causing the rapid decline of US textile
and apparel employment.
In the year 2000, total textile mill shipments fell for
the third consecutive year, declining approximately 1%, to US$ 77 billion,
the lowest level since 1993. This textile mill shipments' drop was the
first three-year decline in at least 40 years. Significant write-offs
resulted in an after-tax industry loss of approximately US$ 300 million
last year, following profits of US$ 700 million in 1999. Prior to 2000,
the US textile industry had not had an annual loss in more than 50 years.
Textile employment also continued its long-term decline in 2000. At the
end of the year 543,000 workers were employed in the sector, down 3%
year-on-year, or 15,000 workers below 1999.
In 2000, the one bright spot on the balance sheet of US
textile producers was the industry's export performance, which highlights
the importance of the North American Free Trade Agreement (NAFTA) and the
Caribbean Basin Trade Partnership Act (CBTPA). Last year, US industry
recorded a 12% increase year-on-year in exports of yarn, fabric and
made-up textile goods. Despite the strong US dollar, total textile exports
exceeded US$ 10 billion for the first time in history. Nonetheless, as the
US economic slowdown took hold in the last quarter of 2000, imports of
low-cost Asian textiles continued to exert downward pressure on domestic
textile prices.
In his 6 June address to the Congressional Textile
Caucus, Chuck Hayes, the president of the American Textile Manufacturers
Institute (ATMI), put it more bluntly, saying, "The US textile and
fibre industry is in a crisis situation". Hayes noted that the
aftershocks of the 1997 Asian financial crisis are still causing damage to
the US textile industry, as the currencies of major Asian textile
exporting countries have not regained their pre-1997 value.
According to ATMI, Asian textile products are entering
the US market at prices 35% below the level they had before the crisis.
The industry claims that this exchange rate situation gives Asian
producers a comparative advantage, which could destroy the US textile
industry, if the Bush administration and Congress do not act. Noting the
US steel industry's successes in persuading the Bush administration to
initiate an investigation under Section 201 of the US Trade Act of 1974,
which could result in establishing import quotas designed to give the
sector breathing space to restructure, the textile industry wants to
receive import relief of its own.
Such relief could take the shape of three distinct
approaches.
-
The US textile industry wants the Bush
administration to initiate antidumping and countervailing duty (AD/CVD)
investigations targeting non-market economies in Asia, such as China,
and all Asian countries that have devalued their currencies since
1997. With China's impending accession to the World Trade
Organisation (WTO), it is likely that China would be the principal
focus of such actions. Although Hayes did not name specific
countries, such action would presumably also include Turkey, which
devalued its currency earlier this year.
-
The industry sees as its second most pressing
problem the prevalence of customs fraud, including illegal
transhipment and smuggling. Singling out China, Hayes alleged that in
the past seventeen years, China has not fulfilled its obligations
under any of the six bilateral Sino-American textile and apparel
agreements.
A related issue is the smuggling of textiles into Mexico to gain
illegal NAFTA origin. The Mexican textile association estimates
that as much as 40% of the Mexican apparel market is made up of
smuggled goods from Asia. To remedy this situation, the US textile
industry advocates increased monitoring by the US Customs Service to
combat both smuggling and illegal transhipping of textile and apparel
products. This enhanced monitoring could include the establishment of
a limited number of ports of entry for textiles and apparel.
-
Finally, US textile manufacturers are concerned
that a new round of WTO negotiations could strike a fatal blow to the
industry. Consequently, the industry is lobbying Congress for support,
in Hayes' words, "to get the administration to include in its
objectives for the next WTO trade round, the exclusion of any cuts of
US textile and apparel tariffs."
It remains to be seen whether the Bush administration
will be receptive to any of these suggestions. Initially, US Trade
Representative Robert Zoellick had indicated that he preferred further
market opening initiatives to protecting endangered domestic industries.
However, the White House action in support of the US steel industry seems
to indicate that this particular position is negotiable, and the US
textile industry clearly hopes that it can make a persuasive argument for
protection against low-cost imports.
Is free trade a costly myth?
Washington
Times Wed
Feb 26 05:43:00 UTC 2003
Charles W. McMillion
President Bush's recent press conference on strengthening America's economy used cargo boxes as props with their true "Made in China" labels covered over, showing theoretical "Made in USA" labels.
This was just another act in a decade-old vaudeville routine of naive "free trade" theories. Increasingly, only the excuses are really made in America.
Americans borrowed and spent $2.4 trillion more for goods and services than we made in just the past decade. America is now the world's largest debtor, by far. And we are today borrowing or selling off assets at the record rate of $1 million per minute — that's one-half trillion dollars a year — just to sustain our great lifestyle.
Free Trade Vaudevillians shout that "foreign direct investment" (FDI) in the United States shows investor confidence. But the details reveal virtually all FDI is merely acquiring firms like Chrysler and Paine Webber for their worldwide assets.
Commerce Department reports show foreign trade has reduced gross domestic product (GDP) growth in 10 of the last 11 years, for an unprecedented total loss of more than 5 percent of GDP. The trade deficit likely reduced the meager growth rate in the last quarter of 2002 by more than one full percentage point.
This is the key reason that even during the asset-bubble economy of the 1990s, with a massive rise in private debt that has not vanished, U.S. growth trailed far behind world growth and was only one-third of China's growth rate.
Replaced by imports, U.S. output has not kept up with population growth and our own market. Last year, U.S. production of autos, trucks and parts fell $123 billion short of our own domestic market needs. We paid $203 billion for foreign-made automotive goods and earned just $80 billion from exports. Our $152 billion deficit shortfall just for office machines, TVs and clothing was triple our surplus for all traded services — which has fallen to an 11-year low.
Federal Reserve Chairman Alan Greenspan and others have finally spoken out about the immense pressures this unsustainable trade deficit puts on financial markets. Some catalyst — terrorism, an accident, a rumor — could cause interest rates to soar, the dollar to plunge and global financial markets to go into another of their now too familiar crises.
But the real, looming economic problems created by our huge and sustained trade deficits are far worse than immediate financial concerns.
The best global corporations and new technologies radically transformed trade from when it was mostly between developed countries and driven by who made the best product. Trade now undermines, rather than raises, current and future prosperity as firms outsource their most productive research, industries and jobs to places like China, which are far less productive but have vastly lower regulatory and wage costs.
Long gone are the days when the United States imported mostly oil and basic commodities while producing a surplus of sophisticated, high-value-added goods and services for export. Commerce Department data show the United States plunged into trade deficit last year even for our most advanced technology products, such as navigational and communication devices, high-tech machine tools and medical equipment.
Last year, Americans paid $28 billion more for computers and computer parts than we earned from exports. This was $5 billion more than our entire net earnings from so-called intellectual property — royalties and fees on all software, movies and Wal-Mart franchise fees abroad.
Outsourcing and imports are destroying millions of our best, most productive jobs in electronics, machinery, aircraft, autos, computer programming and engineering. They are being replaced by low-wage, labor-intensive jobs that cannot be outsourced in areas like healthcare, education, criminal justice, home repair, building security and local government.
This downward shift, and the price pressures on those jobs that remain, is why wages are now barely keeping up with inflation rather than growing by 4 percent per year as they did a generation ago. The shift also undermines tax receipts, worsening the exploding federal, state and local debt problems and service cutbacks.
There always have been people opposed to laws that require a minimum wage, prevent dumping toxic sludge in our streets, assure food safety or prevent predatory pricing from driving out competition. Many of these people have found support in the free-trade movement, both by outsourcing their production to China and other countries, where dictators or others prevent enforcement of such laws, and by declaring that now we must eliminate our own U.S. laws to be "competitive."
Extreme, unregulated global commerce is clearly hurting United States and world prosperity. It must be immediately and forcefully reformed in the best pragmatic traditions that made our country great.
Charles W. McMillion is president and chief economist of MBG Information Services, and former associate director of the Johns Hopkins University Policy Institute.
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