The past few months have seen rough patches for U.S.-China relations. In addition to trading barbs over political issues like President Obama's meeting with the Dalai Lama and a U.S. arms sale to Taiwan, the two juggernauts have traded diplomatic salvos pertaining to their increasingly intertwined economic relationship.

Anxious about the yawning trade deficit with China, some American lawmakers have recently stepped up anti-China rhetoric, calling on the U.S. government to label the Asian nation a “currency manipulator” and impose tariffs on Chinese goods. Falling back on its usual response, China has discouraged the U.S. from “politicizing economic issues.”

With high-level meetings approaching after U.S. Treasury Secretary Timothy Geithner's current trip to Beijing, there are signs that the rift is on the mend. But the idea that China keeps its currency, the yuan, at an artificially low exchange rate has long been a hot-button issue. Some legislators and many economists say that the undervalued currency keeps China's exports cheap and contributes to the lopsided trade gap with the U.S. Last year, U.S. exports to China totaled about $67 billion; imports were at $337 billion.

A recent Economic Policy Institute study aimed to quantify the impact of China's unfair trade surplus on U.S. employment. The study concluded that China trade has eliminated or displaced 2.4 million American jobs since China's accession to the World Trade Organization in 2001. Georgia was among the hardest-hit states, losing 78,100 jobs in the eight-year period, according to the study.

GlobalAtlanta interviewed Penelope Prime, an economist and China expert at Mercer University's Stetson School of Business and Economics in Atlanta, for some perspective on the effects of trade deficits on short-term job loss and long-term competitiveness.

GlobalAtlanta: Is the EPI study too simple of an assessment of how trade with China affects the U.S. job market? If so, what does this view fail to take into account?

Dr. Prime: Maintaining a solid base of manufacturing jobs, and creating more jobs generally, is essential to the long-run health of the U.S. economy. Job losses for any reason are always painful for the people and companies involved. Aside from cyclical downturns, the two other main reasons for economy-wide job pressures are labor-saving technologies and international trade.

When a country’s international trade increases there will be a shift of resources out of some industries (non-comparative advantage sectors) into others (comparative advantage sectors). This transition of resources takes time, however, and therefore the declining areas are immediately identifiable and measurable while the rising sectors are more diverse and actual jobs created due to just this shift are difficult to pinpoint. For example, studies on the long-run impact of Nafta show a substantial net benefit to the U.S. despite increased competition and shrinkage in some sectors. This is what we would expect of increased trade.

The main way that trade benefits an economy is that because of specialization, an economy uses resources more efficiently economy-wide, leading to higher output and incomes. (Other reasons include increased variety of goods, increased competition, sharing of ideas, etc.) The higher incomes become increased demand, which then create investment and jobs for those goods and services that are in demand. We cannot know ahead of time of where the increased income will be spent. This dynamic aspect of trade is not taken into account in the EPI Briefing, but is essential to the benefits of trade.

These are economy-wide shifts and benefits. Particular sectors and skill-sets will necessarily lose in the sense of fewer jobs and perhaps lower wages. Recent studies have shown that lower-skilled workers have seen their wages fall or stagnate during the last several decades, while more educated, higher-skilled workers have done well (VOX 2010).

With respect to U.S. investment abroad, U.S. companies have taken advantage of the global options to stay competitive and improve their profits and shareholder value. If they off-shore some of their production and make money doing this, then they can re-invest in their companies so that they grow. (If companies do not have these global options and do not stay competitive, then over time they will shrink and perhaps fail, which will obviously not help job creation.) If they are U.S. based companies, this often means that employment in the U.S. grows too, although the types of jobs are different; i.e., fewer of certain kinds of manufacturing jobs and more service related jobs, some of which are very sophisticated and well-paying. Recent academic discussion of this issue focuses on changes in jobs by occupations rather than changes in industries.

Economic historians looking over the long term generally conclude that shifting resources geographically to improve efficiency is a very powerful contributor to growth and wealth. The move to increase protectionism during the Great Depression is overwhelmingly seen as a devastating decision. The move of textiles, paper and other industries from the Northeast to the Southeast is also seen as having benefits for the U.S. economy although even today parts of the Northeast have not recovered. The implication is that to prevent such resource movements would probably lead to stagnation and so is more serious than making a social choice for slower growth in favor of increased equity or saving some jobs.

GlobalAtlanta: Does the U.S. trade deficit with China necessarily correlate directly to the number of American jobs lost? Why or why not?  

Dr. Prime: The discussion so far is relevant for U.S. trade with any country. China is just one of our many trading partners but has grown quickly to be one of our major trading partners with an unbalanced flow of trade. We used to worry about the U.S.-Japan trade balance; now we worry about the U.S.-China trade balance.

To measure the impact of trade on an economy, we cannot simply use the imports as the job-destroying part of trade and exports as the job-creating part of trade. As mentioned above, the transition of creating new demand is much more diverse across the economy and is not easy to capture. Also, as pointed out in the Heritage Foundation response [to the EPI study], there are jobs connected to imports that need to be considered, as well as jobs connected with capital flows and government services.

GlobalAtlanta: What has been the net effect of the growth in China's manufacturing might on the American manufacturing base since China's accession to the WTO in 2001? Are we, in fact, hemorrhaging jobs to China, as some argue, or are we simply moving up the value chain?

Dr. Prime: The U.S. is losing low-end jobs and some intermediate skilled jobs too, due to trade/off-shoring/outsourcing but also due to technological change. The trade job loss phenomenon is happening due to U.S. trade with many countries, not just China. At the same time, the U.S. economy and done well in terms of growth and low unemployment throughout the period under discussion, except for business cycle downturns due to the dot-com bubble and then the most recent financial issues. In terms of manufacturing jobs, there are some that go unfilled because of a lack of skilled labor to fill them. If our workers have trouble finding jobs in new industries or occupations, then the U.S. should design policies to help with this transition instead of preventing the transition by being protectionist. If the U.S. is experiencing increased inequality, perhaps because of the fall in demand for low skilled workers (VOX 2010), then if the U.S. would like to reverse this, policies should focus on education and redistribution, rather than preventing trade (and therefore competition).

GlobalAtlanta: President Obama and Treasury Secretary Timothy Geithner have repeatedly urged China to boost demand from its own consumers as part of a "global rebalancing" that shifts away from growth led by American consumer spending. They have said that a revalued yuan would achieve this effect by giving Chinese citizens more purchasing power, making inroads for U.S. exports there. Is this desired result inevitable?

Dr. Prime: Nothing is inevitable. Japan has tried creating domestic demand for a long time but has not succeeded. In China’s case, revaluation would help but is not a sufficient condition to boost domestic demand. That will take domestic reforms and more opening within China’s economy itself to competition and more private sector development. To its credit, the Chinese government has an active agenda to stimulate domestic demand—in the short-run via the stimulus and in the long-run via structural changes.

GlobalAtlanta: Some economists are saying that China is likely to soon begin allowing the yuan to slowly appreciate against the dollar, as it was doing before the financial crisis of 2008. Is this true, and what effect does U.S. pressure on the currency issue have on China's decisions?

Dr. Prime: If we can offer something China wants (e.g., vis-a-vis Taiwan, Tibet etc.) then U.S. pressure has some effect. It is also the case that most of China’s trading partners are currently upset with various aspects of the trading relationship, so it helps that the US is not alone. But domestically Chinese leaders cannot be seen as giving in to the US.

GlobalAtlanta: Some are saying that the yuan is as much as 40 percent undervalued against the dollar. If this were the case, how would the unlikely event of a rapid period of appreciation affect the U.S. operations of American companies manufacturing in and exporting from China?

Dr. Prime: That would depend on their strategy. If they are producing to sell domestically in China, or could switch to the domestic market, then it would not affect them as much. If they are exporting, it would cut into their profits and many would consider shifting to a cheaper location. This is true of a rapid, or slow, appreciation. Rapid is just harder to deal with.

Sources:

Miller, Terry, “China Job Loss Claims Miss the Big Picture,” WebMemo No.2845, The Heritage Foundation, March 24, 2010.

Scott, Robert E., “Unfair China Trade Costs Local Jobs,” EPI Briefing Paper #260, March 23, 2010.

Vox: http://www.voxeu.org/index.php?q=node/3920

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