Yet another &!$% thread about trade with China

[ITR_champion]

It seems that any thread about international trade issues proceeds along predictable lines. On the one hand are those of us who think that free trade policies have been bad for the U.S. economy because they result in jobs getting sucked overseas, particularly to China. On the other hand are those who think that free trade allows the world economy to function more efficiently and that the jobs we lose are balanced by jobs that we gain from exporting stuff. The second group usually point to some robust industries remaining in the United States. The thread usually continues with both sides chanting their talking points and neither one connects with the others. As a member of the first group, I still have hope for breaking the deadlock. As I see it, the facts on the ground simply contradict the claims that there are advantages to global trade as we currently practice it.

First of all, we should define what trade is. In the Adam Smith understanding it works roughly like this. Suppose that country A is suitable for growing peanuts but not strawberries and country B is suitable for growing strawberries and not peanuts. Then A can grow peanuts and sell some to B, while B grows strawberries and sells some to B, and both can have peanut butter and jelly sandwiches. It’s a simplified example; in real life lots of things are traded, but the idea is still that each country produces some things, sell them to others, and buys from others what it can’t produce efficiently.

In the U.S.-China relationship, that simply does not happen. China does much more producing than we do, and we do much more buying than they do. This has always been true and the standard explanation at the start was simply that China was much poorer than us. As China became wealthier, the argument went, they would begin to buy more from us and their competitive advantage from cheap labor would shrink so they’d sell less to us. But now let’s see how that actually played out.

Prior to China’s accession to the World Trade Organization almost a decade ago, free trade proponents argued that the move would create American jobs and eliminate the country’s trade deficit. Neither prediction has proven accurate.

The U.S. trade shortfall with China hit a record high $273 billion last year and government data shows some 40 percent of factories with more than 250 employees closed down from 2001 to 2010.

While it can’t all be laid at China’s door, it is not a coincidence that after decades of more gradual decline, U.S. manufacturing took a nose dive after China’s entry into the WTO.

Obviously China’s wealth has increased hugely in that time, yet it hasn’t lead to trade balancing out. The standard theory advanced by free trade proponents simply hasn’t described the reality.

The second argument for trade with China is that it’s possible for American manufacturers to compete as long as we build stuff with high quality and advanced technology. Sure, the legions of serfs in China can sew underwear and make plastic toys and other cheap crap cheaper than us, but we’ll always have the advantage where it counts. But that hasn’t played out either. In the past few years, China has been shifting its focus away from making cheap crap and towards expensive, high-tech crap. Quoting from the same article:

Instead, Beijing is increasingly focused on moving up the chain to higher valued technology-based goods – which puts it in direct competition with the remaining power base of the U.S. manufacturing sector. And the technology-transfer terms that many big American companies are agreeing to when they do deals in China, and the research centers they are opening up there, means they could in some cases be signing their own death warrants.
…
Critics and academics warn that multinationals trading technology for market access have frequently found themselves a few years later losing out in export markets to Chinese competitors who were formerly their partners.

“The companies that hand over proprietary technology do so in the hope that they’ll be the ones to get the better end of the bargain,” said Eswar Prasad, a trade policy professor at Cornell University and a senior fellow at the Brookings Institution. “But so far the Chinese have come out ahead in most cases. Hope springs eternal, but it’s a very dangerous bargain to make.”

I highly recommend reading the entire article. It’s long and dull but worth it.

So, if the trend continues, China will continue to expand and America’s manufacturing sector will continue to shrink, and we’ll continue sending more and more money to them. Most importantly, even the high-tech manufacturers that have done well in America over the last decade will start to vanish as Chinese manufacturers take their place. It’s worth noting that many of America’s biggest manufacturers survive only because of government aid: think Detroit, Boeing, and any company with a connection to the military. In the years ahead the government will have to cut back its handouts due to budget constraints, which will make things even worse for American manufacturers.

[John_Mace]

What’s your solution to the “problem” and why will it work?

[Hbns]

Inflation.

It will slow the demand for consumer goods and encourage budgeting, saving, and general fiscal responsibility.

As for the rest. The genie is out of the bottle and it ain’t never going back.

[Ludovic]

Obviously China’s wealth has increased hugely in that time, yet it hasn’t lead to trade balancing out. The standard theory advanced by free trade proponents simply hasn’t described the reality.

If free trade were implemented between USA and China and there were still a trade imbalance, then the free trade proponents’ theories would be invalidated.

However, what I see is far from free trade, but rather China still manipulating its markets to make American goods much harder to sell in China than Chinese goods are in America. So-called “free trade proponents” are not so much in favor of enforcing that, but instead propose the incomplete theory that as long as we have cheap Chinese goods, the Chinese protectionism doesn’t matter. It is incomplete because it neglects to take into account the lost American jobs (or pretends that more jobs will magically appear,) and focuses instead on total GDP. Nations with a high income inequality but similar GDP per capita have a less robust economy and political stability.

[ITR_champion]

@Hbns

Inflation.

It will slow the demand for consumer goods and encourage budgeting, saving, and general fiscal responsibility.

Huh? Don’t we usually expect inflation to motivate more consumptions and less saving? If the value of your money is going to get wiped out by inflation, doesn’t it make more sense to just go ahead and spend it all?

[emacknight]

@ITR_champion

The second argument for trade with China is that it’s possible for American manufacturers to compete as long as we build stuff with high quality and advanced technology. Sure, the legions of serfs in China can sew underwear and make plastic toys and other cheap crap cheaper than us, but we’ll always have the advantage where it counts. But that hasn’t played out either. In the past few years, China has been shifting its focus away from making cheap crap and towards expensive, high-tech crap. Quoting from the same article:

I see this mistake made a lot in these discussions because we confuse what it means for something to be “high quality and advanced technology.” We tend to assume it means something like an iPad that seems really complex and hi-tech.

At least for now, what the US is producing is the “concept” of the iPad which is the “high quality and advanced technology” part of the equation. Once designed putting the thing together is relatively easy.

Making shoes, underwear, cars, and plastic toys used to be high tech at one point in time. Now we’ve reduced the complexity allowing Chinese factories to produce them cheaply. What they still can’t do is design or develop any of those products.

American companies spend billions developing extremely sophisticated biomedical devices. Look at the work done by Medtronic, Boston Scientific, and St Jude. The high level research is still done in the US, paying American engineers high salaries. The low level coding is done in the Ukraine, and the basic production done in Puerto Rico, Mexico, and now China.

Now, all three of those companies are scaling back their US workforce and hiring more overseas contractors. But what it actually means to the researchers is that less of their time is spent on low level work, and more of their time is focused on high level.

That is still the advantage the US has over China and most other countries, but it’s not going to last for ever. China and India are producing better and better engineers, but the best are still immigrating to the US, just like the best from Canada tend to move south (or north in the case of UofT grads working for medical device companies in Minneapolis).

For the next few years Chinese products will continue to carry the stink of low end production.

[emacknight]

@ITR_champion

Huh? Don’t we usually expect inflation to motivate more consumptions and less saving? If the value of your money is going to get wiped out by inflation, doesn’t it make more sense to just go ahead and spend it all?

Yes, higher inflation encourages demand and reduces saving.

However, AFTER inflation, once prices have gone up, demand will fall and people will probably have less to save.

[Dr.Love]

@ITR_champion

In the U.S.-China relationship, that simply does not happen. China does much more producing than we do, and we do much more buying than they do. This has always been true and the standard explanation at the start was simply that China was much poorer than us. As China became wealthier, the argument went, they would begin to buy more from us and their competitive advantage from cheap labor would shrink so they’d sell less to us. But now let’s see how that actually played out.

As a strong proponent of free trade, I’m going to start my contribution to this thread with an unusual statement: most “standard” arguments in favor of free trade are wrong. This is because the standard pro-trade arguments are made in terms that most people intuitively believe, but our intuitive beliefs are quite often wrong–especially when discussing something as complex as a national economy. One of the most basic erroneous beliefs is that imports are bad and exports are good. This comes, I think, from the belief that the goal of an economy is to have the most money. Not true. The “goal” of an economy, so far as it has goals, is to make more stuff with fewer resources, and importing from other economies is an important method of achieving this.

Did you know that nearly 50% of imports from China (and nearly 60% of imports overall) are capital goods and equipment? These are goods used by US businesses to make their own products more effectively. If the US government were to increase the price of these capital goods, US businesses would likely become much less competitive in the global market.

Obviously China’s wealth has increased hugely in that time, yet it hasn’t lead to trade balancing out. The standard theory advanced by free trade proponents simply hasn’t described the reality.

China’s wealth has increased a lot, but China is still a poor country. For example, the above estimates of China’s PPP GDP per capita still show it to be significantly poorer than Mexico.

Furthermore, there are some economists who argue that traditional bilateral trade calculations can’t handle the modern economy. When such calculations were first done, goods were mostly produced in a single country, and then exported to other countries. In the modern economy, manufacturing is often spread across many countries, each supplying different things to the final product. Yet traditional bilateral trade calculations are done assuming that only the country of final assembly contributed to the manufacturing of the product. The economists in the linked article claim that an accurate calculation would cut the US-China trade deficit in half.

US exports to China have grown significantly in the past decade. In fact, they grew by over 300% between 2000 and 2008, and by 468%(pdf, pg 7) from 2000 to 2010, far more than any other country.

The second argument for trade with China is that it’s possible for American manufacturers to compete as long as we build stuff with high quality and advanced technology. Sure, the legions of serfs in China can sew underwear and make plastic toys and other cheap crap cheaper than us, but we’ll always have the advantage where it counts. But that hasn’t played out either. In the past few years, China has been shifting its focus away from making cheap crap and towards expensive, high-tech crap. Quoting from the same article:

First, it’s ridiculous to make any economic argument claiming that some country will “always” have a comparative advantage in some field. Second, your article claims that the Chinese government is simply not respecting intellectual property rights. If they keep this policy up, it will eventually come back to haunt them when foreign firms refuse to invest in their economy.

The fact that the Chinese economy is moving towards higher value manufacturing is nothing to worry about. There are high tech companies based in dozens of highly developed countries around the world, and no country has managed to destroy any of the others. How will China do what these countries haven’t managed to?

So, if the trend continues, China will continue to expand and America’s manufacturing sector will continue to shrink, and we’ll continue sending more and more money to them. [My emphasis]

The bolded statement is simply false. I’ve pointed out many times on this board before that US manufacturing has been growing steadily for decades, see Chart 1. Yes, US Manufacturing took a big hit in the recession, but it’s been pulling itself out for 2 years and shows no signs of slowing down. High tech industries are doing better than other manufacturing industries, as seen in Chart 3. In particular, notice in the lower left, that the US is manufacturing 50% more semiconductors and computers than it did in 2007, despite the recession.

As a final note: there is almost nothing economically special about national borders. Most trade arguments, either for or against, are as valid when discussing trade across national borders as they are across state borders. If you believe that we ought to curtail trade (and perhaps immigration) between the US and China, should we also curtail trade (and immigration!?) between California and Michigan?

[Pleonast]

@ITR_champion

So, if the trend continues, China will continue to expand and America’s manufacturing sector will continue to shrink, and we’ll continue sending more and more money to them. Most importantly, even the high-tech manufacturers that have done well in America over the last decade will start to vanish as Chinese manufacturers take their place. It’s worth noting that many of America’s biggest manufacturers survive only because of government aid: think Detroit, Boeing, and any company with a connection to the military. In the years ahead the government will have to cut back its handouts due to budget constraints, which will make things even worse for American manufacturers.

The the focus on manufacturing and not the economy as a whole? Since most of the US economy is not manufacturing, you’re ignoring the largest component.

[John_Mace]

@Dr.Love

Furthermore, there are some economists who argue that traditional bilateral trade calculations can’t handle the modern economy. When such calculations were first done, goods were mostly produced in a single country, and then exported to other countries. In the modern economy, manufacturing is often spread across many countries, each supplying different things to the final product. Yet traditional bilateral trade calculations are done assuming that only the country of final assembly contributed to the manufacturing of the product. The economists in the linked article claim that an accurate calculation would cut the US-China trade deficit in half.

Good point. It’s often said that the iPhone, for example, is made in China. The final assembly is done there, but the actual Chinese contribution to the iPhone is about $6.

[XT]

Excellent post by Dr. Love…hit all the high points there.

@Dr. Love

The bolded statement is simply false. I’ve pointed out many times on this board before that US manufacturing has been growing steadily for decades, see Chart 1. Yes, US Manufacturing took a big hit in the recession, but it’s been pulling itself out for 2 years and shows no signs of slowing down. High tech industries are doing better than other manufacturing industries, as seen in Chart 3. In particular, notice in the lower left, that the US is manufacturing 50% more semiconductors and computers than it did in 2007, despite the recession.

I think part of the reason for this perception is that manufacturing JOBS have gone down, due to more automation and more efficient processes, so people assume that this means that US manufacturing is in decline.

-XT

[emacknight]

@Dr.Love

As a final note: there is almost nothing economically special about national borders. Most trade arguments, either for or against, are as valid when discussing trade across national borders as they are across state borders. If you believe that we ought to curtail trade (and perhaps immigration) between the US and China, should we also curtail trade (and immigration!?) between California and Michigan?

The rebuttal is that “free trade” doesn’t include freedom of movement. So now manufacturing an be done in China, but Americans can’t go there to work in the factories.

[An_Arky]

If we could just learn to live on a dollar a day, we wouldn’t have to worry about all this. Oops…

[emacknight]

@xtisme

Excellent post by Dr. Love…hit all the high points there.

I think part of the reason for this perception is that manufacturing JOBS have gone down, due to more automation and more efficient processes, so people assume that this means that US manufacturing is in decline.

-XT

but…but…but…without jobs who will buy stuff??? If we automate everything no one will be able to afford stuff!!!111one

[emacknight]

@An_Arky

If we could just learn to live on a dollar a day, we wouldn’t have to worry about all this. Oops…

What’s stopping you? If Americans wanted to they could live on considerably less than they do now.

[XT]

@emacknight

but…but…but…without jobs who will buy stuff??? If we automate everything no one will be able to afford stuff!!!111one

I figure the horned one will be along shortly (as soon as he notices the thread on his favoritest topic evah) to make just this point…again…and again…and again…

-XT

[CalMeacham]

Now, all three of those companies are scaling back their US workforce and hiring more overseas contractors. But what it actually means to the researchers is that less of their time is spent on low level work, and more of their time is focused on high level.

No, it means that US firms higher fewer U.S. engineers. the High Level ones aren’t being ogged down by 'low level" work, and never were – it was handled domestically.

[BlinkingDuck]

@Hbns

Inflation.

It will slow the demand for consumer goods and encourage budgeting, saving, and general fiscal responsibility.

As for the rest. The genie is out of the bottle and it ain’t never going back.

It can be put back in.

War with China would do wonders for reducing the trade deficit.

[BlinkingDuck]

@CalMeacham

No, it means that US firms higher fewer U.S. engineers. the High Level ones aren’t being ogged down by 'low level" work, and never were – it was handled domestically.

Where do new/young U.S. engineers cut their teeth? Will Chinas engineers always do low level work even in 50 years/current U.S. Senior engineers retire/die?

[BlinkingDuck]

Dr. Love.

My logical side understands, I think, the upside of free trade. However, I just can’t help but feel something is wrong. Perhaps dangerously wrong with what the U.S. is doing.

What makes a country great?

Perhaps…maybe…inertia has a role. A country is great because the people believe the country is great. The country has a history of being great so we will continue to be great.

However, you screw with this inertia and it could be…bad. When the young cannot find good jobs building things, or engineering things…or teching things…or medical researching things etc…then they will not do these things (duh). They may lose their elan…their inertia on these things and concentrate on things that (and my bias is showing here) that currently pay well and are rewarded but are (hey bias) just not really important. Business running, selling, managing companies etc.

Sure, these things are important. Very important. However, not nearly as important as building things! Designing new things. Innovation.

Sure, we can shift the lower end stuff overseas…but doesn’t that mean that our young people can’t get jobs doing it and theirs do? Their young people get experience…build their elan and in 50-200 years THEY have the inertia while we languish.

What’s to stop them from firing our business people, from firing our sales people in the future? I’m sure they will be able to run their own companies easily enough. However, we can’t quickly revamp the expertise to start building again because the inertia chain may be broken.

A few years ago I was put in charge of our India team. I was told “Mr Duck…we don’t ever see hiring an American for what you do ever again”. I can concentrate on high level stuff/managing and not worry about low level crap…but…how does a younger me learn how to do what I do in this day and age? What happens when I retire/die?? Who will replace me?

I know the above is probably not a bad problem…maybe. However, I just cannot think that we are playing with VERY dangerous forces here. You screw with your young at your peril.