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    Greater China
     Feb 9, 2005
China trade costs US 1.5 million jobs
By Robert E Scott

The rise in the United States' trade deficit with China between 1989 and 2003 caused the displacement of production that supported 1.5 million US jobs. Some of those jobs were related to production or services that ceased or moved elsewhere; others were jobs in supplying industries. These jobs reflect the effect on labor demand - in lost job opportunities - in an economy with a worsening balance between exports and imports. Most of those lost opportunities were in the high-wage and job-hemorrhaging manufacturing sector. The number of job opportunities lost each year grew rapidly during the 1990s and accelerated after China entered the World Trade Organization (WTO) in 2001. The loss of these potential jobs is just the most visible tip of China's impact on the US economy.

During the 14-year period covered by this study, there has been a significant shift in the kinds of industries suffering job displacement, a shift that runs counter to initial expectations. Where the largest impact was once felt in labor-intensive, lower-tech manufacturing industries such as apparel and shoes, the fastest growth in job displacement is now occurring in highly skilled and advanced technology areas once considered relatively immune, such as electronics, computers, and communications equipment.

Major findings of this study
  • The loss of job-supporting production in the United States due to growing trade deficits with China has more than doubled since it entered the WTO in 2001. The 1.5 million job opportunities lost nationwide are distributed among all 50 states and the District of Columbia, with the biggest losers in numeric terms being California (199,922), Texas (99,420), New York (81,721), Pennsylvania (69,822), Illinois (69,668), North Carolina (62,698), Florida (60,026), Ohio (58,094), Michigan (50,991) and Georgia (46,848).
  • The 10 hardest-hit states, as a share of total state employment, are Maine (14,951, or 2.47%), Arkansas (19,123, 1.67%), North Carolina (62,698, 1.65%), Rhode Island (7,548, 1.56%), New Hampshire (9,443, 1.53%), Indiana (43,533, 1.50%), Massachusetts (46,463, 1.46%), Wisconsin (39,668, 1.43%), Vermont (4,211, 1.41%) and California (199,922, 1.39%).
  • China's exports to the US of electronics, computers and communications equipment, along with other products that use more highly skilled labor and advanced technologies, are growing much faster than its exports of low-value, labor-intensive items such as apparel, shoes and plastic products.
  • Consequently, China now accounts for the entire US$32 billion US trade deficit in advanced-technology products (ATP).
  • China is also rapidly gaining advantage in more advanced industries such as autos and aerospace products.

    China's entry into the WTO was supposed to provide openings for a sufficiently rapid growth in US exports to reduce the trade deficit with China. While the export growth rate has increased since 2001 (from a very small base), the value of those exports has been swamped by a rapidly rising tide of imports. The WTO is a free-trade and investment agreement that has provided investors with a unique set of guarantees designed to stimulate foreign direct investment and the movement of factories around the world, especially from the US to low-wage locations such as China and Mexico.

    Furthermore, no protections were contained in the core of the agreement to maintain labor or environmental standards. China's refusal to revalue its exchange rate despite enormous demand for its currency is also a major contributor to the growth of the US trade deficit. Thus the WTO and the broader process of globalization have tilted the economic playing field in favor of investors and against workers and the environment, resulting in a race to the bottom in wages and environmental quality.

    Dissecting trade and employment flows
    An analysis of the effect of trade on the US economy begins by considering the impact of both imports and exports. If the United States exports 1,000 computers to China, many American workers are employed in their production. If, however, the US imports 1,000 computers from China rather than building them domestically, then a similar number of Americans who otherwise could have been employed by the office-machine industry and its suppliers will have to find other work.

    Hence increases in exports support domestic employment while increases in imports displace domestic production that could have supported more jobs in any given sector. Some analysts examine only the benefits of growing exports to the economy, while ignoring the role of imports. This is especially true at the state and metropolitan level, because the US Census Bureau generates a series of reports on exports from these regions. No comparable statistics on domestic production displaced by imports are available from the US government. This report is designed in part to begin filling that gap with estimates of the employment effects of imports and exports from China at the state level.

    Overview
    US exports increased from $5.8 billion in 1989 to $26.1 billion in 2003, a fourfold increase. Imports rose from $11.9 billion to $151.7 billion in the same period, a 12-fold increase on top of a base that was already twice as large as exports. As a result, the US-China trade deficit increased $119.5 billion, a 20-fold increase. The rate of growth of US trade with China has accelerated since 1989. Between 1989 and 1997, US imports from China grew an average of $6.4 billion per year while exports increased about $1 billion per year. Thus the trade deficit widened by $5.5 billion per year, on average, in this period.

    Between 1997 and 2001, import growth increased more than 50% (to $10 billion per year) while export growth picked up slightly (to $1.4 billion), and the trade gap expanded by $8.6 billion per year. Between 2001 and 2003, import growth jumped to $25 billion per year, a 150% rise in only four years. Exports grew rapidly, but not enough to offset the explosion in imports, so deficits increased, on average, $21 billion per year in 2002 and 2003, and these figures were restrained by the 2001 recession. The effect on the US economy from trade trends with China has clearly jumped on to a different plane.

    The employment impact of a change in trade is determined by its effect on the trade balance, the difference between exports and imports at the detailed sectoral level. Ignoring imports and counting only exports is like balancing a checkbook by counting deposits but not withdrawals. The officials, policy analysts and business leaders who ignore the negative effects of imports and talk only about the benefits of exports are engaging in false accounting.

    Between 1989 and 2003, the growth in US exports to China created demand that supported 199,000 additional US jobs. In the same period, the growth of imports displaced production that could have supported an additional 1,659,000 jobs. As a result, growth in the US trade with China eliminated a net 1,460,000 domestic job opportunities in this period.

    Manufactured goods make up the vast majority of the United States' trade with China. In 2003, 79% of US exports to China were manufactured goods, as were 99% of imports. However, only 40% of the jobs supported by growth in exports and 79% of the jobs supported by growth in imports were in manufacturing in the period between 2001 and 2003. The differences between these two shares (29% for exports and 19% for imports) reflect differences in the relationships of the industries involved with production that supports jobs in sectors such as transportation, utilities, services and government.

    Some economists reject the general notion that growing trade deficits can cause a net loss of job opportunities. Their most common argument is that employment levels are determined by macroeconomic policies such as monetary and fiscal policies and, most relevant to trade, exchange rates, and that, in the long run, the economy is usually at full employment. In fact, when the economy is operating at full employment, as in the late 1990s, growing trade deficits affect the distribution of jobs rather than the overall number of jobs in the economy. Growing trade deficits resulted in less employment in manufacturing and more jobs in non-traded goods such as services, retail trade and construction.

    In the long run, monetary and fiscal policies are usually adjusted to maintain full employment. If jobs in traded-goods industries pay better than the alternatives for workers affected by trade deficits, then the most important effects of growing trade deficits will be on the distribution of wages and incomes. Numerous studies have borne this out, demonstrating the significant negative effects that trade has had on the distribution of income over the past few decades of variable but generally growing trade deficits. In addition to offering higher wages for workers with comparable education and skills, manufacturing jobs also tend to offer better benefits.

    On the other hand, the US economy has operated well below potential output since 2001 because total employment growth has failed to keep up with growth in the working-age population. In this environment, the persistence of large and growing trade deficits has had a depressing effect on the overall level of employment, as well as its distribution across major sectors of the economy. The growth in the global US trade deficit reduced manufacturing jobs by 1.78 million between 1998 and 2003 alone. In 2003, the manufacturing sector represented only 11.2% of the 129.93 million total US jobs. But for the loss of these jobs in manufacturing and in the economy as a whole, the manufacturing share of US employment would have been 1.4 percentage points (12.3%) higher in 2003 than it actually was.

    China's entry into WTO
    The claim that new trade agreements will create jobs and raise incomes in the US has frequently been made by supporters of these agreements in both Republican and Democratic administrations. President George W Bush called the Senate's 2002 approval of fast-track trade negotiating authority (or Trade Promotion Authority, as it is now labeled) a "historic moment" that would lead to the creation of more jobs and more sales of US products abroad.

    Two weeks later, at his economic forum in Texas, he argued, "It is essential that we move aggressively [to negotiate new trade pacts] because trade means jobs. More trade means higher incomes for American workers." The administration of Bush's predecessor Bill Clinton confidently forecast that the huge US trade deficit with China would improve if Congress ratified the agreement to bring China into the WTO. President Clinton called the agreement "a win-win result for both countries". He pointed to growing exports to China that "now support hundreds of thousands of American jobs", and claimed, "These figures can grow substantially with the new access to the Chinese market the WTO agreement creates."

    Others in the Clinton White House, such as Kenneth Liberthal, the special adviser to the president and senior director for Asia Affairs at the National Security Council, had echoed Clinton's assessment: "Let's be clear as to why a trade deficit might decrease in the short term. China exports far more to the US than it imports from the US ... [The trade deficit] will not grow as much as it would have grown without this agreement, and over time clearly it will shrink with this agreement."

    In practice, the results of China's 2001 entry into the WTO have confounded these expectations. US exports to China increased by $8 billion between 2001 and 2003, an increase of 44%. US imports increased by $50 billion, or 49%, on a base of imports that was nearly six times the value of exports in 2001. As a result, the trade deficit increased by 50% in this two-year period alone.

    Growing trade deficits eliminated production supporting about 70,000 jobs per year between 1987 and 1997, and 105,000 jobs per year between 1997 and 2001. Between 2001 and 2003, job displacement soared to 234,000 per year, more than twice the rate of the preceding four years. This change is particularly noteworthy because total US domestic employment fell from 2001 to 2003 and the rate of growth of the US trade deficit with all countries slowed. Between 1997 and 2001, the US global trade deficit increased by 31% (7.8% per year). Between 2001 and 2003, it grew 10% (5.1% per year).

    Trade and employment displacement
    The great bulk of US imports from China and a sizable majority of US exports are manufactured goods. In 1989, the manufacturing share was 91.5% of imports and 74.2% of exports. Between 1989 and 1997, the total manufacturing deficit with China rose from $6.6 billion to $50 billion, a net change of $46.6 billion. This trend accelerated between 1997 and 2003. The net export deficit in manufactured goods rose from $50 billion to $129 billion in this period.



    In manufacturing alone, the growth of exports between 1989 and 1997 supported 48,742 new jobs in the US, while the growth of imports displaced production supporting 496,989 jobs, or a net loss of 448,247 job opportunities. Between 1997 and 2003 increased production for exports supported 63,000 jobs, while imports displaced 740,000 job opportunities, or a net loss of 677,000 manufacturing jobs. Note that the net loss of employment-supporting production accelerated, with 228,000 more manufacturing jobs displaced in the latter period, even though it was two years shorter.

    Employment displacement sped up further after China's WTO entry in 2001. China has moved aggressively up the product ladder from labor-intensive non-durable products such as clothes and shoes to more sophisticated machinery and durable goods. Over the past decade, a rapidly rising share of China's exports has consisted of electronics, machinery and transport equipment.

    The rapid development of China's industrial base and research capacity is closely related to the recent decline in the United States' trade position in ATP. Imports and exports in this category grew steadily between 1994 and 2000, with the US running a surplus throughout this period. Imports and exports dropped during the recession in 2001. Then imports leveled off and began to recover in 2002, but exports continued to decline in 2002 and stagnated in 2003. The US deficit reached $27 billion in 2003, and it continues to grow.

    In 2004, the US eliminated a modest ATP trade deficit with the rest of the world, but the deficit in ATP trade with China continued to soar. In 2003, 89% of China's ATP exports to the US were information and communication systems (such as computers and phones). US imports of ATP products from China rose from $20 billion in 2002 to a $42 billion annualized rate for the first nine months of 2004. The fact that the US has returned to an ATP trade balance with the rest of the world, even as the deficit with China continues to grow, belies the view that China exports "low-end" products to the US while the US exports "high-end" products to China.

    Other manufacturing industries
    In 1989, the United States' largest deficits were in apparel ($2.9 billion), leather and leather products ($977 million), household audio-video equipment ($697 million), communications equipment ($284 million), and rubber and plastic products ($542 million). That same year, the US had sizable trade surpluses with China in chemicals ($1.029 billion) and non-electrical machinery ($550 million), which included a small surplus in computer equipment ($83 million).

    In 1997, the United States' net export deficit with China in manufactured goods swelled to $51 billion. Of this total, apparel still had the largest deficit ($7.9 billion), but other sectors were catching up, including leather and leather products ($6.6 billion), household audio-video equipment ($3.5 billion) and communications equipment ($1.2 billion), and rubber and plastic products ($4.3 billion). Between 1989 and 1997, the US surplus with China in chemicals was in essence flat ($1 billion) and what had been a surplus in non-electrical machinery swung into a sizable deficit ($3.8 billion).

    The swing in non-electrical machinery was driven by a surge in computer exports to the US, resulting in a net export deficit of $4.2 billion in this sector. These data show that China is rapidly climbing the product ladder from low-wage, low-capital-intensive industries to sectors requiring more capital, skills and technology, which have supported rapid income growth in China. These trends continued and accelerated between 1997 and 2003.

    The net export deficit in manufactured goods rose from $50 billion to $129 billion in this period. The largest deficits ($22.6 billion) were now in non-electrical machinery, most of it computers ($17.6 billion). Other sectors with large deficits included audio and video equipment ($12.2 billion), communications equipment ($5.93 billion), and semiconductors. The trade deficit in semiconductors nearly tripled between 1997 and 2003 alone (from $2.2 billion to $6.4 billion). Net exports in leather goods soared to $12.9 billion in 2003, exceeding the apparel deficit ($10.6 billion). Furniture is another sector where the trade deficit has soared in the past six years, more than quadrupling from $1.6 billion in 1997 to $7.6 billion. China has widely diversified and expanded the base of its industrial structure and exports to the US over the past 14 years, moving rapidly up the production-technology ladder as it has done so.

    US exports have been less than $1 billion and largely stagnant in communications equipment, audio/video equipment, computer equipment and auto parts. There is more evidence of two-way trade in semiconductors, where exports rose from $500 million in 1989 to $2.5 billion in 2003 and the trade deficit has leveled off since 2000 as a result. The modest growth in US exports of non-electrical machinery to China was not sufficient to thwart a doubling of the trade deficit in 2003, when China's exports soared and imports from the US failed to keep pace. The rapid growth of imports and trade deficits in five of the six sectors covered in these figures is remarkably similar.

    Employment effects of trade with China
    The distribution of job losses between 1989 and 1997 closely follows changes in trade patterns, with a few major exceptions. The largest losses of job-supporting production in this period occurred in leather products (66,000 jobs) apparel (55,000), rubber and plastics (38,000), furniture (15,000), and electronic machinery (69,000) - which included audio/video equipment (18,500) and communications equipment (3,700 jobs). The textile industry also experienced a major indirect effect as it suffered a loss of output that would have supported 24,000 jobs due to the growth of apparel imports. During this period, the apparel deficit was more than 10 times as large as the deficit in textiles, yet both industries suffered a similar amount of employment displacement.

    Between 2001 and 2003, loss of job opportunities in apparel (24,000), textiles (23,000), leather products (14,000) and rubber and plastics (15,000) fell off sharply compared with the 1989-97 period. Job displacement increased sharply in furniture (39,000) and non-electrical machinery (50,000), including nearly a tripling in computers (30,000). The largest amount of employment displacement in this period occurred in electronic machinery (91,000 jobs), which included audio/video equipment (28,000), communications equipment (11,000, a near tripling), and semiconductors (25,000).

    Although the loss of job-supporting production in textiles and apparel sped up after China entered the WTO in 2001, the total remained well below levels that prevailed in the 1989-97 base period. Since 2001, the displacement of production that could support jobs has grown most rapidly in middle- and high-technology sectors such as furniture, computers, audio/video, communications equipment and semiconductors. China's move up the technology ladder in the opening years of the 21st century has been truly breathtaking. The net job displacement goes from 312,000 between 1989 and 1997 to 677,000 from 1997 to 2003, even though the second time period is far shorter than the first.

    Trade-related employment changes occurred in both high- and low-wage business service sectors. In the former, production supporting 13,000 jobs was displaced in the personnel supply (temporary help) industry, which offers many workers wages lower than those of their industrial counterparts, and few benefits. On the other higher-wage side of the scale, employment displacement included 3,200 depository institution jobs, 1,400 investment-banking jobs, 1,500 computer and data-processing jobs (though many of these could have been data-entry personnel), 12,000 miscellaneous business service jobs, 2,800 legal service jobs, 2,900 management and public relations jobs, 3,200 accounting jobs, and 5,200 job-training positions, along with a similar number of positions in many other service industries.

    Business service sectors continued to experience job losses on a similar scale in the later periods. Newly identified sectors include architecture and engineering services (2,800 jobs between 1997 and 2001, and 3,400 jobs between 2001 and 2003); management, scientific, and technical consulting (2,100 and 2,500 respectively); and scientific research and development and related services (5,200 and 6,400 jobs).

    The displacement of domestic production in these advanced scientific, technological and research industries illustrates how the demise of manufacturing brought on by growing trade deficits with China is eroding the foundations of US technological leadership in many industries. Two critical transportation-equipment industries - motor vehicles and aerospace - offer a good case in point. Businesses in both these sectors strongly supported China's entry into the WTO, claiming that the growth of the Chinese markets would increase demand for US products. However, those investments have not increased US employment in tandem with growing trade with China.

    Between 1989 and 1997, the growth in the US trade deficit with China had in essence no effect on the auto industry. Meanwhile the aerospace sector enjoyed substantial gains (8,100 jobs) due to its growing trade surpluses with China. However, by 2003 changing trade flows resulted in a net decline in employment-supporting production in both sectors. Overall, the auto industry lost production supporting 6,000 jobs between 1997 and 2001, and 5,000 jobs between 2001 and 2003, largely because of a surge in auto-parts imports from China.

    In aerospace, the growth in the job-creating trade surplus came to an end, and employment changes in essence ended by 2003. While the industry still maintains a substantial overall surplus in trade with China, the surplus has in effect stopped growing. It could become negative in the years ahead if parts imports begin to grow, as was the case for autos in 2003. If the US cannot compete with China in aerospace, it is not clear which sectors could provide the foundation for closing the trade gap in the future.

    States share the losses
    The growth of trade deficits with China has displaced production supporting jobs in all 50 states and the District of Columbia. Exports from every state have been offset by faster-rising imports. Net employment-displacement estimates between 1989 and 1997 range from a low of 334 in Alaska to a high of 81,800 in California. Other hard-hit states include Texas, New York, Pennsylvania, Illinois, North Carolina, Florida and Ohio, each with more than 20,000 jobs lost. These states all have high concentrations of industries where a large number of plants have moved to China (textiles and apparel, furniture, computers and electrical equipment, semiconductors, and motor-vehicle parts).

    Manufacturing industries suffered 77.8% of trade-related jobs displacement between 2001 and 2003 - 364,800 goods-manufacturing jobs in those two years alone. Net displacement of production-supporting employment was also negative for every state and the District of Columbia between 1997 and 2003. The magnitude of job losses in the states remained generally similar in each sub-period, though a few states moved up or down a notch or two between the two periods of 1997-2001 and 2001-03. For example, between 2001 and 2003, North Carolina and Georgia moved slightly up the list.

    States that fell in the rankings from the earlier to the latter period include Ohio, Indiana and Wisconsin. However, each of these states experienced large and significant job losses in both periods. For example, Wisconsin, the lowest-ranking state in this group, lost 12,300 job opportunities in the four years from 1997 to 2001 and 11,300 in the two years from 2001 to 2003. While job displacement in most states was modest compared with total employment, it is important to remember that the promise of new US jobs was the principal justification for China's entry into the WTO.

    Dr Robert E Scott is the director of international programs at the Economic Policy Institute, which made this article available.

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