America’s unemployment situation makes the news month after month with analysts offering many reasons, spins, and interpretations of the data.
The Economic Policy Institute (EPI) released a briefing paper in August, which pins a lot of the blame for U.S. unemployment on the U.S. trade deficit with the Chinese state.
When China was admitted as a member of the World Trade Organization (WTO) in 2001, market pundits predicted a relationship that would benefit not just America, but the entire world.
Instead, “the extraordinary growth of trade between China and the United States has had a dramatic effect on U.S. workers and the domestic economy, though in neither case has this effect been beneficial,” the EPI brief states.
EPI’s research into the subject matter was quite extensive. The economic policy think tank looked at the issue from many angles and came to the conclusion that currency manipulation, laws and regulations that violate WTO agreements, and trade distorting policies are the major causes affecting the U.S.-China trade imbalance and with it the U.S. employment situation.
“Growing U.S. trade deficit with China cost more than 2.7 million jobs between 2001 and 2011, with job losses in every state,” the EPI brief states.
Job loss as part of the U.S.-China trade imbalance is not the only loss suffered by Americans, but also wages for working-class Americans and the bargaining power gained through unionization have eroded.
“China is the most important source of downward wage pressure from trade with less-developed countries because it pays very low wages and because its products make up such a large portion of U.S. imports,” the EPI brief suggests.
Eyeing the U.S.-China Trade Deficit
“Economists have warned that the relationship [dependency between the United States and China] has contributed to a large U.S. current account deficit—$470.2 billion for 2010—and an expanding Chinese current account surplus—$306.2 billion for 2010—putting pressure on the global economy,” according to a November 2011 article on the Council on Foreign Relations website.
In 2011, the U.S.-China trade imbalance hit a record high of $295.4 billion and during the first seven months of 2012, it reached $174.4 billion. When annualized, the 2012 year-end trade deficit would amount to $299 billion.
According to the EPI, of the 2.7 million jobs lost between 2001 and 2011, 76.9 percent were in the manufacturing sector, and in that sector, computer and electronic products accounted for 38.8 percent or 1,064,800 jobs lost. In dollar terms, imports of computer and electronic products accounted for 54.9 percent of the $217.5 billion of the trade deficit between the Chinese state and the United States.
The trade deficit between the two countries increased not only because of an increase in products imported into the United States, but also because U.S. exports to the Chinese state have been decreasing on a monthly basis since March, when it peaked at $9.8 billion. With a few up and down movements during the following months, U.S. exports to China hit $8.55 billion by the end of July.
Multinationals in China’s Export Market
There are many interpretations and discussions about the U.S.-China trade imbalance and much responsibility is placed on the doorsteps of the U.S. government and global enterprises.
A Congressional Research Service (CRS) 2008 report on U.S. trade policy with China doesn’t put the blame solely on the Chinese regime, but points fingers at global companies. These multinationals have moved operations to China because of low-cost labor.
Exports from multinationals accounted for 1.9 percent ($600 million) of the Chinese state’s total exports in 1986. By 2006, exports from multinationals in China increased to 58.2 percent ($563.8 billion).
Back in 2008, market experts suggested that “much of the increase in U.S. imports (and hence, the rising U.S. trade deficit with China) is a result of China becoming a production platform for many foreign companies (who are the largest beneficiaries from this arrangement), rather than unfair Chinese trade policies,” according to the CRS report.
A recent article on the Seeking Alpha website suggests that the majority of products for export by the Chinese state are still made by companies with foreign ownership.
“Of China’s 200 biggest exporters last year, 153 were firms with a foreign stake,” a Sept. 10 article on the Seeking Alpha website suggests.
This year, General Motors Co., which was bailed out by the U.S. government and additionally received subsidies via tax credits and funding, and in which the U.S. Treasury still owns 26.5 percent, is exporting the production of Cadillacs and other GM cars to China, according to a July article on the Investors.com website and a Huffington Post article in May.
One problem voiced by many of the experts, be they economists, market analysts, or investment gurus, centers around the Chinese regime’s uncompromising demands. The charges most often heard are that in order to operate in China, foreign companies must provide proprietary technology to their Chinese partners and thus lose their competitive edge in the world market.
Figment of the Western Imagination
“Today, Made in China usually means that the product was assembled in China. What it doesn’t mean [is] that the product was manufactured there,” the Seeking Alpha article advises.
The trade deficit between the Chinese state and the United States is at unprecedented heights; however, other reasons, such as faulty reporting tactics, affect the trade deficit numbers as well.
A Chinese company assembles a product, but the parts are imported from other countries. The Chinese state pays foreign countries for the parts, which more often than not are paid with Chinese currency and not the U.S. dollar. This affects the trade deficit because the original cost for the parts does not show up.
For example, the production cost for the Apple iPhone is $196.00, of which actually only $8.00 is earned by the Hon Hai Precision Industry Co. Ltd. (Foxconn), the company that assembles the product. The parts are not produced in China but come from companies located in Taiwan, South Korea, and Japan, according to the Seeking Alpha article.
The EU SME Centre, a European Union support center for small- and medium-sized European companies, states in its “Processing Trade in China” report: “Processing trade in China refers to the business activity of importing all, or part of, the raw and auxiliary materials … from enterprises abroad to enterprises within China to carry out the manufacturing process. The finished products after processing or assembly by the enterprises within China will be re-exported.”
The implication is that other countries besides China are the hidden source of the trade imbalance between the Chinese state and the United States.
“As is so often the case with Things That Everybody Knows, the notion that China’s current growth is due to its export sector is false. … In fact, the primary beneficiaries of the ‘growth’ in China’s export sector isn’t China at all,” the Seeking Alpha article states.
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