Enter the Protectionist Dragon

by Daniel T. Griswold

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute in Washington.

America's rapidly expanding trade with China is awakening a dragon - the dragon of protectionism.

As trade has grown between the two giant economies, so too have trade tensions. Legislation sponsored by Sen. Charles Schumer, D-N.Y., would impose a draconian 27.5 percent tariff on imports from China because of its allegedly unfair exchange rate. Meanwhile, a recent study sponsored by a federal commission claims that trade with China destroyed 1.5 million jobs in the United States from 1989 through 2003.

The study, performed by the left-leaning Economic Policy Institute, did not actually count real people who lost their jobs, but instead applied a simplistic formula based on the shaky assumption that exports create jobs and imports destroy jobs. As usual, reality is more complicated - and more positive - than the critics of trade portray.

The most basic facts of the U.S. economy refute the claim that trade with China has caused a net decline in jobs. Between 1989 and 2003, the period covered by the EPI study, the U.S. economy created a net 20 million new jobs, while real compensation per hour for American workers during that same period rose by 19 percent. In other words, the American economy has not only created more jobs since 1989 but also better jobs.

Manufacturing also prospered during that period, despite competition from China in certain limited sectors. From 1989 to 2003, the volume of manufacturing output in U.S. factories rose by more than 50 percent. The number of workers employed in manufacturing fell by a net 3 million during that period, but that was because of soaring productivity, not displaced production. In fact, manufacturing employment in China has also been falling for that very same reason.

The sectors of U.S. manufacturing hit the hardest by the recent recession were the more export- oriented industries where imports from China are a small factor. The exception was the apparel industry, but production and employment in that sector has been declining for decades, long before China emerged as a global competitor.

It may be true that 1.5 million American workers lost their jobs over more than a decade because of import competition from China, but that number would be a drop in the bucket in a dynamic economy that is creating and destroying millions of jobs every year.

According to the U.S. Department of Labor, 15 million jobs are permanently eliminated in the U.S. economy in a typical year (while even more jobs are being created). Spread out over 15 years, the job losses claimed by the EPI study would represent less than 1 percent of gross jobs losses during that period. New technologies, domestic competition and imports from other countries account for the other 99 percent.

Claims of net job losses also ignore the full and mostly beneficial impact of trade with China on job creation in the United States. The most visible impact comes, of course, from rising exports to China. The people of China have become America's fifth-largest export market, ahead of Germany and France, and by far the fastest- growing major market for U.S. exports. Since 2000, while U.S. exports to the rest of the world have been essentially flat, exports to China have doubled.

The United States does run a huge bilateral trade deficit with China, in the neighborhood of $160 billion last year, but the Chinese did not just stuff those dollars under a mattress. Those dollars came back to the United States, mostly to buy U.S. Treasury bills, which puts downward pressure on U.S. interest rates, delivering more affordable capital for businesses and lower mortgage payments for households.

Tens of millions of American households can use the savings from lower mortgage payments to buy lots of useful products made in China - clothing, shoes, toys, household electronics and other consumer goods aimed at discount shoppers. Last year, total imports from China reached nearly $200 billion, but at the same time Americans were producing $11.7 trillion in gross domestic product. There is nothing alarming in the fact that we spent less than 2 percent of our GDP last year on products made by the one-fifth of mankind that lives in China.

Trade with China delivers tangible benefits to tens of millions of Americans through lower interest rates on their loans and lower prices at the store. The number of Americans adversely affected by that trade is surprisingly small, limited to a few industrial sectors that have been in decline for decades.

If misunderstandings about trade with China lead to higher tariffs on Chinese imports, American companies, workers and families will be among the casualties.

This article appeared in the Star-Ledger on February 13, 2005.