March 17, 2006    Volume 13, No. 6

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China Trade Will Considerably Boost U.S. Wealth, Argues U.S.-China Business Council



BY RICHARD McCORMACK richard@manufacturingnews.com


The huge trade imbalance with China is a good thing, not a bad thing, even though trade with China will lead to the direct loss of an additional 500,000 manufacturing jobs by 2010, argues the U.S.-China Business Council, a trade group made up primarily of large companies doing business in China.

"The long-term benefits to the United States of trade with China are substantial and likely to endure," states the group in a 28-page assessment of the benefits of trade with China

The projected loss of 500,000 manufacturing jobs in "sensitive" industrial sectors over the next four years will be made up by the gain of 500,000 service sector jobs. "While this structural shift displaces some workers in manufacturing sectors and thus represents a real cost to workers in those sectors, the economy as a whole will benefit from permanent output and price effects of increased trade with China," the U.S.-China Business Council argues. "The overall impact should be a continuing and increasing positive boost to U.S. output, productivity, employment and real wages."

China is making Americans wealthier by saving them money -- lots of it, says the council. By 2010, the United States GDP will be 0.7 percent higher due to trade with China; prices will be 0.8 percent lower, resulting in an increase of $1,000 in real disposable income per U.S. household per year. That amount will constitute 1.9 percent of median (or 1.5 percent of average) annual family income in 2010.

The China effect will also force greater improvements in U.S. manufacturing productivity, argues the council. "Increased competition [will] cause the least productive manufacturing firms to close or to increase their productivity to compete with imports from China," says the report entitled "The China Effect: Assessing the Impact on the U.S. Economy of Trade and Investment With China."

Trade with China will boost productivity by 0.3 percent per year by 2010. "This higher productivity is the result of price effects, which allow U.S. firms that source some of their inputs from China or from other countries competing with China, to benefit from lower costs," says the council. "While improvements in economic efficiency are often associated with painful dislocations in certain sensitive industrial sectors, in the end, everybody benefits. Thus, the costs that we identify tend to be transitory and sector-specific, while the benefits tend to be permanent and distributed across the economy as a whole."

Displaced workers might not agree with the council's harsh assessment of their fate, but that's to be expected, says the U.S.-China Business Council. "The people whose jobs are at stake in those sectors are likely to consider the long-term benefits to the entire economy much less important to them personally," says the report, prepared by Oxford Economics and The Signal Group. "That trade-off between temporary or sector specific costs and permanent whole-economy benefits, is at the core of the policy debate in the United States and elsewhere on this issue. This trade off involves a value judgment that is beyond our purview as economists."

The U.S.-China Business Council notes that China's export machine is growing at a thunderous rate. Between 1990 and 2004, the volume of Chinese exports increased by 850 percent. During the same period, its share of world trade in manufactured goods rose from 2 percent to 11.5 percent.

The U.S.-China Business Council report uses Chinese government figures when it argues that China's imports are rising at the same level as exports. It states that the strong growth of imports into the country has tempered China's overall trade surplus, which amounted to $110 billion in 2004. But that isn't the figure that China's trading partners report. When the China Currency Coalition added up the trade figures from China's major trading partners, it found that China's surplus was more like $435.5 billion.

China has been unfairly singled out as being the primary cause of America's trade problems, says the council. "Part of the explanation of the increase in the overall U.S. current account deficit is that U.S. exporters are losing market share everywhere, not just in China," it notes. "It is important to consider the bilateral U.S.-China trade position in the context of the overall U.S. current account position, which has also deteriorated rapidly in recent years....It is far from clear that the story of the overall U.S. trade deficit is really a story about trade with China, as much as the media commentary seems to suggest. If anything the reverse seems to be true. The growing bilateral U.S.-China trade imbalance certainly plays its part in the overall picture, although the deterioration in the trade deficit with China has come at the expense of other East Asian exporters to the United States...Since 1992, the bilateral deficit with China [using Chinese government trade statistics] has constituted a roughly constant share of the total U.S. merchandise trade deficit."

The U.S. trade deficit can be attributed in large part to the unwillingness of Americans to save, says the council report. "The United States as a whole wants to borrow at a time when the rest of the world...wants to save. The result is a current account deficit in the United Sates with all countries, including China."

The value of China's currency has little to do with the trade imbalance, the U.S.-China Business Council argues. "Chinese exporters to the United States are likely to do their best to protect their market share in the event of an exchange rate revaluation, even if that means cutting their profits and/or squeezing their costs, including labor costs," says the council. "As a result, the RMB revaluation is unlikely to have much impact on the dollar price of U.S. imports from China. U.S. exporters to China would benefit, as they would enjoy greater profits or a chance to increase their market share, but since U.S. exports to China are small compared to U.S. imports from China, the impact of higher exports on the bilateral deficit would be marginal."

The council predicts that trade with China will continue to adversely impact "the manufacturing industry as a whole." In 2005, increased trade with China reduced U.S. manufacturing employment by 250,000, or 1.5 percent. Worst hit were textiles, office and telecom equipment and electrical machinery. "By contrast, however, U.S. service sector employment has increased," says the council. "By 2005, that increase is not sufficient fully to offset the decline in manufacturing employment, leaving economy-wide employment down, but only by an estimated 50,000 jobs."

A good portion of the 500,000 manufacturing workers who will lose their jobs between 2005 and 2010 due to increased imports from China will be permanently unemployed. But turnover is normal for a flexible economy, and the monthly loss of millions of jobs is common. In June, 2005, the council points out, 4.3 million jobs were lost, while 4.6 million were created. Besides, the loss of manufacturing jobs is a long-term trend and is inevitable. The job losses in manufacturing due to China's growth "would have been inevitable in the long run anyway," says the council. To view the report, go to http://www.chinabusinessforum.org/pdf/the-china-effect.pdf.



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