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China’s WTO Entry, 15 Years On

by Brad Setser
January 18, 2017

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Late last year Tim Duy asked for an assessment of the decision to allow China to join the WTO, now that 15 years have passed.

Greg Ip met the call well before I did, in a remarkable essay.

But I will give my own two cents. Be warned, this isn’t a short post. Frankly it is an article disguised as a post. I added the subheadings to make it a bit easier on the eye.

Autor, Dorn, and Hanson Deserve All the Attention They Have Received

It now seems clear that the magnitude of the post-WTO China shock to manufacturing was significantly larger than was expected at the time of China’s entry into the WTO. China already had “most-favored-nation” (MFN)/“normal trade” access to the U.S. market, so it wasn’t clear that all that much would change with China’s WTO accession. But China’s pre-WTO access to the U.S. came with an annual Congressional review, and the resulting uncertainty seems to have deterred some firms from moving production to China.

The domestic labor market adjustment to the “China” shock was not smooth. Autor, Dorn, and Hanson’s research shows the China shock left a significant number of Americans temporarily without jobs and left some workers and communities permanently worse off. The U.S. labor market isn’t as homogenous or as flexible as many thought; displaced workers in the most exposed regions often dropped out of the work force rather than finding new, let alone better, jobs.

Similar effects to those that Autor, Dorn, and Hanson found in the U.S. also seem to be present in manufacturing intensive parts of a number of European countries (France, for example). Bob Davis and the Wall Street Journal also deserve credit for their reporting on this topic: Davis and his colleagues really helped flesh out the narrative that goes with the Autor, Dorn, and Hanson data.

Not All China—The Underreported Impact of Dollar Strength (2000-2002)

All that said, the shock from the rise in imports that came with China’s WTO entry was not the only source of the enormous decline in manufacturing jobs between 2000 and 2005.
The broad strength of the dollar from 2000 to 2002 mattered.

The late 1990s were actually pretty good years for U.S. manufacturing even with a relatively strong dollar. In the late 1990s the strong dollar came hand-in-hand with a surge in domestic U.S. demand for American-made as well as global manufactures. The data superhighways of the 1990s were often built with U.S. made equipment. The booming stock market—and low oil prices in the 1990s—created demand for “big” U.S. made SUVs. However, the strength of the dollar weighed on the U.S. economy after U.S. demand for capital goods collapsed. In the aftermath of the dot-com era and the collapse in domestic demand for capital goods, the U.S. needed to turn to exports to have a healthy economy—and from 2001 to 2003 exports fell along with domestic demand, leading a lot of manufacturing capacity to leave the U.S.

With the benefit of hindsight, I sort of think that Treasury Secretary Paul O’Neill should have rented out Yankee Stadium to announce a shift in dollar policy back then.

The dollar bubble burst in 2003. But the dollar only fell against the euro and some other major currencies. It didn’t fall against China, or fall by much against many Asian currencies. 2003 is really when China and others started intervening on an unprecedented scale to keep their currencies undervalued. China was hardly adding to its reserves at all when it joined the WTO. At the time, annual reserve growth, using my best estimates which attempt to count all hidden or shadow intervention, was 2-3 percent of China’s GDP. By 2006 it was ten percent of China’s GDP (counting hidden intervention through the banks); by 2007 it was 15 percent of China’s GDP (counting a new form of hidden intervention through the state banks). Based on the work of Joe Gagnon of Peterson Institute and his co-authors, I think that China’s intervention from 2003 to 2008 added between 3 and 6 percentage points to its current account surplus (I could argue for a higher number, actually—see the footnotes here). The market wasn’t allowed to work for a long time—China’s exchange rate didn’t really start to appreciate in a way that would push firms to reconsider their production structure until late 2007.

china-intervention-reserve-accumulation

By then much of the damage had been done. There seems to be a bit of path determinacy in the location of production decisions (to be fancy, hysteresis). Once industries and supply chains move to low-cost emerging economies, they have tended to stay put. Moving final assembly of electronic goods to Asia created pressures for the full supply chain to move to Asia, as Bradsher and Duhigg documented back in 2012.

WTO Accession Didn’t Make China an Easy Market for Other Countries’ Exports

Even if the currency issue is taken off the table, I suspect that the trade gains—or really the export gains— from integrating China into the WTO’s “rules” were overestimated.

It is now clear that WTO accession was not enough to make China into an easy market for foreign firms to supply from outside China.

Here is a point that I think should get a bit more emphasis. China’s imports of manufactures, net of its imports of imported components, peaked as a share of Chinese GDP in 2003—and have fallen steadily since then. There is no “WTO” effect on China’s imports of manufactures, properly measured (i.e. leaving out imports for re-export). Chinese imports of manufactures for China’s own use are now under 5 percent of China’s GDP—a low number compared to China’s peers. As a result, right now, China supplies roughly three times as many manufactures to the world as it buys for its own use (net of processing imports, manufactured exports around 12.5 percent of China’s GDP; net of processing imports, manufactured imports are around 4.5 percent of China’s GDP, for a manufacturing surplus of around 8 percent of China’s GDP).

china-manu-trade

Back in 2000 and 2001, China was expected to do well in the production of apparel and low-end consumer goods. But it was also expected to be a big market for a wide range of sophisticated U.S. and European capital goods. Broadly speaking that hasn’t been the case, setting aircraft aside. Some firms have succeeded in China, but generally by producing in China for the Chinese market, not by selling to China. Successful challenges to some specific Chinese practices in the WTO have yet to alter this pattern.

Mark Wu’s excellent article offers a plausible explanation for why. The WTO rules aren’t all that constraining in a country like China—thanks to state control of commanding heights enterprises and banks, and institutions, such as the National Development and Reform Commission (NRDC), that assure party control of major state firms and large investment projects.

Let me be concrete, and offer a few examples.

McKinsey’s 2016 China outlook notes that Chinese firms are now among the world leaders in wind turbines and high speed rail: “[China has the] potential to carve out a world-leading position in pharmaceuticals, semiconductors, and communications equipment in the way that it has done in high-speed rail and wind turbines.”

Yet China’s success in rail and wind wasn’t exactly a product of the magic of the market.

The Chinese used the purchasing power of the railway ministry to encourage foreign firms to form joint ventures with Chinese firms to develop China’s high speed rail infrastructure, and over time the foreign technology was “digested” by Chinese firms. And in wind power, equipment from Chinese companies got preference in the bidding for large wind farms to supply the state controlled power grid (even if sometimes the grid hasn’t always figured out how to make use of resulting energy supply, at least not yet).*

The state’s hand was clear, but not in ways that were obviously forbidden by the WTO. Or at least not in ways that have been successfully challenged in the WTO. Firms’ investment decisions aren’t technically government procurement if the investment is for the provision of a commercial service, and the state’s guidance isn’t always written down. Yet even today the preferences provided for local firms in strategic sectors, like medical equipment, aren’t exactly a secret that China tries all that hard to hide. McKinsey again: “Mindray, United Imaging Healthcare, and other smaller new Chinese players will continue to make inroads in market categories (for instance, CT scanners and MRI machines) that foreign suppliers now dominate. Government programs to subsidize purchases of Chinese-made equipment by the country’s hospitals are providing a boost…”

There are a few important sectors where Chinese demand isn’t met locally: notably aircraft (though China has plans for import substitution there) and high-end autos. But not nearly as many as would be needed for trade with China to be reasonably balanced, given China’s dominance in electronics manufacturing—and its increasing powers across a range of “engineering” sectors.

The U.S. for example, runs a significant trade deficit in capital goods with China (even after taking out computers). That wasn’t the expectation back in 2001.

us-capital-goods-deficit

As an aside—I fully recognize that China naturally will run a surplus in manufactures and import primary products/commodities: looking at manufacturing in isolation is a very partial analysis. Chinese demand for commodities did deliver large positive spillovers to commodity producers globally, even as higher commodity prices squeezed the real incomes of a lot of commodity consumers globally.

Agreed Safeguards Against Import Surges Were Under-Used

In the face of a China that didn’t deliver the expected market for manufactured exports from the advanced economies—and in the face of foreign exchange market intervention that reached 10 to 15 percent of China’s GDP in the period that immediately preceded the crisis—the U.S. and Europe remained relatively open to Chinese imports.

Mark Wu argues, correctly, that the WTO accession agreement provided a set of provisions that were designed to help manage the risks associated with China’s integration: the “non-market economy” provision, which made it easier for U.S. firms to bring dumping cases against China; and the “special safeguards” provision, which lowered the standard required for imposing temporary tariffs against a surge in imports from China for the twelve years after China’s WTO accession.

The non-market economy provision was certainly used, notably by the steel industry.

The special safeguards provision (section 421) wasn’t used much at all.

In no small part, this is because U.S. and European firms benefited from making use of Chinese production to meet global demand. The interests of U.S. firms and U.S. labor were not always aligned.

But 421 safeguards also were not used because the remedy if a function of discretionary decisions made by the executive branch, and the Bush 43 administration made it clear it wasn’t going to hand out safeguards easily. Robert Lighthizer, back in 2010:

“Between 2002 and 2005, the U.S. International Trade Commission (“ITC”) heard four cases in which it determined that the requirements for a China-specific safeguard had been met. In every case, however, the Bush Administration exercised its discretion to deny relief – effectively rendering Section 421 a dead letter. Indeed, after 2005 U.S. companies stopped even applying for safeguard measures from the Bush Administration. Thus, for much of the time that Section 421 was supposed to be available to U.S. companies, the U.S. government refused to provide any relief”

With the benefit of hindsight, I think it was a mistake not to make greater use of the 421 safeguard provision in the years following China’s WTO entry.** There were surges of imports left and right from 2002 to 2007 (and additional surges in imports of machinery in particular from 2010 to 2014). These surges had a material impact on many manufacturing dependent communities, especially in the American Midwest and Southeast (and in some smaller towns on the west coast that were part of the U.S. tech manufacturing sector). The threat of injury should not have been hard to show.

I also think there was a “421” based option—and an option that was within the agreed accession rules—that could have been used to respond to the initial China shock more effectively. The U.S. could have signaled that so long as China was intervening heavily to hold its currency down, it would be open to a ton of 421 safeguards cases—and hand out real sanctions in response.*** This would not have required Congressional action, nor would it have created a broader precedent that might be used against other countries that intervene to hold their currency down—unlike the various incarnations of the Schumer legislation. Some say that China would never have responded to public pressure on its currency, but I suspect that it would have found a way to shift its policy in the face of real sanctions that hindered China’s ability to export. And politically, the U.S. government would have put itself squarely on the side of those adversely affected by China’s policy of supporting its exports while hindering others’ exports into China.****

(Alternatively, the use of safeguards could have been linked to a request to change policies that were clearly impeding firms from producing outside China for sale inside China, though I personally prefer the currency ask as the main driver of adjustment: currency is market-based, and it doesn’t depend on successfully identifying and changing a ton of China’s domestic policies)

Concluding Thoughts

The initial China shock overlaps with the dollar shock. WTO accession made producing in China for the global market attractive, but did not made China into a great market for manufacturers looking to sell globally produced goods to China. Successful WTO challenges to individual Chinese practices haven’t changed the overall pattern—China’s imports of manufactures for its own use have slid steadily relative to China’s GDP after WTO accession. The more-limited-than-expected gains for manufacturers looking to sell to China though didn’t lead (until now, when the China shock is arguably starting to fade) to a serious reconsideration of the basic gains from China’s asymmetric integration, in part because U.S. and European firms captured many of the initial gains of China’s export success. And some “within the rules” remedies weren’t used as aggressively as they could have been to challenge China’s currency management and other discriminatory practices during the years immediately after China joined the WTO.**

One final note.

There is a huge difference between the 2002-2012 period and now. China’s currency was clearly under pressure to appreciate during most of that period, so letting the currency appreciate was the obvious option for bringing China’s trade into greater balance (the empirical evidence here is actually quite clear, Chinese exports and its trade balance respond as one would expect to changes in the real exchange rate).

China is a more difficult problem, at least intellectually, now than then. There is a plausible argument that—if capital controls are lifted and if China’s system of social insurance remains miserly so savings remains high—the natural market outcome is for China to export more savings and even more goods than it does now to the world. Fighting China’s intervention is in some ways fighting the last war. The correct fight right now is against the domestic policies that keep China’s savings so high, against a surge in capital outflows that leads to a yuan depreciation that then becomes entrenched (if China’s currency goes down, I worry it won’t go back up), and against Chinese import-substituting industrial policies that aim to displace major exports to China. Aircraft and semiconductors come to mind, but there are no doubt others (medical equipment?).***** China’s import-substituting industrial policy aims are at odds with a world that needs more Chinese imports (and less Chinese savings) to be in better balance.

Note: Edited to remove a few type-os subsequent to posting.

* For more on China’s policy of import substitution on high speed rail, see the FT’s Jamil Anderlini, a few years back: “these companies have spent years ‘transferring’, or selling, technology to state-backed partners in exchange for market access—only to be rewarded with shrinking market share in China as a result of state policies that favour local industry. Now these companies find their high-speed technology has been “digested”—defined by the government as a multistep process of buying foreign technology, innovating on that existing platform then selling it under a domestic brand—by former Chinese partners. Furthermore, the foreigners find themselves competing head-to-head for tenders all over the world with Chinese companies selling digested high-speed technology at discount prices, often with cheap state bank financing thrown in.” For more on import substitution on wind, see McKinsey’s Orr: “The wind turbine market in China is a clear example of the virtuous (for China) cycle that China’s industrial policy is sometimes able to deliver. Government-owned generators are the core customer for the turbines. They receive subsidies from the government for installing these turbines. The size of the market in China quickly grows to become the largest in the world. Government policy skews the market towards Chinese producers.”
** I am well aware of the argument that the tires safeguard raised import prices and hurt consumers, while doing more to raise tire production in Thailand, Malaysia, Indonesia, and Taiwan than in the U.S.. I also suspect that if anyone looked closely, they would find that China’s counter-sanctions on U.S. chicken feet exports were less effective than the U.S. tariffs on tires. Someone should look closely at the data on chicken parts trade through Hong Kong in 2009 and 2010—trade spats are so glamorous. I also am aware that negotiating leverage comes in part from the threat of taking actions that have a real impact on the other side, even if that comes at a cost to your own consumers.
*** I am dodging the question of whether this should be done in conjunction with a finding of manipulation. Remember manipulation is just a name. The designation matters less than the combination of sticks and carrots that could be brought to the table. A linkage could have been made between safeguards and currency without a formal designation, or it could have been done subsequent to a designation. The argument against designation is that it would make any appreciation into a loss of face. That argument has to be weighed against the fact that persuasion didn’t deliver much of a shift in China’s currency from 2003 to mid 2007 (the big move against the dollar was from mid 2007 to mid 2008; that one year period now accounts for about half of the cumulative appreciation from 2001 to 2016). I also am setting aside the option of using counter-vailing duties to combat currency undervaluation (or to counter the effects of intervention more specifically) in order to highlight the scope for using a “within the agreed rules” option. I personally favor well-designed counter-vailing duties for currency intervention, though only as a back-up if counter-intervention doesn’t work – but that is a topic for another time.
**** 421 safeguards also could have been used more aggressively in the early part of the Obama administration, though the case isn’t as clear as it was in the 2003 to 2007 period, as there weren’t quite as many import “surges” after the crisis—and the fact that the provision was set to expire in 2013 reduced interest in the remedy.
***** China is within its WTO rights to levy a 25 percent tariff on imported autos, but I think the high tariff here — in a sector where China actually imports significant sums from the rest of the world — ought to get a bit more attention. If China wants to be global trade leader, it could unilaterally bring its tariffs down to world levels. The EU’s tariff on autos is relatively high, but at 10 percent, it is well below China’s tariff.

17 Comments

  • Posted by Godfree Roberts

    “Midway in the sixteenth century China began to be the great repository of the early modern world’s newly discovered wealth in silver. Through the exchange of New World precious metals for Chinese products, in volumes that far exceeded China’s previous foreign trade, 16th century Ming China was becoming part of an economically interactive if not yet economically unified world. Long a participant in international maritime trade, China experienced the consequences of the greatly enlarged patterns in world trade.

    In that commerce China was essentially a seller of high-quality craft manufactures. Other countries could not compete either in quality or price.

    The colonies of the New World and the entire Mediterranean sphere of trade, from Portugal and Spain to the Ottoman Empire, began to complain that the influx of Chinese goods undermined their economies”. – F.W. Mote. ‘Imperial China’.

  • Posted by Mick Rolland

    Very important article. Even casual observers can appreciate that China has overtaken the US and Europe as a manufacturer, but sometimes we economists seem to have been blind to its consequences. China is now by far the largest exporter and manufacturer, and it is logical that its rise have substantial effects on competing industries and labor. (Just like the rise of very efficient Dutch and British cloth industries in the XVIIth and XVIIIth century ravaged Spanish and French producers). Brad documents the effects on the US, but a comparable impact study on Europe is still to be made -to the best of my knowledge.
    The point that China is a difficult market to export to (unless you export raw materials or intermediate products) is extremely important. And the historical comment by Godfree Roberts is very true: Spanish traders with China (via the Philippine trade in Manila with the Galleon fleet) and others found that the only European product they could sell was silver.

  • Posted by Kaleberg

    Even during the time of Augustus the Romans had a problem with balancing Roman exports against imports of Chinese silk. The only time China ever developed a serious market for an import product it was opium. The Chinese government even fought a war to stop the import, but lost. Emperor or commissar, the Chinese were never importers save when they had no choice. (Some of this is government policy; some of it is political in that China has never suffered an independent middle class.)

    That’s why I am amazed that anyone was ever slightly surprised at the trade imbalance. It was rather obvious through the 1990s that China was building out its manufacturing sector following the classic playbook with industrial policy, import controls, currency manipulation and the like. Friedrich List wrote the book on this is in the early 19th century and there are no industrial nations that haven’t followed its guidance.

    It didn’t help that manufacturing was getting massively more labor efficient in the 1990s. If I remember correctly, white goods dropped labor requirements by 75%, and soon after factories were shuttered and long time brand names were acquired by competitors. Admitting China to the WTO accelerated the process of deindustrialization, but not just in the sense of taking manufacturing jobs. The increasing labor efficiency is biting China too, which is why they have been cracking down politically for the last ten years. The real problem is the loss of technical know-how, since operating an industry is a spur to innovation in related areas.

    I’m glad some economists are now recognizing how naive they were 15-20 years ago. At the time I assumed it was willful, well paid ignorance, but in light of these modern assessments, I get the impression that many economists actually were that ahistorical and that uninformed about their own field of study. Let’s hope some good comes of this rethinking.

  • Posted by David O'Rear

    Back to 21st century.

    Where do we include in the assessment of China’s WTO impact on America the increase in household purchasing power – higher standards of living – that come from lower import prices?

    In 2000-05, for example, the PCE deflator for durable goods fell 1.8% p.a., including an 8.7% annual drop in the prices of video, audio, and photographic information processing equipment and media; and an 8.1% annual drop in the price of telephone and facsimile equipment.

    I realize those are small portions of household spending, but savings on clothing and footwear (-1.4% p.a.), furniture (1.4% p.a.) and recreational goods (5.0% p.a.) need to be taken into account somewhere in the overall assessment.

    And, then there’s off-shore relocation. Most consumer products imported to the US from China used to be made in Taiwan, Korea, Japan, Hong Kong or somewhere else outside the US. Or, for newer products (e.g., iPads) they really never were made in America.

    If production shifts from Taiwan to China, how does that make American workers worse off, particularly if it results in a lower purchase price in the US?

  • Posted by Brad Setser

    David — two things. First, in theory, trade raises the price of exports — soybeans for example — while lowering the price of imports, so looking at imports in isolation misleads. for much of the past 15 years, until supply caught up, china was helping to raise the global price of many commodities (oil) even as it lowered other prices. Chinese demand for bonds, including securitized housing bonds, also raised the absolute price of homes for a time. Two, more importantly, the evolution of prices needs to be assessed relative to the evolution of wages. Autor and others have found Chinese imports did put downward pressure on wages in manufacturing regions , and more generally trade (plus automation, and more recently, a lack of demand post global crisis) all are part of the reasons for weak wage growth. However you cut it, the era of the China shock is not associated with strong increases in real wages and the real purchasing power of the median American.

  • Posted by Brad Setser

    David — your second point, about Chinese imports displacing imports from elsewhere in Asia, is not backed by the data. Imports from Asia were unusually high in 2000 — US booming, Asia exporting in aftermath of its crisis — they should have fallen back with the fall in .com demand. Instead Asian imports were equal as a share of GDP to their .com peak by 2003, and exceeded that level substantially from 2003. Broadly speaking, the China shock is associated with an increase in imports as a share of GDP (imports from Asia, or manufactured imports) by about a percentage point. Because of the evolution of prices, real imports rose more — but that is a bit harder to quantify. Autor-Dorn-Hanson look speciifically at sectors where there was overlap between Chinese imports and US production; there were plenty.

    also it is worth remembering that — especially as time goes on — Chinese production also starts displacing American exports globally. Notably in say telecom equiptment. Cellphone and phone networks are now made by Huawei, not Motorola and Lucent. SANY competes with Catepillar, etc.

    The image that Chinese imports just displaced Taiwanese imports in the US market isn’t actually true, absolutely, total imports from Asia go up. Taiwan moved to producing more and more components, so the Taiwanese content in US consumption remains high. And Korea moved into autos in a big way.

    right now — looking at goods alone — imports from East Asia are a bit under 5% of US GDP, while exports are around 2% of US GDP, and as I said, goods imports rose over time as a share of GDP

  • Posted by Blissex

    Pretty good overall, lots of good details and insight.

  • Posted by Blissex

    «the China shock is not associated with strong increases in real wages and the real purchasing power of the median American.»

    But it has helped raise the price of residential property, boosted the profits of agribusiness and grow the price of farmland, has cut the prices of durables for those who can afford them, boosted the profits and share prices of USA corporates: it is ha been pretty good for the incomes of business and property owners, and that’s what matters to many voters. Also for Economists better real wages for median americans are “inflationary”. :-/

  • Posted by Blissex

    «At the time I assumed it was willful, well paid ignorance,»

    I think it was «willful, well paid ignorance» at many levels, especially corporate and political, also in large part motivated by the urgent goal of smashing unionized industries to downsize the unions. Union busters know well that unions thrive in industrial sectors that require large fixed capital investments and are important to the economy.

    «but in light of these modern assessments, I get the impression that many economists actually were that ahistorical and that uninformed about their own field of study.»

    For many “Economists” ahistoricity is an important goal, because it is obvious to them that the neoliberal/neocon Washington Consensus is the “end of history” and therefore anything that came before it can only be source of error or at least confusion, and the only knowledge that matters is in Mankiw’s textbook :-).

    However there have been many, many others with a different attitude, well rooted in history. Consider at least Landes “Wealth and poverty of nations” from 1998.

    For a different take on clever historical arguments, consider DeLong, who argued that the offshoring of many industries and jobs to China was astutely designed by the USA political class to enhance the future security of the USA by making the those governed by the chinese communist party grateful for having been given the jobs of many USA residents:

    http://www.bradford-delong.com/2016/04/project-syndicate-america-dog-screams-and-policy-errors.html
    «The national security of the United States fifty years hence will be much improved if schoolchildren in Mexico and China are then taught that the United States worked hard to help their economies become prosperous rather than tried to keep them as poor as possible as long as possible.»

    Offshoring and a large trade deficit as the modern version of the Marshall Plan, how clever. Little to do with boosting the profits of business owners and the real incomes of property owners. 🙂

  • Posted by Rob Schwab

    No comment, just a question from a fellow who got a D- in Economics 101 and, despite tutoring by Lester Thoreau, could raise it only to C-.

    I was prepared not to understand most of the underpinnings of your interesting analysis, but the question that bothers me the most is WHY the Bush and subsequent administrations/Congresses chose not to enforce WTO provisions against China. To me, that’s the most critical factor in the prolonged situation, yet you didn’t go into it. Please do so.
    Thanks.

  • Posted by David O'Rear

    Brad,

    “First, in theory, trade raises the price of exports — soybeans for example — while lowering the price of imports, so looking at imports in isolation misleads.”
    —Does that also take into account the – literally – hundreds of farmers producing soybeans for export vis-à-vis the hundreds of millions of people purchasing daily consumer products?

    “Chinese demand for bonds, including securitized housing bonds, also raised the absolute price of homes for a time.”
    —My understanding was that higher demand for bonds lowers the interest rates, which lowered the debt:service ratio, which increased the amount of spare change hiding under the mattress, but maybe I’m wrong.

    “Two, more importantly, the evolution of prices needs to be assessed relative to the evolution of wages.”
    —Hang on a second. Only about 8.5% of US nonfarm employees actually make stuff: nonsupervisory production workers in manufacturing. If prices of imported goods fall, that suggests a minimum of 91.5% of employees are neutral or better off.

    And, since we know that exporting companies pay better wages than those that only sell domestically, and that exporting companies overwhelmingly also import (and vice-versa), any effort to restrict trade is going to lower standards of living.

  • Posted by David O'Rear

    My second point:

    US imports from Japan, China and the NICs have been remarkably consistent, but not immune to movements in overall US demand.

    In 2000, they totaled about $360 billion. In 2001, $325 billion.
    In 2008, $590 billion, and in 2009 $485 billion. Ebbs and flows.

    I don’t understand why physical international trade should be compared to the overall size of the exporters’ GDP (except in national accounts). Rather, the appropriate comparison is share of importer’s imports, or market share.

    Despite those ebbs and flows, the sum total imports from these six economies in 1999-2014 was locked into a very tight range of from 29% to 31% of US imports. (Your results may vary, depending on BoP, customs or other adjustments and definitions.)

    What changed was the composition: Japan lost nearly half its share (from 12 to 6 percentage points), the NICs lost one third (from 9 to 3) and China picked up the slack, rising from 8% of US imports to over 20%.

    I know of no clearer way to illustrate the relocation of production-for-export-to-the-USA facilities from one East Asian manufacturing site to another. Nor, any alternative explanation as to what the data are telling us.

  • Posted by Brad

    David — why i share of imports relevant? (heavily influenced by oil prices by the way, and then by fall in oil import volumes) Seems like the relevant consideration is imports as a share of GDP, relative to exports as a share of GDP (understand why you might want to look at that globally but the data is essentially the same). There unambiguously has been a rise in imports from Asia v US GDP, and also in manufactured imports — one that hasn’t been made up by higher exports. And that is true even if you take your starting point at 2000, which should have been a cyclical peak in US imports (Asia recovering from crisis, US in the midst of an import intensive capex boom) — and i think starting in 2000 shades the analysis as its starts at the .com top.

    As for soybeans, looking only at the producers who grow for export misses the point. Export prices pull up domestic prices, law of one price and all Soybeans are an input into a ton of agricultural prices — chicken and pork are, from an agricutlural economics point of view, capital, a bit of labor and a lot of feed. So exporting commodities raised the price of commodities throughout the economy. Looking at manufactured consumer goods prices w-o also looking at the rise in commodity prices that came from exporting to china and chinese demand writ large (e..g us pays more for copper than it otherwise would) in my view cherry picks.

    and the same applies to workers released as a result of Chinese competition — they enter the overall labor force, and unambiguously (per the Autor Dorn and Hanson results) lower overall wages for all low skilled workers through manufacturing regions. there is a debate on the relative size of this effect nationally, as opposed to some specific regions , and thus how much trade contributed relative to other factors to the overall stagnation of wages, but most think it is part of the story. Standard trade theory (Stolpher Samuelson I think) tells us this is what is expected to happen when a low-wage economy joins the world. sum it up and the Chcina/ WTO period is not a period of strong real wage growth. lower prices on consumer goods yes, but not nominal wage growth than exceeded overall nominal price growth.

    US can/ should be faulted for not doing more to help — but i have lost patience for arguments that imply the rise in imports from asia was not real/ had no overall impact. Autor et al i think have settled the question. Import shares arguments are in my view a way of obscuring the clear rise in imports over time, one not offset by a rise in exports, and the associated shifts in the internal labor market

  • Posted by Brad Setser

    Rob. Two reasons. One is ideology. Many top folks in the Bush administration were committed free traders — and generally did not want to do 421 safeguards. They also had got loudly criticized for their steel safeguard early on (that one wasn’t primarily against China) and didn’t want to do more. Two is interests Lots of the surge in imports — particularly the initial surge — was to feel into retail networks run by US companies. Firms lowered cost, didn’t cut prices by as much, and had higher profit margins (Think Apple by sourcing the ipad and iphone production to China). And even when the US was importing components from Chinese firms that carried a Chinese brand so to speak, the components fed into products that US companies built and helped lower their cost (e.g. auto, other machinery, parts imports for the auto industry and the like).

    Early in the Obama administration i think there was also a sense that the most important thing was pulling the US and the world out of the huge slump in demand, and that protectionism would add to the global difficulties of recovery. And a sense that China through its 09 stimulus was doing its part to raise demand and raise imports. then in 2010 China let its currency move some, and there was perhaps too much optimism that China was generally heading in the right direction.

    It is also the case that after the 09 tires case, relatively few additoinal safeguards cases were brought. for whatever reason, industries that did want a safeguard tended to go for the anti-dumping safeguard not the surge safeguard. the new USTR has written extensively on this — his article, in the links above, is worth reading.

  • Posted by David O'Rear

    Brad,

    I thought is was obvious. Share of imports is important to understanding the relocation of production facilities from one off-shore location to another, and hence to the impact on US manufacturing jobs.

    When China provided 7-8% of US imports 15 years ago, Japan + the NICs provided 18%. In 2015, China provided 18.5% and Japan and the NICs less than 8%.

    As for Chinese demand for soybeans driving up US grocery prices, I don’t see it.

    CPI-urban food prices were rising 3% p.a. when China joined the WTO. Then, in 2003, 1%, then up to 4%, down to 2% and during the Bush Depression, 5-6%. In 2010, negative, then up to 5%, down to 1% in 2014, 3% and less than 1% last year. I don’t see a sustained China Shock to American food prices.

    In the 1980s, CPI urban food rose an average of 4.6% p.a., non-food 5.8%.
    In the 1990s, food 2.8% p.a., non-food 3.1% p.a.
    In the 2000s, food 2.9% p.a., non-food 2.5% p.a.
    Since January 2010, food 1.9% p.a., non-food 1.6% p.a.

  • Posted by Brad Setser

    David — my point on soybeans is that China raises the price of what it imports, so looking only at the fall in price of things that China exports doesn’t capture its overall impact. Directionally, China clearly put upward pressure on feed prices — though overall impact on soybean prices on final food prices is probably modest.

    the percent of imports argument though is one where i feel strongly. It is used by those seeking to minimize the impact of the rise in Asian imports. A constant share of a rise in imports v GDP (as happened from 97 to 07 — thanks in part to rising oil prices) means a higher level of imports to GDP. Asian imports unanbiguously rose as a percent of US GDP over this period (e.g. China didn’t just displace other ASian exports). And the calculation v GDP is a far better metric of impact on the US than import share when imports are rising. When i see the import share argument, i generally believe someone is trying to obscure the facts — to me the fair argument around gains is that argument that trading bonds and other fnancial assets for Asian goods (e.g. running a trade deficit) is healthy for the US economy, not that China didn’t impact the US economy b/c it just displaced imports from other markets.

  • Posted by Joe

    Really liked this post. I’m a historian rather than an economist, but seems like a few related but different questions.

    1) why didn’t China import more American manufactured goods?
    2) what was the impact of cheap Chinese imports on the American economy (esp. wages) (in context of lack of increase in Chinese imports of US manufactures)?
    3) could/should the US government have done more to defend American industries from the impact of Chinese imports?

    I think the answer to 3 is yes, 2 is complicated, but I am persuaded by your analysis. 1 is also complicated, but it seems the weakest part of your post, and I don’t think we can be confident that economic nationalism was key here. The cost differences between China and the US when it joined the WTO were immense. They had a pretty well educated population, very cheap labour, and lots of investment from other places in East Asia. Given these conditions, import substitution didn’t need all that much promotion from the government and I think hopes that China would become a big importer of US manufactured goods were unrealistic. McKinsey might be right, but the quote you give doesn’t really settle it for me. Most countries have subsidies for wind turbines, and how good is their case that the Chinese turbines were uncompetitive but chosen anyway?
    In any case it was a relatively brief historical moment; the legacy in part of decades of catastrophe and policy that had kept Chinese very poor but fairly well educated for such a poor country. Real wages rose a lot in the 2000s and early 2010s. The Chinese government could, of course, still chose to pursue import substitution, but it will be a lot more expensive and difficult than past import substitution policies, which I would characterize as fairly light-touch given the tail winds behind them. They may well try, but it strikes me as a shift into a new era for them.

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