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US-China Trade Deficit Reality Check

There's no doubt that America needs jobs in a big way. The US Bureau of Labor Statistics says that 14 million people are unemployed, and estimates that 25 million others can't find full-time work.

It's a gruesome situation, with home foreclosures rampant and, counting upside-down debt-to-income ratios, the poverty level at 16.6 percent.

But putting the blame squarely on the US-China trade deficit, as some political interests are doing, simply does not compute.

At issue is a briefing paper called "Growing US Trade Deficit with China Cost 2.8 million Jobs Between 2001 and 2010."

Scores of news stories are quoting the report published by the Economic Policy Institute (EPI), a think tank based in Washington, D.C., including such diverse and respected media outlets as the Los Angeles Times, The Atlantic, Seeking Alpha, International Business Times and Reuters.

Worse, some top US politicians are already using the number as well. Senate Majority Leader Harry Reid, for example, embracing a get-tough-with-Beijing stance as part of his jobs agenda, promised a swift vote to pressure China to let its renminbi currency rise in value, said: "The first major jobs bill we're going to have is (to) send a message to the Chinese, where we've lost 2.8 million jobs during the last eight years, and that is we're going to do something about the Chinese currency. And we're going to do that quickly."

It's not that the EPI is self-admittedly funded by American labor unions. There are scores of special interest and advocacy groups that sponsor research to support their particular viewpoint.

The problem is that the EPI, which has been producing similarly melodramatic reports annually since at least 2001, has funky methodology.

"The Economic Policy Institute's latest study, ‘Growing US Trade Deficit with China Cost 2.8 Million Jobs Between 2001 and 2010’ is still based on the faulty assumption that every product imported from China would have been made in the US otherwise," said Erin Ennis, vice president of the US-China Business Council. "As USCBC has said in response to previous versions of EPI’s report, this assumption is still decades wrong."

UBS analysts put it another way: "The overwhelming majority of multinational US firms operating in China—the automakers, the industrial chemical companies, the fast food chains and the beverage giants, the consumer products majors, et cetera, et cetera—are not 'outsourcing' for export back to the US. Instead, they are producing almost exclusively for the Chinese domestic market. And this means that they don’t have the luxury of choosing their geography in a flexible manner; they are local, and if wage and cost pressures intensify they take it in stride along with their other local competitors."

The Cato Institute's Dan Ikenson, an expert on WTO disputes, regional trade agreements and US-China trade issues said: "The Economic Policy Institute is at it again, asserting itself as an unrivaled purveyor of economic nonsense. Every year, the labor-sponsored lobbying shop produces a sensational report, which presumes to measure the deleterious impact of trade with China on US employment. And every year those figures become scripture to the likes of Sen. Sherrod Brown and Rep. Mike Michaud, in their efforts to make Americans less free to choose how and with whom to transact."

In simple terms, think about the television in your home. The label on the back probably says "Made in China". Fifteen years ago the label likely would have said "Made in Japan"—but it was still an import. Much of what we import from China replaces imports from other countries, not products we make in the US today, Ennis said. "A jobs impact study that ignores the facts undermines its own credibility."

But there's further evidence of why EPI's study is wrong: wages in China are rising for a variety of reasons including steady currency appreciation since 2010 (and as China's currency did between 2005 and 2008 before the global financial crisis). Production costs in China have increased, but most of those jobs aren't coming back to the United States—they're heading to other countries with cheaper wages.

Some workers nonetheless do lose their jobs to lower-cost imports. US policymakers need to ensure these workers have the opportunity to transition to new work in growth sectors of the economy.

"The key is to make sure our companies and workers stay competitive and remain global leaders in manufacturing—and that means sensible innovation, education, tax, healthcare, and energy policies," Ennis said. "The answer is not to build walls around the US to isolate ourselves from our growing export opportunities with China—especially given the continued difficulties facing the US economy."

US exports to China in 2010 were just over US$90 billion, up 32 percent from the previous year. China remains the third-largest export market for US goods, after Canada and Mexico, and has been the fastest growing market for US goods over the past decade.

EPI's focus on changing China's exchange rate to reduce the US trade deficit is equally flawed, Ennis noted. "Yes, China needs an exchange rate that better responds to China's global trade flows. But China's exchange rate is probably not as significant a factor in the US trade deficit that some make it out to be."

China's currency appreciated nearly 30 percent between 2005 and today.

"Rather than having a single-minded focus on China's currency, we should focus our efforts on addressing Chinese policies that keep US companies out of its market," Ennis said.

"When China is found to be flouting international trade rules, we should first seek direct dialogue to resolve the issue," Ennis said. "If good faith dialogue fails, we should use available trade tools, such as World Trade Organization (WTO) cases, when well-defined and winnable, to fix the problem. The US government has done this successfully through WTO cases on China's export subsidies, auto parts import barriers, financial news services market access barriers, and intellectual property rights enforcement shortcomings."

Most economists don't take EPI's methodology seriously because, for one, "it approximates job gains from export value and job losses from import value, as though there were a straight line correlation between the figures. There’s not," said Ikenson. "And it pretends that imports do not create or support US jobs, which is clearly wrong."

"After all, US producers—purchasing raw materials, components and capital equipment—accounted for more than half of the value of all US imports last year (US$1.05 trillion)," added Ikenson. "In other words, the majority of US imports support US economic activity, which is the basis of US employment. Yet EPI’s methodology counts those imports as jobs-reducing."

In my mind and others, you can blame China for a lot of things, but the loss of 2.8 million American jobs isn't one of them.

President Obama's American Jobs Act, a US$447 billion plan unveiled earlier this month, is expected to go to vote in Congress in October.

Full content of EJ Insight is available at www.ejinsight.com. Copyright Hong Kong Economic Journal Ltd. Republishing and editing are forbidden without authorization from Hong Kong Economic Journal. If there are any questions, please contact Chris Yeung (chrisyeung@hkej.com) for editorial matters and Margaret Lor (margaretlor@hkej.com) for sales and marketing matters.

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