Thoughtful Perspective on the Chinese Competitive Threat

A recent article by Economy.com does a good job of arguing that we need to avoid "China-bashing" and blaming our economic problems on the growth of the new Asian tiger. There is some wisdom to be had in the article. Here are some of the major points it makes. The overall message is this: "Don't lay all the blame on the Chinese, other factors are at work here."

Perhaps it is the current cyclical environment—with the U.S. economy in the midst of a jobless recovery after a prolonged slump—that has "Chicken Little" economists coming out of the woodwork. The current global economy is now producing a throng of doomsday scenarios, the most prominent of which is the hollowing out of the U.S. at the hands of China.

According to Economy.com, as with previous obsessions, the China challenge appears to be more threatening than it really is because of a narrow, partial analysis that looks only to the negative dimensions of the issues without considering the holistic economic environment.

As in the past, the current log of doomsday soothsayers will ultimately be proven wrong. Unfortunately, their crusade is not entirely harmless, as it diverts attention and resources away from legitimate concerns, and motivates policy reactions that are even more harmful than the imagined crises.

That the U.S. economy is experiencing stresses, both foreign and domestic in origin, is not in dispute. On the international side, the most prominent issue is America’s growing trade deficit with China, and the implied job losses that coincide with that deficit. The debate is characterized by more myth than fact, however, because precise numbers, aside from the actual value of the bilateral trade deficit, are difficult to come by.

One then has to consider the employment effects from these differing trade patterns. Despite the fact that Ross Perot disparaged free trade with Mexico as a job-destroying accord, Canada is actually contributing a larger share of the total deterioration in the U.S. trade balance since Nafta went into effect. Canada’s contribution is elevated due to its exports of oil and gas, which possess small employment elasticities. Indeed, one could argue that a large part of Canada’s exports to the U.S. are employment-creating by lowering energy costs.

Elsewhere, the analysis is more complex. While there are job losses associated with our trade deficit, the losses are not uniform across trading partners. Imports from China are disproportionately comprised of low value added goods, such that U.S. job losses associated with China trade will be comparatively low-wage, low-skilled positions. Among all of the costs imposed on the U.S. economy due to international exchange, these are the most easily offset by the gains that accrue to the entire economy arising from less expensive Chinese-made goods.

Trade with western Europe is a higher value added affair, however. The job losses associated with economic ties to that region are characterized by a higher educational attainment, higher wage levels, and would affect a larger cost to the U.S. economy—engineers who design commercial aircraft, for example.

Thus, the perspective that China is a uniquely destructive force for the U.S. economy does not stand up to scrutiny. While such sentiments may be popular with politicians, headline writers and protectionists, the truth is more complex. Certainly, whatever one says about China concerning the destructive effects of trade, one must also be willing to argue regarding western Europe. And yet calls for protectionism from our European trading partners are nonexistent, even as they savage our civilian aerospace industry.

What is problematic is the extent to which politically-motivated individuals are jumping on the bash-China bandwagon. Labor union leaders, business leaders, politicians, and even some economists are pushing for trade restrictions to stop the perceived bleeding of the American economy. Even at the highest levels, the Bush administration is pushing China to float the yuan, believing that a revaluation would stem the flow of Chinese imports.

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