April 1, 2017    7 minute read

The US vs China: When Winners Win More than Losers Lose

No Way to Tip the Scales?    April 1, 2017    7 minute read

The US vs China: When Winners Win More than Losers Lose

Throughout his campaign, President Trump had a lot to say about China. And even after he won, his opinions of China continue, even through his inaugural speech.

“We’ve made other countries rich while the wealth, strength and confidence of our country has dissipated over the horizon. One by one, the factories shuttered and left our shores with not even a thought about the millions and millions of American workers that were left behind.”

Immediately the far left regarded this as an attempt to further his nationalist agenda and often claimed that his attacks against China were not only unwarranted but dishonest. Although it might come as a shock, some of what Donald Trump has claimed about China is correct.

The Other Perspective

The trouble with solely looking through an economist’s lens is that one tends to focus on finding the most good when one analyses things. Efficiency, in this case, is not just a measure of profit maximisation or inequality, but it is a measure of whether or not China stealing American jobs has done more good than bad overall. For the past several years, labour economists have been attempting to aggregate and analyse huge datasets in an attempt to understand how China’s rise in exports has affected our domestic labour market.

Although most economists had a good idea of the domestic impact, what they did not originally account for was how fast China’s economy was going to expand. Perhaps if one knew this, one would have been able to facilitate better and more appropriate foreign and domestic policies.

A Self-inflicted Injury?

Now, one does not want to completely undermine the left because yes, the US was willingly in agreement and an architect in facilitating jobs overseas in the hope that it would lower prices domestically and give everyone a better and more educated labour force in the long run.

This is what everyone wanted, and economists thought it would be a great move towards a better educated and well-rounded workforce. What they did not account for was China growing beyond what one could realistically handle for prosperity and long-term labour force growth.

Starting in the early 1990’s and ending in 2013, Chinese exports rose from a mere 2% of the world’s total exports to a whopping 20%. China, having started off decades behind the production frontier, had now become one of the most important world class producers. Their resources were beyond those of the US, and this is why one needed their imports.

Many countries eventually followed the same route, entering this new found world of globalisation, but there was always something different about China: its size. China continued to produce high-quality goods at very low prices, and this made them incredibly competitive to the rest of the world. This was the beginning of a lot of displacement of production for the US.

Focus on Skills

Since the early 50s, there has been increasing literature and studies on globalisation and its impacts. Economists and much of the world have generally known that globalisation will overall make a country wealthier and raise its GDP, but it also makes more and more people living in those countries poorer. This is where the problems began and have continued to arise with China. The US can handle these shifts well.

However, when one looks at more developing countries, they are facing far worse adverse effects from globalisation and China monopolising imports. Prior to this monopolisation, China frequented trade only with wealthy nations. They only traded expensive products like aircrafts, cars, wine, etc. Being that it was high-priced, this meant that it was also produced by high-skilled workers and expensive labour.

Prior to China opening up its trade barriers, they were solely focused on a set of expensive goods traded at high costs. They weren’t trying to see who could make the cheapest version of any of those. When China opened up its barriers, it all changed. Much of what the US trades with China are labour-intensive goods.

There is absolutely no product that China sells to the US, that could not be made here. The catch has always been that those products cannot be made as cheaply as they are made there. It has always been about price competition and not about specialisation.

Everything seemed perfect. The US get the products it needs at a lower price. Everyone wins. Right? Wrong.

The Price Conundrum

When the US – or any developed country for that matter – trades with a far less developed nation, they will almost always export their skill-intensive products – with labour performed by highly educated workers. And with that said, one will almost always import low-skilled products or those that are labour-intensive. When one is only exporting high-skilled intensive goods, then that will inevitably raise the demand for skilled and highly educated workers in the US.

On the other hand, by importing labour-intensive goods, one is reducing demand for blue-collar workers who lack the proper training and education to do skill intensive production. On the surface, the US “wins” because it gets lower prices on the goods that it needs and wants, and it gets to sell the goods that it is better at manufacturing at a much higher price to the rest of the world. Because of this, it will see dramatic increases in both GDP and wages for high-skilled and highly educated workers. However, it will ultimately make low-skilled and labour-intensive workers worse off because there is a decrease in demand overall for their labour.

The Ethical Standpoint

When one looks at the net effect of the workers’ losses from globalisation and trade with China, analytically, it is going to be positive. Meaning, the winners win more than the losers lose. Throwing away the graphs and the cost/benefit analysis, the distributional consequences are adverse because everyone would ultimately rather see the rich redistributing to the poor rather than the opposite. Right now, it is working in the opposite.

Trade is working more for the rich than it is for the poor. So a skill-intensive labour benefits from China, and from the cheaper consumer items that they need to purchase. Trade with China will never affect their personal salary. However, for at least a million domestic workers, trade with China did mean an absolute end to their jobs, and things only got worse for those people when China was accepted into the World Trade Organization in 2001.

Trump Had a Point

Even though over a million manufacturing jobs were completely eliminated between 2000 and 2007, economists and policymakers had hoped to see some of those workers moved into other sectors. The most troubling part of all of this is that Trump was right. Throughout that period, one does not see many relocations into other sectors to make up for such a trade shock. Economists and policymakers really hoped that in time, and with data, one would be able to see that these workers would be relocating into other sectors of the economy. Unfortunately, it is not the case.

There have been great falls in manufacturing labour that correspond almost equally to falls in overall employment rates over the same period of time. What economists have seen is that the higher-skilled displaced workers are among the only ones who are able to easily relocate into other sectors. Ultimately it is not really about the industry, but more about how skilled one was prior to losing their job. This is a determinant in who was able to relocate properly, but it has not been very many.

The Effect on Manufacturers

Aside from this very obvious and negative impact on domestic labour, Chinese competition has inevitably lowered profit margins for dozens of American manufacturers, which has resulted in less overall money for research and development. The nation is seeing more money, but less innovation.

So yes, China has stolen American jobs, but it has also helped China rapidly develop. Globalisation is a tricky thing, there are many pros and even more cons, but one that is for sure is that the trade deals with China have also brought 400 million Chinese out of poverty, while also raising incomes in Central and Southern America.

The winners are winning more than the losers are losing.

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