Chinese fire drill over trade

by Leland Teschler, Executive Editor

Many moons ago I encountered the first auto I’d ever seen that was manufactured in China. It sat in Detroit’s North American International Auto Show, the premier event for vehicle introductions in the U.S. My experience opening the driver-side door set the tone of that initial encounter: A loud and extended creeeeak came from the door hinges. So much for Chinese manufacturing prowess, I remember thinking.

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Little did I know that the Chinese were in the process of putting many U.S. manufacturing plants out of business. To get a sense of this well-chronicled trend, consider that analysts at the Manufacturing Alliance for Productivity and Innovation have pointed out that the U.S. exported only $74 billion in manufactured goods to China in 2013, while importing six times that amount of Chinese goods. MAPI policy analysts have also claimed this imbalance in trade “has been driven by China’s wanton violation of international rules related to its currency.”

But that’s not what economists writing for the National Bureau of Economic Research concluded when they tried to determine why there had been such a swift drop in U.S. manufacturing employment after about 2001. U.S. manufacturing employment stayed at about 18 million workers between 1965 and 2000 before plunging 18% from 2001 to 2007. The principal cause of the decline, claim economists Justin Pierce and Peter Schott, was the U.S. granting of Permanent Normal Trade Relations (PNTR) to China.

The interesting thing about PNTR was that, contrary to popular reports, it didn’t change the amount of tariff applied to Chinese goods coming into the U.S. – these rates had been pretty low as far back as the 1980s. The big change was that PNTR eliminated the need to annually renew the tariff rates. The renewal process was uncertain and politically contentious, the economists say. PNTR status ended the possibility that Chinese import tariffs could suddenly spike. And the spike could be significant; in 1999 U.S. tariffs on trade with countries lacking normal trade relations averaged about 36% higher than on those having this benefit.

Ending the chance for sudden hikes in Chinese import tariffs probably accounts for big declines in U.S. manufacturing employment, the economists say. One reason is that with uncertainty about tariffs gone, manufacturers had more incentive to open plants in China and establish relationships with Chinese suppliers. Likewise, PNTR may have given Chinese producers more reason to invest in the U.S. market, squeezing U.S. producers. U.S. manufacturers responded with capital- or skill-intensive production technologies or less labor-intensive mixes of products. Indeed, skill intensity rose in U.S. industries most affected by PNTR – the workers they shed were predominately blue collar and middle class.

A point to note about the two economists is that they have no political axe to grind on Chinese trade. They say inspiration for these ideas comes in part from models of investment under uncertainty, where firms are more likely to undertake irreversible investments if there is less ambiguity surrounding expected profits. They also point to circumstantial evidence that their model holds: After 2001, U.S. imports from China surged in the same industries that experienced the largest reductions in employment.

So there you have several reasons why China was able to take away 18% of U.S. manufacturing jobs in a mere six years. It had little to do with currency manipulation and much to do with U.S. companies willing to show the Chinese how to make doors that don’t creak.

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