The Realities of China-US Trade

China is being blamed by members of Congress and some labor leaders among others for the loss of good jobs in the United States and our country’s enormous balance of payments (trade) deficit.

Much of the mass media uncritically echoes the views of the economic China bashers on these matters. But the business press, which is more inclined to level with its readers because their money is involved, is more nuanced on the question of jobs, the trade deficit, and the value of China’s currency.1

US-China trade is taking place within an economic construct championed and enforced by the United States through the World Trade Organization. China thus plays by American rules, or it would not be allowed in the game.

The rules are based on neoliberal globalization, the contemporary modus operandi of American corporate capitalism and its bodyguard, the US government. Neoliberalism prefers a free trade orientation, deregulation of markets, privatization, and government noninterference. Globalization facilitates the current unprecedented internationalization of business. This is not to say Washington practices what it preaches about neoliberalism: it is quite interventionist on behalf of big business and protective of its trade when thought necessary.

Corporate and financial wealth in the US has one overriding objective: the acquisition of more wealth. Reducing the cost of labor is a key means of increasing profits. Many years ago, owners of factories in New England closed shop and moved to the poorer, non-union South. In the current era, corporate leaders are moving throughout world to take advantage of the lower wages paid in the post-colonial economies of developing Asia, Latin America and Africa. This window of opportunity will not last forever because workers in time are going to demand increasingly better compensation.

American multinationals operate in many such countries in quest of higher profits, and threaten to move elsewhere if wages rise. The largest number have been investing, building production facilities, and subcontracting to thousands of factories in China for over 20 years, all with Washington’s encouragement and understanding that a byproduct of this policy would be an increase in the trade deficit. The move to China, and the great profits that the corporations earn there, was considered worth the higher deficit. As Foreign Affairs magazine commented in 2002:

“U.S. multinational corporations are using China as an export platform in the face of unrelenting global competition. An increasing percentage of the products these affiliates export from China is destined for the U.S. market. These goods count as Chinese exports to the United States — even though they are shipped by US-owned entities — and they contribute to the ever-widening American trade deficit. European and Japanese multinationals are following a similar strategy of manufacturing in China for export, further adding to America’s import bill from that country. Together, the delivery of U.S. goods through affiliates and the increasing use of the mainland as an export base by the world’s leading multinational corporations could inhibit any significant improvement in the American trade deficit with China.”

And of course it has. Last year, the total U.S. trade deficit was $738.6 billion, a 9% decline from 2006 due to the weaker dollar (which increases demand for lower-priced American exports) and slowing economy. Some U.S. politicians convey the impression that China causes the entire deficit but about $400 billion of the 2007 total was because of ever increasing oil imports. By comparison, America’s petroleum import bill was only $48 billion a decade ago. China accounted for $256.3 billion of the U.S. trade deficit in 2007.

At least 30% the “Made in China” goods exported from that country to the U.S. actually is produced by subsidiaries of American multinational companies — and this accounts for a considerable portion of the deficit. (If American companies stayed in the U.S., and paid a decent wage, there wouldn’t be a big China deficit, and many jobs would have remained back home, but corporate profits would be smaller.) Another chunk of the China deficit is from imports of goods manufactured by subsidiaries of corporations from other advanced capitalist economies.

These U.S. and foreign corporations make the big bucks. American consumers of modest income tend to get cheaper prices from items imported from China, in many cases to partially compensate for lower wages or joblessness. China benefits, but gets the blame in Congress and from some unions for “stealing” American jobs and causing the deficit. The China bashers act as though our country’s runaway corporations and a complicit Washington are innocent bystanders, and that it was not in the ingrained nature of capitalism to put profits before the needs of the people.

The anti-Beijing coterie suggests China doesn’t buy American goods, but Commerce Secretary Carlos Gutierrez recently called China America’s “fastest growing market for U.S. exports.” China would import more, but the de-industrializing U.S. now produces far fewer goods than yesteryear, and many of them made in America are simply not competitive. Look at how the mighty U.S. auto industry deflated its own tires. In addition, a range of costly high technology items that Chinese buyers want to purchase are withheld for “national security” reasons.

China’s critics attribute some of the deficit to Beijing’s undervalued currency, the yuan. According to Ramapo College (NJ) Professor Behzad Yaghmaian in early May: “Conceding to American pressures, China relinquished its decade-long policy of pegging the yuan to the dollar in July 2005. The yuan rose by more than 5% in the first year, 12% by the end of 2007, and 14.13% by March 2008. Meanwhile, the trade deficit with China continued to swell by more than 15 percent.”

The U.S. wants China to increasingly strengthen the yuan, but Beijing responds that it must proceed gradually lest its own economy stumble. The stronger the yuan, the tighter the profit margins for a multitude of small and medium export-oriented Chinese companies, causing reductions in wages and layoffs at a time when the Communist Party is already concerned about worker protests.

On June 5, the PRC Customs Administration reported that for the first time in five years “China’s trade surplus is likely to shrink in 2008.” It fell 7.9% in the first four months of this year against a similar period in 2007. One of the factors was a “clear acceleration” in the value of the yuan against the dollar, plus increased global protectionism and a reduction in exports to the U.S. due to the apparent recession. The agency also forecast China’s “imports will keep picking up speed. This will result in a reversal of the swift growth in the trade surplus and in the trade imbalances.” In the wake of the American financial downturn, the European Union has now become China’s largest export market.

A significant problem behind the trade deficit is that the U.S. is simply spending much more money on imports than it has in the bank, and its trading partners (China and Japan mainly) have been lending Washington great sums of money for deficit financing. Much of America’s consumer and government spending is based on debt as well, and it is one of the symptoms of our country’s decline.

As far as jobs and wages for American workers are concerned, big business for the last few decades, has been carrying out a campaign to eviscerate the labor movement, to deprive workers of the fruits of increased productivity, to lower wages and benefits, and to oppose government intervention on the side of the working class/lower middle class and the poor. Shifting jobs overseas and turning the screw ever tighter on American workers at home is what’s causing job loss, not China.

As Business Week wrote a few years ago, “One reason politicians are whipping themselves into a frenzy over China is because it’s an easy way to explain the constant din of layoff announcements that show little sign of slowing.”

Much of America’s industrial base that has not gone abroad for superprofits has failed to keep up with the foreign competition (except in the production and export of weapons of war, where the U.S. is without peer). As progressive writer James Petras wrote a couple of years ago, “China bashing is merely a response to the loss of competitiveness. Nationalist demagogy in a declining global power is a compensatory mechanism.”

Contrary to many of the arguments seeking to blame China for some of the problems afflicting the U.S. economy and American workers, we think such difficulties were generated within our country’s capitalist system itself, compounded by the policies of neoliberalism and corporate globalization.

  1. Although there are many more recent pieces on the question of job loss and the trade deficit, we think Business Week’s article of Oct. 2, 2003 — “Is the Job Drain China’s Fault?” — touches lots of bases and holds up quite well. []
Jack A. Smith is the editor of the Hudson Valley Activist Newsletter. He can be reached at jacdon@earthlink.net. Read other articles by Jack.

14 comments on this article so far ...

Comments RSS feed

  1. Tennessee-Socialist said on July 16th, 2008 at 11:50am #

    GET READY FOR THE WORST FOLKS: A FINANCIAL TSUNAMI WILL DESTROY THE USA SOON !!

    THE FINANCIAL TSUNAMI

    The Next Big Wave is Breaking
    Fannie Mae Freddic Mac and US Mortgage Debt

    by F. William Engdahl

    The announcement by US Treasury Secretary Henry Paulson together with Federal Reserve chief Bernanke, that the US Government will bailout the two largest guarantors of housing mortgage debt—the Fannie Mae and Freddie Mac—far from calming financial markets, has confirmed what we have said repeatedly in this space: The Financial Tsunami which began in August 2007 in the relatively small “sub-prime” high risk US mortgage securitization market, far from being over, is only gathering momentum. As with the Tsunami which devastated Asia in wave after terrifying wave in December 2004, the financial Tsunami we are witnessing is a low-amplitude, long-wave phenomenon of trillions of dollars of financial securities being unwound, defaulted on, dumped on the market, far from being over, is only gathering momentum. As with the Tsunami which devastated Asia in wave after terrifying wave in December 2004, the financial Tsunami we are witnessing is a low-amplitude, long-wave phenomenon of trillions of dollars of financial securities being unwound, defaulted on, dumped on the market. But the scale of the latest wave to hit, the collapse of confidence in the two Government-Sponsored Entities, Freddie Mac and Fannie Mae, is a harbinger of worse to come in what will be the most devastating financial and economic catastrophe in United States history. The impact will be felt globally.

    The United States economy is in the early phase of its worst housing price collapse since the 1930’s. No end is in sight. Fannie Mae and Freddie Mac, as private stock companies, have gone to excesses in leveraging their risk, most as many private banks did. The financial market bought the bonds of Fannie Mae and Freddie Mac because they bet that the two were “Too Big To Fail,” i.e. that in a crisis the Government, that is the US taxpayer, would be forced to step in and bail them out.

    The two, Fannie Mae and Freddie Mac, either own or guarantee about half of the $12 trillion in outstanding US home mortgage loans, or about $6 trillion. To put that number into perspective, the entire 27 member states of the European Union in 2006 had an annual GDP of slightly more than $12 trillion, so $6 trillion would be half the GDP of the combined European Union economies, and almost three times the GDP of the Federal Republic of Germany.

    In addition to their home mortgage loans, Fannie Mae has another $831 in outstanding corporate bonds and Freddie Mac has $644 billion in corporate bonds.

    Freddie Mac owes $5.2 billion more than its assets today are worth meaning under current US “fair value” accounting rules, it is insolvent. Fair value of Fannie Mae assets has dropped 66% to $12 billion and may as well go negative next quarter. As the home prices continue to fall across America, and corporate bankruptcies spread, the size of the negative values of the two will explode.

    On July 14, symbolically the anniversary of Bastille Day, US Treasury Secretary Paulson, former chairman of the powerful Wall Street investment bank Goldman Sachs, stood on the steps of the US Treasury building in Washington, a clear attempt to add psychological gravitas, and announced that the Bush Administration would submit a bill proposal to Congress to make taxpayer guarantee of Freddie Mac and Fannie Mae explicit. In effect, in the present crisis it will mean nationalization of the $6 trillion agencies.

    The bailout by Paulson was accompanied by a statement by Bernanke that the Fed stood ready to pump unlimited liquidity into the two companies.

    The Federal Reserve is rapidly becoming the world’s largest financial garbage dump as for months it has agreed to accept banks’ Asset Backed Securities including sub-prime real estate bonds as collateral in return for US Treasury bond purchases. Now it agrees to add potentially $6 trillion in GSE real estate debt to that.

    However, the disaster in the two private companies was obvious as far back as 2003 when grave accounting abuses in the two companies were made public. In 2003 then President of the St. Louis Federal Reserve, William Poole publicly called for the US Government to cut its implied guarantee of Freddie Mac and Fannie Mae claiming then that the two lacked capital to weather severe financial crisis. Poole, whose warnings were dismissed by then Fed Chairman Greenspan, called repeatedly in 2006 and again in 2007 for Congress to repeal their charters and avoid the predictable taxpayer cost of a huge bailout

    As financial investors warn the Paulson bailout is not a bailout of the US economy but a direct bailout of his Wall Street financial cronies. What until recently had been the largest bank in terms of loans outstanding, Citigroup in New York, has been forced to raise billions in capital from Sovereign Wealth Funds in Saudi Arabia and elsewhere to remain in business. In its May announcement, Citigroup’s new Chairman Vikram Pandit announced plans to reduce the bank’s $2.2 billion balance sheet of liabilities. However, he never mentioned an added $1.1 trillion in Citigroup “off balance sheet” liabilities which include some of the highest risk deals in the US real estate and securitization era it so strongly backed. The Financial Accounting Standards Board in Connecticut, the official body defining bank accounting rules is demanding tighter disclosure standards. Analysts fear Citigroup could face devastating new losses as a result with value of liabilities exceeding the bank’s $90 billion market value. In December 2006 prior to the onset of the Tsunami crisis, Citigroup had a market value of more than $270 billion.

    .

  2. Samir said on July 16th, 2008 at 2:38pm #

    Funny how you failed to mention that China got into the WTO in 1997 by agreeing to WTO rules but then promptly proceeded to break those rules.

    Two of the major WTO rules that China violated are 1) they didn’t open their markets to U.S. products as agreed (there’s currently a 200% tariff on American cars sold in China), and 2) they didn’t allow their currency to float as required by WTO rules – instead artificially pegging it to 20% below the dollar and thus insuring that China’s products are ALWAYS cheaper in the USA than domestic products.

    Funny how you failed to mention that. China is in violation of its WTO agreement. China is ILLEGALLY keeping its currency low so it can suck wealth out of western nations. We would never put up with this from any other nation because it’s killing our economy. We won’t do anything about it because China has threatened us with nuclear war if we do not acquiesce to their terms.

    But like the good little leftist that you are, you failed to mention THOSE realities. Like all good liberals you see only that which fits the preconceived view that you want to hold, rather than seeing FACTS.

    I hope you enjoy fighting the Chinese on U.S. soil because that is the next step in China’s plan: once they have all our wealth and manufacturing, they will come for our land. And they will not hesitate to use nuclear weapons on us.

    You’d better wake up and fast instead of being an apologist for the Communist China that you so obviously love so much.

  3. Donald Hawkins said on July 16th, 2008 at 6:54pm #

    In just a few years because of climate change China big trouble. Food, water and people headed North into Russia. The Earth is warming and in some places a little faster. North pole is one place China is another. In the States California is in a bit of trouble and sea level rise when will that start to happen it already has. The temperatures in Greenland right this second are just 9 degrees above the last 100 years and those glaciers are moving into the sea fast. 20 foot of sea level rise probably to late to stop. China and the States need to wise up and fast. There is a World power and it’s called the Earth and it has it’s own rules.

  4. peterb said on July 16th, 2008 at 8:39pm #

    Samir:If I’m not mistaken you are an Indian, it goes without saying….

    Anyway,the WTO was founded to meet US needs and only for the US and you have to play by Americans rules. I’m glad that China is not playing blindly by the rules (to US heart’s content).In fact it was a WRONG decision for China to join the WTO since they are not well-experienced in world trading and China’s market is still very young.80% of Chinese (and non American international managers)who understand business thinks US is just using China to make money and to penetrate Chinese market with the plan to monopolize the market and ultimately the consumers.However, Chinese prefer to do business with Europeans and other non American entities.China insiders noticed that more JVs and contracts were given to Europeans and more Chinese businesses are being opened outside of US. If you think that American companies are closing in China , think about it, it doesn’t take that long before they are replaced by non US companies. Getting into China business isn’t easy, the competition is very tough and being asked by Chinese to replace a departing American company felt like gift from heaven b/c they will make it easy for a new company and they even will take care of it so as to keep their natives employed. If Americans have negative attitudes towards Chinese, I would say the feeling is mutual and what’s sad is China has nothing to lose.If you travel around S-E Asia ( I’m in fact doing it now) China’s muscles are everywhere.From Chinese products to business establishments to big banks adorned with Chinese calligraphy, they are everywhere.In Philippines for instance, Chinese banks (or owned)are just everywhere (70%).It was in ChinaBank where I went to change my $ bills (the tellers are young and gorgeous).

  5. evie said on July 17th, 2008 at 6:50am #

    peterb
    “… not well-experienced”? Such hogwash. Even if you are traveling around S-E Asia, you understand very little of what’s going on around you.

    For example – ChinaBank was founded 90 years ago in Manilla by a Manilla-based family, and owned today by their descendants, Peter Dee and Gilbert Dee. ChinaBank recently bought Manila Bank and merged, of course their calligraphy is everywhere.

    Folks from the China mainland have been involved in the islands of the Pacific for a long, long time and many generations.

    The US monopolize ? And other world powers do not want to corner the markets? With the mergers and acquisitions in the last 30 years – how many corporations are completely American anymore?

    When those preferred Europeans (Royal Dutch Shell) and China, are “forced” to clean up the US mess in Iraq after Obama “ends the war” – will the US “left” be content buying their energy supplies from Beijing?

  6. Timber said on July 17th, 2008 at 9:56am #

    Samir–

    So I guess you don’t invest in companies that operate in China? You don’t profit from Chinese exploitation of workers by shopping at WalMart?

    The hypocrisy of conservatives who demand cheap labor costs so they can maximize profits or dividends for themselves, while complaining about illegal immigration or China is just astounding.

  7. brs said on July 17th, 2008 at 2:22pm #

    It is just exploitation by upper inherited wealth classes, that is all. It has been going on since Rome and before and just continues. The enemy of the American worker is not the Chinese or the Mexicans or the Muslims or anyone but the corporate owner class.

  8. hp said on July 17th, 2008 at 4:27pm #

    And the corporate owner class’s owners, their “financiers.”

  9. anthony innes said on July 18th, 2008 at 12:50am #

    Peterb Evie beat me to it ; the Chinese invented world trade and abandoned it before their decline . They will not repeat that mistake ; the asian honeys are not child molesters if your wondering why they ignore you. Don Hawkins is on it …. the Earth rules.
    And bless her she ‘s had enough of people who put money before life.

  10. heike said on July 18th, 2008 at 11:52am #

    If you were as progressive as you make yourself out to be, you would write something about the appalling conditions under which migrant workers have to labor in China. You should support those who are lobbying for worker rights and decent treatment. Actually, U.S.-invested firms are usually more progressive in this field, whereas Taiwan or HK-invested firms are not. Courageous lawyers who take up the rights of Chinese workers in Shenzhen who have lost their limbs in industrial accidents find themselves hounded out of town. Or how about the dangerous quality of Chinese products such as pet food?

    You are simply selecting facts to prove your points and conveniently leave out anything that challenges them. Gutierrez in other remarks has roundly denounced Chinese discriminatory trade practices and piracy of U.S.-origin software. As for the WTO, decision-making is by consensus. The WTO has put in a number of rules that favor LDCs, including exemption from tariff cuts (China is not an LDC).

    As far as expanding overseas, it’s not a U.S. monopoly. Former Chinese President Jiang Ze Min initiated the zouquchu policy for Chinese firms nearly a decade ago. Same motivations.

    The U.S. simply wants a level playing field with China on trade and investment. You agree to do something, you carry it out. Is that so unreasonable?

    (as far as U.S. firms closing in China is concerned, yes, and they are going to lower cost areas such as Vietnam. )

  11. anthony innes said on July 19th, 2008 at 2:15am #

    heicke very good point . I do not think anyone here is writing China a blank check . Corporate capitalists have been mauled by the Chinese when they have tried laizze nous faire arrogance hence the pullout to Vietnam . Fair trade is the answer all round. The dynamics of the change sweeping China bodes well for the world in general . Sure the police state aspects are terrifying but the Law is something in China you can be shot for breaking . The bankers who seem to be above the Law here in the west should be extradited to China to face the charges bound to be brought against them .

  12. heike said on July 19th, 2008 at 5:50am #

    Laws are enforced very selectively in China. Sanya, the flesh capital of Hainan, has everyone on the take. When people come to inspect from Beijing, the locals are informed in advance so the girls can he hustled out of town. Someone who operates an illegal motorcycle taxi that crashes into a visiting SUV can get away with it because the police decide that the SUV operators, being more wealthy than the taxi driver, should pay his medical bills before they let them off the hook. Despite its nominally totalitarian system, China is a situation where “all law enforcement (or lack of it) is local.” It’s certainly not strict law enforcement that causes Western investors to pull out of China, but rather increasing costs due to wage inflation. Major U.S. companies know that groups back home are monitoring their behavior in places like China, hence they try to be good corporate citizens.

  13. Guy James said on July 19th, 2008 at 8:07am #

    Poor Samir,

    Someone needs to tell him the Chinese tariff on imported American cars is not 200%. Its 28% He streatched the numbers to fit his screed.

  14. Chinese said on July 25th, 2008 at 11:37am #

    Samir: “…We won’t do anything about it because China HAS THREATENED US WITH NUCLEAR WAR if we do not acquiesce to their terms…”, really?
    LOL.