1. The China Phenomenon
In defense, generals are said to be forever fighting the last war. Voters are no less prone to re-litigating yesterday’s battles. From 2000 and on, the rise of China stunned the world, just as the rise of Japan back in the 70’s and 80’s did a generation earlier. Shell shocked americans reacted by lashing out at all trade treaties, and nominating Trump to the GOP ticket. Too bad this is misplaced anger, and a decade too late to boot. Just like the earlier rise of Japan- by the time americans started freaking out about it- the phenomenon had already peaked.
China looked unstoppable back in 2001 to 2007. A lot of people assumed that China was unstoppable. Yet if you look at their current account- the China manufacturing juggernaut has indeed come back down to earth in the past 5 years. China accounts for close to half of the US’ total trade deficits- almost 5X that of Japan which is in a distant 2nd place (incidentally neither country has a free trade agreement with the US). The USA’s current account tells the same story but in reverse:
It looked hopeless back in 2006. And yet in the post recession years, our trade deficits have halved; and returned roughly to the late 80’s average. The explanation is simple. China has priced itself out of the low wage manufacturing market:
3X Wage increase in China between 2006 to 2015 means China is no longer the low wage sweat shop of the world. So people who thought that China was an unstoppable steam train that would destroy every last american job- relax, that steam train has run out of steam. The chinese government fully recognizes this fact. Xi Jinping has made it a priority to transform China from an export economy, into a consumption economy. China doesn’t want to replace us- China wants to be just like us. The only thing more jaw dropping than their wage growth was their consumption growth:
4X growth between 2006 to 2015.
2. American Manufacturing
Of course- you might counter that the US continues to bleed manufacturing jobs year after year. This is true. It is part of a long term secular trend:
A lot fewer people are employed in manufacturing. Just as a lot fewer Americans are employed in agriculture than a century ago. The other inexorable long term trend is the rise of the service sector:
Note that in this accounting, manufacturing actually peaked back in the 1950’s- which is right around the time that Detroit’s population peaked.
3. Trade deficits revisited
There is a school of thought which holds that all trade deficits are bad because they subtract from the GDP growth. In Econ 101 terms, that is literally true:
GDP = C + I + G + B
C= consumption, I=investment, G= government spending, B = balance of trade
Looking at this equation, it seems like any trade deficits would subtract from the national GDP. However, what is not obvious is that it could be balanced out by increased consumption. For example- when you buy a pair of Levi’s jeans, the chinese manufacturer might make $5. American corporate brand Levi’s might make $10, and the american retailer the remaining $10. You are subtracting $5 from the GDP due to the trade imbalance, but you are adding $20 due to consumption. Now you might argue- if these jeans were not outsourced, the entire $25 would be added to the consumption column. But guess what- if the jeans weren’t outsourced- they would cost $45. Would you still buy it at $45? Probably not. So instead of $15 added to the GDP, the alternative would be $0.
If I handed you $5, and asked you to pass along $3 to Fred next door and keep $2 for yourself. Would you turn down my $5? Not if you were rational. This is why trade could be beneficial to both parties, even if one party is gaining more from the transaction than the other party.
The other effect of the rise of China, is the rise of the chinese consumer. It does us no good to keep China dirt poor. Whereas China today has a sizeable middle class who is able to buy american goods. There are 131 million IPhones in service in China, more than the 110 million in the USA. GM sells 3.6 million cars in China in 2015, more than the 3 million sold in the USA. Chinese box office makes up 25% of Hollywood’s box office revenues- fully half of US domestic box office, which makes up 50%. Even the NBA does brisk business selling merchandise in China. One could imagine Hollywood and NBA revenues has a lot more room to grow if only we had a free trade treaty with China which protects our IP.
In summary
China’s meteoric rise has given shell shocked american workers a case of PTSD. People don’t realize that this phenomenon is only one moment in time. And that moment looks to be over. China’s rise is not easily duplicated by any other country neither. India has much lower wages than China, and a comparable inexhaustible work force- but so far they have no made any impact in global manufacturing. So it’s highly unlikely that the TPP would transform Vietnam or Peru into ‘the next China’. If Vietnam had the wherewithal to become the next China- they would have shown signs of it by now. After all- China captured the US market without any free trade agreements. China’s current standing with the USA is no different than Vietnam’s.
The long term transformation into a consumer/ service economy is not something to be feared. It is the way of a mature economy. In fact China is deliberately following in our footsteps.