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9.3 Shifting the Target to Frame China
The U.S. government is eager to create jobs, but the unemployment rate remains high. The American people have growing resentments to the government, giving great pressure on the Obama adminis- tration. The high unemployment rate seriously threatened Obama’s re-election plan. To save the depressed job market in the U.S., the Obama administration announced the implementation of a five- year export re-doubling plan, launched a new offense on the RMB exchange rate, and targeted China on which to put the blame the crisis.
According to the data released by the U.S. International Trade Commission, since 2009, the Sino-U.S. trade deficit has accounted for half of the total of the U.S. deficit and exceeded the sum of the U.S. deficit against OPEC, 27 EU members, Canada, Mexico, Japan, South Korea, and other major trading partners. Some Amer- icans make an issue out of the Sino-U.S. trade deficit and point out in different occasions that the Chinese take away the jobs for the Americans. As this topic was very intriguing for the unemployed American voters, both the Democrats and the Republicans pretended to care about the public and blamed China to win votes in the 2012 presidential election.4
3See Roth and Gross, President Obama Touts Onshoring: Is Made in America Back.
Finance Yahoo.com, Feb. 15, 2012 for are levant report.
4Prof. Carlos Ramirez from George Mason University in the U.S. studied the decisive factors when the members of the U.S. congress took a position on China’s exchange rate issue from the perspective of political economics. Using a large number of statistics, he identified the factors as the U.S. senators receiving campaign contributions and the quantity of workers in the manufacturing industries in the constituencies. He found that an increase in the campaign contributions received by the senators from interest
Effect of the Exchange Rate on Employment 273
For example, since 2009, Paul Krugman5 has published running reviews in the New York Times and blamed China’s mercantilism for leading the loss of nearly 1.4 million jobs in the U.S. Regretfully, he did not specifically say how the data were calculated but said that it was according to a rough estimate.
Joseph E. Gagnon, a senior researcher in the Peterson Institute for International Economics, wrote a paper in April 30, 2010. In this paper, he pointed out that, if RMB appreciated against the $ by 10% nominally, it would create about 670,000 jobs in the U.S.
in the current period. The appreciation of the RMB exchange rate would cause U.S. exports to increase, drive the growth of domestic consumption and investment, and thus promote faster GDP progress.
Scoot (2010)6 argues that the Sino-U.S. trade deficit is the main reason for the high U.S. unemployment rate. He studied the rela- tionship between import and export and the employment change in 201 American manufacturing industries and concluded that the trade deficit against China’s manufacturing industry causes the U.S.
to lose 346,000 jobs every year. In 2001 and 2008, U.S. manufacturing industries lost more than 2.764 million jobs.
Regretfully, all these reports do not clearly indicate how RMB appreciation promotes U.S. exports and what the transfer mecha- nism is.
Despite the different statistical calibers on trade deficit and the different values between China and the U.S., the U.S. imports more from and exports less to China. Therefore, that a large deficit exists in the Sino-U.S. trade is an undisputable fact. Statistically, an increase in U.S. exports by $200,000 can create a job opportunity. However,
groups against China by $5,000 promoted the frequency of their accusation of China as a currency manipulator to increase by 1.35 times. Moreover, an increase in the proportion of labors engaged in manufacturing industries in a senator’s constituency by 1% promoted the possibility of advocating China as a currency manipulator to increase by 19.6%.
5Krugman (2010). Chinese New Year,New York Times, 1 January. The original text is
“My back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing U.S. employment by around 1.4 million jobs. . . ”, Available at: http://www.nytimes.com/2010/01/01/opinion/01krugman.html.
6Scott (2010). Unfair China trade costs local jobs,Economic Policy Institute Briefing Paper No. 260, [online;cited 23 March 2010]. Available at: http://www.epi.org/publica- tions/entry/bp260/.
274 From Trade Surplus to the Dispute over the Exchange Rate
according to U.S. statistics, the Sino-U.S. trade deficit was $256.3 billion in 2009. Some U.S. senators suggest that if the U.S. deficit increases by $200,000, a job opportunity will be lost. Without this deficit, the U.S. can have more than one million jobs. It seems right from the simple arithmetic point of view, but in fact it is wrong.
It is interesting to know if the U.S. can naturally increase its domestic production given the reduction of imports from China. This argument implies the hypothesis that products in the U.S. and China can replace each other completely. In other words, the U.S. does not import commodities from China but produces them by itself. How- ever, this scenario is not the case. Generally, labor-intensive products exported from China are not produced in China, and the products exported from the U.S. are not produced in China; thus, the com- plementarily between China and the U.S. is far more than the com- petition. For example, the One Dollar Store sells folding umbrella made in China at $1 each. The U.S. merchant pays only $0.37 per umbrella when importing the products from China. The minimum wage in most U.S. states is $10 per hour or more. Therefore, if U.S.
enterprises produce the umbrella, the labor cost of one umbrella will be several dollars. If one umbrella is sold at $1, the enterprise will lose money. As another example, China needs to buy 1,900 civil aircrafts in the next five years, but its civil aircraft industry has just started, and the products are of poor quality; thus, meeting the market demand it will take time. If China does not procure Boeing aircraft made in the U.S., it has to purchase airbus aircrafts from Europe and cannot be self-sufficient immediately. China’s umbrellas and the Boeing aircraft of the U.S. have no alternative between two countries. If people insist on talking about the import and export products between China and the U.S. having no alternative, they must lack common sense or have other ulterior motives.
Krugmanet al.threatened to start a trade war to shift the employ- ment opportunities from China to the U.S. If there are only these two countries in the international market, the trade war may be workable.
However, more than 200 economies exist in the world whose compar- ative advantages are different from one other. If the U.S. refuses to import labor-intensive products from China, it does not mean that it
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can produce these products by itself. As an authority in international trade theory, Krugman clearly indicates in his economic paper that importing and the quantity of imports depend on the relative prices between the domestically produced products and the imported ones.
If a trade war breaks out between the U.S. and China, the merchants will have to look for products that will replace those made in China to maximize profits. If it is more profitable to import the products from other countries than to produce them in the U.S., the mer- chants will certainly choose the former. In fact, the unit labor cost of many developing countries, such as Mexico, Vietnam, Indonesia, and India, is almost the same as that of China. Let us take the tex- tile industry for example. The unit labor cost is $0.55 in mainland China and $0.85 in the coastal areas, where as it is $16.92 in the U.S., which is 30.7 and 20 times higher than that in mainland China and the coastal areas, respectively. The unit labor costs in other countries are as follows: $0.69 in India, $0.65 in Indonesia, $0.46 in Vietnam, and $0.28 in Bangladesh (Fig. 9.2). If American business- men cannot import textiles from China, the developing countries will replace China to export the labor-intensive products to the United States.
Undoubtedly, China is known as the industry of the world because its unit labor cost and selling price are lower than those of other countries. If the U.S. imports products from other countries, it has to pay a higher price. The possible origin of the import commodities may be Mexico, Vietnam, Indonesia, and India, among others. The Americans are too busy for it and do not get the job opportunities.
Therefore, they have to pay for the high inflation. What for?
As the term suggests, the labor-intensive industry provide many jobs. Conversely, the high-tech and capital-intensive industries cre- ate fewer number of jobs, although they are very important to the national economy and have high added value. The labor-intensive manufacturing industry in the U.S. has gradually declined and lacks competitiveness. Why is this so? In fact, its science and technology does not lag behind, and it does not lack money or natural resources. The answer is its too high labor cost. The aver- age wage in the American manufacturing industry is a dozen times
276 From Trade Surplus to the Dispute over the Exchange Rate
0 5 10 15 20 25 30 35
SwitzerlandHong KongAustralianArgentinaThe USAGermanyBelgiumSlovakiaPortugalLithoniaThe UKAustriaTaiwanEstoniaTurkeyIrelandGreecePolandFranceKoreaCzechBrazilJapanSpainIsraelItaly South AfricaColombiaMalaysiaThailandBulganiaMexicoTunisiaMaricoEgyptPeru Coast of ChinaIndonesiaIndia China MainlandBangladeshVietnamPakistan
Figure 9.2: Unit labor cost in the textile industry.
Source: Werner International (2007).
higher than that in China and several folds higher than that in other developing countries. The U.S. is uncompetitive in producing labor-intensive products because of its too high labor cost, which severely limits the size of U.S. job market. Under the general envi- ronment of internationalization, as long as the wage level remains high, producing labor-intensive products is impossible for the United States.
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Economic theory points out that wage level has rigidity. In gen- eral, the wage level can only increase and not decrease, particularly in the U.S. Whenever election comes, the U.S. government and senators always promise to increase the wages of the public. Politicians who propose to reduce the wage level in their campaign speech will lose votes and in the election no matter how many promises they give.
The Obama administration dares to say anything except reducing the minimum wage. In this case, once the labor-intensive industries are transferred from the U.S. to other countries, getting them back is difficult. Some U.S. senators think that job opportunities can be increased proportionally by limiting the products made in China and by reducing the U.S. trade deficit, but the slightest difference leads to a huge loss. The implementation of trade protectionism cannot increase the employment opportunities in the U.S.; instead, it further reduces jobs, leading to a higher unemployment rate.