A Level Playing Field on Trade is a Core Progressive Value
Originally published on Medium.
As part of a series of thoughtful papers for the next administration focused on economic policy and equitable growth, MIT labor economist David Autor argues that the damage caused by “China shock” is mostly behind us, and the focus should now be on readjustment for displaced workers.
While Autor and his colleagues have performed remarkable research on the impact of surging Chinese imports on American factory workers and their communities, I believe his advice to the next administration on trade underestimates the ongoing impact of trade with China, and offers the ineffective solution of treating the symptoms (layoffs) rather than the underlying problem (a truly level playing field).
Here’s why.
Autor points to rising Chinese wages as a sign that the worst is behind us and makes the unstated assumption that labor costs are the deciding factor in decisions to locate production. That’s an outdated idea. It’s a combination of lax Chinese regulations and enforcement, direct and indirect subsidies for industry, periodic currency misalignment, and barriers to trade and investment that contributes to a growing share of the trade imbalance.
In fact, one of the fastest growing trade deficits the U.S. has with China isn’t in lower-skill apparel, but rather in advanced technology products, which suggests China’s cost advantage isn’t built on the backs of its workers alone. Rather, it has been sustained by an insidious web of market-distorting features that Beijing won’t soon abandon in the absence of external pressure. While wages in some parts of China may indeed be rising, labor costs are a declining factor in determining sourcing decisions and impacting trade flows.
More evidence: The United States is a global leader in steelmaking efficiency and productivity, but we’re losing market share there too, suffering import surges from China, and experiencing layoffs in a period of economic growth.
Why? Our steelworkers aren’t in real competition against low-wage, lower-productivity workers in China. They’re competing against the full force of the Chinese government and its network of state-owned enterprises (SOEs) that lack profit motivation. The effect of Beijing’s state control plagues other American industries as well, ranging from commodity producers to semiconductors. Little of this has to do with comparative wage rates.
There is still much at stake in our trade relationship with China. Yes, it’s true that virtually all of the apparel, furniture, and toy-making jobs that could be offshored to China are already there. But vast swathes of highly competitive American industries, from steel to automobiles, semiconductors to aerospace, face unfair competition from China.
There's a lot of space between doing nothing and Trumpism.
Still, if Autor’s suggestion?—?that we enhance readjustment policies while continuing on the path of new free trade agreements such as the Trans-Pacific Partnership (TPP), while avoiding trade confrontations with China?—?isn’t the right answer, then what is?
There’s a lot of space between doing nothing and Trumpism, which I agree would be destructive.
First, do no more harm. That means denying China its coveted market-economy status for trade remedy purposes until it really functions as a market economy. Limit China’s opportunities for state-driven foreign investment in the rich and coveted U.S. market until it provides true trade and investment reciprocity to American firms.
Second, push back on China’s unfair trade practices with the market leverage we have. For most American exporters, China’s consumer market has been underwhelming and is far from irreplaceable. But China depends on exports to the United States to fuel its industrial economy. Our government has started to push back on some of Beijing’s steel policies, and the Obama administration has imposed tariffs of up to 500 percent on some Chinese products. We’ll need much more of this to compel China to wind down its state-driven growth strategy, which is why appointing a Special Trade Prosecutor and devoting more resources to trade enforcement measures makes sense.
Third, at the very least renegotiate the TPP to make the terms more favorable to American manufacturing. Even pro-TPP economic models predict some harm for American factory workers if the current agreement goes into force. This downside could be mitigated through stronger terms on currency manipulation, rules of origin, SOEs, and truly equalizing the rights of workers and investors within trade rules.
Fourth, enhance adjustment policies for American workers as Autor suggests. Technology, automation, and globalization will continue to send shock waves through our labor markets, and we lag behind other wealthy, industrialized nations in our support system for workers and those in transition. From vocational training and STEM education on the front end to wage insurance and readjustment programs at the backstop, we need a smarter, better-resourced system.
Fifth, ensure that a new manufacturing ecosystem in the U.S. grows strong roots via sound tax and innovation policies. It’s true that far more people work in service industries today, and even more will tomorrow. But no industry plays an outsized role in our economic performance like manufacturing; its spin-off effects are unmatched. And even in the face of tremendous odds?—?a stronger dollar that dampens exports, global weakness, automation, Chinese mercantilism?—?manufacturing has managed to add jobs over the past six years. Ninety percent of U.S. patents, two-thirds of private sector research and development, and more than half of U.S. exports come from manufacturing. Couple that with national security concerns, and you have a rationale to afford manufacturing special policy treatment. Sue Helper offers some good ideas for strengthening supply chains as part of the Washington Center for Equitable Growth’s series. There’s a lot to build on from the policy foundation that the Obama administration has established.
Autor deserves credit for moving “China shock” into the political and economic vernacular, building on the groundbreaking work of Rob Scott at the Economic Policy Institute in measuring and mapping the impact of Chinese imports and competition on American workers and communities. He’s persuaded thought leaders in a way that many of us have tried (and, more often than not, failed) to do. And though there’s still too much emphasis placed on outsourcing’s consumer welfare benefit when it’s clear most of the benefits of such labor arbitrage strategies accrue to the shareholders of the multinational corporations that pursue them, Autor deserves recognition for calling out the one-sided boosterism of free-trade supporters.
A bolder trade policy is possible and desirable for American workers, and it’s a core progressive value.