Is the Job Drain China's Fault?

The truth is, the major reasons for U.S. job losses lie elsewhere -- and a revalued yuan isn't the answer

China bashing is all the rage. With millions of manufacturing jobs evaporating from the U.S. while China's trade surplus soars, politicians of all stripes are under pressure to show the folks back home that they're doing something, anything, to stem the losses. The swelling federal budget gap means that further stimulative tax cuts are out of the question. So many politicians, manufacturers, and labor representatives have pounced on China, accusing it of keeping its currency artificially low to boost exports and snatch jobs from American workers.

In Congress, moves are afoot to impose punishing tariffs on U.S. imports from China if Beijing doesn't mend its ways. Separately, a coalition of business groups, led by the 14,000-strong National Association of Manufacturers (NAM), is planning to file an anti-China trade case with the government, alleging that it rigs its currency to gain unfair advantage. The Bush Administration has also gotten into the act. Treasury Secretary John W. Snow flew to Beijing in early September and called on China to stop rigidly controlling its currency rate, then sang a similar song at the G-7 meetings in Dubai. Administration officials say the President may repeat that refrain when he meets with Chinese leaders in Bangkok on Oct. 20-21.

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. From Levi Strauss, which announced on Sept. 25 that it will close its last remaining U.S. factory and lay off 2,000 workers, to Detroit, where Ford Motor (F ) and DaimlerChrysler (DCX ) were laying plans in early October to lay off thousands of U.S. workers in coming months, the toll continues. All told, the Big Three could shrink their workforces by 50,000 jobs over the next five years, after inking a new union labor contract.

But all the political handwringing misses a crucial point. The relationship between the world's biggest economy and its fastest-growing one in recent years can't be reduced to a single trade statistic or a single exchange rate. It's far more complex than that. Over the last decade, the two countries have become increasingly intertwined and interdependent thanks to a rapidly globalizing world economy where cutthroat competition among multinationals is the norm.

UNDER THE GUN. U.S. companies from Intel (INTC ) Corp. to General Motors (GM ) Corp. face a simple imperative: invest in China to take advantage of the country's cheap labor and its fast-growing economy or lose out to rivals from Europe, Japan, and elsewhere. "It's hard to serve Chinese customers in a lot of our businesses unless we manufacture there," says W. James McNerney Jr., chairman and CEO of 3M (MMM ). "We don't do it just to eviscerate U.S. jobs. We do it to be competitive." The $17 billion maker of consumer and industrial products was the first U.S. entry to set up a holding company in China in 1984.

Still, there's no disputing that the U.S trade deficit with China is soaring. Since 1994, Chinese exports to the U.S. have more than tripled, rising from $39 billion to an annualized $137 billion in the first seven months of this year. While U.S. exports have risen, too, to around $25 billion, the resulting imbalance has led to a staggering trade deficit of more than $100 billion.

But those numbers obscure the real story. With scores of U.S., Asian, and other companies opening factories in low-wage China, corporations around the globe are benefiting, and so are the consumers who buy their low-priced, high-quality goods. And as the U.S. trade deficit with China grows, the gap is shrinking with such countries as Taiwan, Singapore, and even Japan, which are increasingly moving factory floors to such mainland China industrial cities as Tianjin and Guangzhou. As a result of that shift in production, some 65% of the rise in Chinese exports since 1994 have come not from Chinese companies but from foreign companies, including many U.S. corporate giants.

This increased interconnectedness is making it a lot harder for Washington to get beyond anti-China rhetoric. Of China's top 40 exporters, 10 are U.S. companies, including Motorola (MOT ) Inc. and Dell (DELL ) Inc. What's more, retailers Wal-Mart Stores Inc. and Target (TGT ) Corp. count on low-priced goods from China to help meet U.S. consumer demand for affordable products. Wal-Mart alone has doubled its imports from China over the last five years, to $12 billion. It now accounts for nearly 10% of all Chinese exports to the U.S. That has helped keep U.S. inflation down, allowing the Federal Reserve to cut interest rates to their lowest level in four decades. Moreover, China is helping to keep U.S. interest rates down by investing bundles of money in U.S. Treasury securities -- some $126 billion, up from $60 billion in 2000.

The moral of all this: China is not another Japan, bent on grabbing global share for home-grown companies with mercantilist trade policies and stiff barriers to keep foreigners out of its own markets. While Beijing often talks about industrial policies, its economy is dramatically more open to trade and direct foreign investment than the old Japan Inc. Foreign manufacturers of autos, telecom equipment, and computers dominate the increasingly buoyant domestic Chinese market. China "is allowing American companies to participate in its growth," says Mustafa Mohatarem, GM's chief economist. "That distinguishes it from Japan." Indeed, China now imports more than Japan, even though its economy is one-third of the size.

That doesn't mean China is an ideal trading partner. After getting off to an impressive start in meeting its commitments to the World Trade Organization, China's compliance has begun to flag. Foreign insurers can now sell policies directly to Chinese consumers, for example, but the entry cost is steep. Foreign insurers must inject at least $20 million in capital to set up shop. While tariffs and import quotas have fallen for farm goods, U.S. agribusiness outfits still must overcome complex import-licensing procedures. And while Beijing has enacted important laws protecting intellectual-property rights, piracy of software, music, and movies remains rampant. Moreover, China's currency may indeed be undervalued. Morris Goldstein of the Institute for International Economics, a Washington think tank, figures China's currency is undervalued by about 15% to 25%. That's not insignificant, but it's well below the 40% figure China's critics bandy about.

BEHIND THE TRADE GAP. Still, the logic behind scapegoating China for the loss of American manufacturing jobs doesn't hold up. U.S. manufacturing employment peaked in 1979 and has been declining ever since. True, the drop has accelerated tremendously, with 2.7 million manufacturing jobs lost in the last three years alone. But a good part of that simply reflects stepped-up productivity, or, as in the case of Detroit, sales lost to the Japanese.

Of course, the widening U.S. trade gap -- up from $107 billion in 1997 to $418 billion last year -- has played a part in manufacturing's swoon. But here again, China isn't to blame. The biggest rise in the U.S. deficit over the last five years has come not with China but with the European Union. What's more, as even the NAM concedes, it has been a shortfall of exports rather than a boom in imports that has been most responsible for the growing U.S. trade gap. Over the last two years, U.S. manufacturing exports fell by $85 billion, accounting for roughly one-third of the fall in U.S. shipments during that period, according to the NAM. Behind the plummeting exports: weak demand overseas, especially in Europe and Japan.

China, by contrast, is sucking in imports. U.S. shipments rose by over 20% in the first seven months of this year as China snapped up everything from X-ray machines to cope with last spring's SARS epidemic to steel for its booming construction business. "The Chinese were huge buyers," says Keith E. Busse, CEO of Steel Dynamics Inc. in Fort Wayne, Ind., which sold 180,000 tons of light-gauge sheet steel to the Chinese in the first half of 2003.

The tighter links between the U.S. and Chinese economies means that a change in Beijing's currency policy would not be the panacea the China bashers seek. While a big rise in the value of the yuan would undoubtedly boost the competitiveness of U.S. exports, it might not have much impact on U.S. imports. "An appreciation of [China's currency] would have a negligible effect on the overall trade balance and manufacturing jobs at home," says Rich Brecher, Motorola's director for global business relations. Many of the low-tech industries the U.S. has lost to China and other countries with cheap labor are gone for good. Case in point: textiles. Levi Strauss & Co. was among the last to keep some production at home.

There's a lot at stake in getting the U.S. relationship with China right. Following its accession into the WTO in 2001, the country is on course to open its economy and markets to foreign competition. It's up to Washington to encourage China to continue down that path. Bashing Bejing over mutually beneficial bilateral trade is not the way to go.

By Rich Miller in Washington and Pete Engardio in New York, with Dexter Roberts in Beijing, Michael Arndt in Chicago, and bureau reports

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