By Laura D'Andrea Tyson
Protectionist sentiment is on the rise in Washington, fueled by poor employment growth, real wage stagnation, and a record trade deficit. Job growth in 2004 was nearly 40% below the level consistent with previous economic recoveries. Most of the "missing jobs" are in the trade-exposed manufacturing sector. Meanwhile, real average hourly earnings in 2004 were no higher than they were in November, 2001, the trough of the most recent recession. Economists are busy debating the causes of this jobless and wageless recovery. Meanwhile, many politicians, workers, and business leaders already have jumped to the conclusion that the yawning U.S. trade deficit is to blame, and China has become the focus of their ire. But blaming China for the plight of American workers, while predictable, is wrongheaded. And adopting protectionist policies against China is downright dangerous.
It's easy to see why the public has fingered China as the culprit. China, which sends one-third of its exports to America, accounts for 26% of the U.S. trade gap. Most of its exports to the U.S. are manufactured products, made by workers earning only 4.5% of the average U.S. factory wage. As more American companies try to cut costs, Chinese workers are increasingly competing for U.S. manufacturing jobs and putting downward pressure on pay. So it's hardly surprising Congress is weighing legislation that would impose a 27.5% tariff on Chinese imports unless Beijing agrees to an equivalent appreciation of its currency.
BUT THE FATE OF US. WORKERS depends primarily on domestic conditions, not the trade gap. A Brookings Institution study by economists Martin N. Bailey and Robert Z. Lawrence found that trade accounts for only about 12% of the nation's manufacturing-job losses since 2000. Most of the losses stem from weaker exports, not soaring imports from China or elsewhere. The main source of the deficit isn't China's fixed exchange rate, low wages, or export subsidies, but the imploding U.S. savings rate -- a fact Congress would rather ignore.
The U.S. current account deficit -- the gap between what America spends and what it produces -- recently hit a high because of a sharp drop in personal savings and out-of-control federal spending. Since the 1980s, America's trade gap has been about as large as its current account deficit. According to a study by economist Ronald I. McKinnon of Stanford University, if the current account had been in balance in 2003, there would have been 4.7 million more U.S. manufacturing jobs. So these missing jobs stem from our macroeconomic choices, not our trading partners' unfair trade and currency policies.
True, China, along with Japan and a few others, has enabled our misguided choices by financing the U.S. current account gap via huge purchases of dollar-denominated securities at relatively low interest rates. If China were to slash its purchases or its already substantial holdings of such securities -- something it might be tempted to do in retaliation for punitive trade legislation -- long-term real rates would rise sharply and swiftly. The result could be a slowdown that damages the global economy and leaves American workers substantially worse off in terms of jobs, wages, and interest payments on their mortgages. So instead of China-bashing, Congress should make tough political choices on revenues and spending to contain the fiscal deficit and stimulate household saving.
To head off a possible trade war, China also must take action to ease tensions. First, Beijing should reduce or eliminate some implicit and explicit export subsidies, including value-added tax rebates for imported equipment and components, discounts on land for export facilities, and tax preferences for foreign investors. According to Morgan Stanley (MWD ), eliminating these subsidies would be equivalent to a 16% appreciation in the yuan relative to the dollar. This approach would avoid some risks of adjusting China's exchange rate in the presence of significant speculative flows into China's currency. Next, China should introduce either temporary quotas or tariffs on apparel and textile exports. Finally, just as the U.S. must increase household savings, China must foster more consumption to reduce its reliance on exports for growth.
The U.S. and China have benefited enormously from their economic ties. Now both must act to make sure trade friction does not undermine their mutually beneficial relationship and push the world economy into a downward spiral of protectionism and recession.
Laura D'Andrea Tyson is dean of London Business School (email@example.com)