For most of the 1980s and 1990s, Japan was our fi ercest trade competitor. In addition, year after year we ran huge trade defi cits with that country. In the long run, however, our largest trade defi cits are with China, which overtook Japan in 2000. (See Figure 5.)
$ billions
1995 1996 1997 1998 1999 2000 2001 2002 Year 120
140
100 80 60 40 20
2003 2004 2005 160
JapanChina 180 200 220 240 260 280 300 320
2006 2007 2008 2009 2010 2011 2012
Figure 5
U.S. Trade Defi cit with Japan and China, 1995–2012
Our defi cit with China grew steadily since 1990 and has far surpassed our defi cit with Japan.
Source: U.S. Bureau of the Census.
484 C H A P T E R 1 9
Many goods once made elsewhere in Asia—in Japan, Taiwan, Singapore, South Korea—are now produced in foreign-owned factories that have been moved to China.
So our growing defi cit with China is partially offset by declining defi cits with other Asian nations.
Japanese Trading Practices
The American economy has long been, by far, the largest in the world. But in the years after World War II, as the only major nation with an undamaged economy, we produced half the world’s man u factured goods. Our economy had been built on the dual founda- tions of mass production and mass consumption. Basically we mass produced consumer goods, which were then sold to the vast American market.
The Japanese economic infrastructure had been largely destroyed by our relentless bom b ings during the war. And even if the Japanese had somehow been able to produce low-cost co n sumer goods, their market was not only much smaller than the American market, but much, much poorer. So the Japanese government and business leaders developed a strategy to rebuild their economy. They would fl ood the rich American market with very cheap, low-end consumer goods, and then move up the economic feeding chain, eventually producing black and white TVs, color TVs, motorcycles, and cars.
The Japanese compete not just on the basis of price but on the basis of product quality. They have taken our system of mass production one step further, turning out a wide range of cu s tomized variations, while we continue to concentrate largely on single standardized products.
Our Trade Defi cit with China
When we began trading with China in the mid-1970s, after President Richard Nixon’s historic trip to open relations with that nation, American exporters had great hopes that the world’s most pop u lous nation would eventually become the world’s largest consumer market. Three decades later, toys, athletic shoes, clothing, textiles, and other relatively low-price manufactured goods are fl oo d ing into the United States, along with an increas- ing stream of higher-priced goods such as tools, auto parts, electronic gear, microwave ovens, and personal computers. Although U.S. exports to China are growing rapidly, our exports are less than one-fourth of our imports.
Why are we importing so much from China? Mainly because U.S. retailers are seek- ing the cheapest goods available and fi nding them in China. Walmart Stores imported
$30 billion worth of goods in 2012; and Target, Sears-Kmart, Toys ‘R’ Us, and other giant retailers also found that the price was right in China.
One of the big trade issues between China and the United States is that thousands of Ch i nese factories, many controlled by top offi cers of the Chinese army, have been making unautho r ized, or knock-off, copies of American movies, CDs, and most impor- tant, computer software. Days after the premier of the latest Terminator fi lm in the United States, pirate copies were on sale throughout China. More than 90 percent of the movies, music, and software are illegal copies sold at a fraction of the original price.
It’s bad enough that the Chinese are pirating American goods and services and sell- ing them in their own country. But now they’re taking their piracy a step further. In 2005, the United States Patent and Trademark Offi ce said that 66 percent of the counterfeit goods seized at Amer i can borders now come from China, up from just 16 percent fi ve years before. Indeed Chinese-made fakes are so good that bogus Duracell batteries, Oral- B toothbrushes, and pretend Prest o barba disposable razors are sold all over the world.
And the U.S. Chamber of Commerce says that Chinese piracy and counterfeiting have cost American industry over $200 billion a year.
Our trade defi cits with China have been running over $200 billion a year since 2005.
These are the largest defi cits ever recorded by one country with another country. But The Japanese compete on the
basis of price and quality.
International Trade 485 closer inspection reveals that our trade defi cit with China is grossly overstated. Most
often “made in China” is act u ally made elsewhere—by multinational companies in Japan, South Korea, Taiwan, and the United States, that are using China as the fi nal assembly station in their vast global production networks. Indeed, about 60 percent of this country’s exports are controlled by foreign companies. A Barbie doll may cost $20, but China gets only about 35 cents of that. In recent years, however, the Ch i nese government has insisted that increasing proportions of its manufactured goods actually be made in China. For example, solar panels—of which China is the leading producer—must have at least 75 percent Chinese content.
While China has huge trade surpluses with the United States, it also has large trade defi cits with the rest of Asia. What were the Chinese importing? Much of their imports were components of television sets, computers, cell phones, cars, refrigerators, microwave ovens, and other consumer electronics. When these products were assembled and shipped out as fi nal products, China’s e x ports appeared to be much greater than they actually were.
Consequently its trade surplus with the United States was greatly exaggerated.
Since the beginning of the new millennium we have lost over 5 million manufacturing jobs. Some of these losses may be attributed to China, but probably other nations and cer- tainly the huge multinational corporations—many of which are based in the United States—
should bear much more of the blame. And it is the American consumer who has benefi ted the most from the fl ood of low-cost goods that were assembled, if not made, in China.
Trading with China and Japan: More Differences than Similarities
There is one striking similarity between the Japanese and Chinese development models.
Both were pulled by the engine provided by the huge American market. After World War II, the only consumers who had the money to buy Japanese exports were the Americans.
So the Japanese economic recovery plan was, essentially, a no-brainer. Close the much smaller Japanese home market to American producers, while selling the bulk of their manufactures to the rich Americans.
When the Chinese launched their industrial development plan in the early 1980s, they fo l lowed a similar strategy—create an export platform on the East China coast to sell cheap man u factured goods to the rich Americans, and, to a lesser degree, to the rich consumers of Western Europe and Japan. The Chinese, unlike the Japanese before them, had a relatively open eco n omy. Foreign manufacturers were more than welcome to set up shop in China.
Was the Chinese market closed to foreigners? What market? Few Chinese consum- ers had the money to buy relatively expensive imported goods. But as Chinese economic development really began to take off, and relatively cheap Chinese manufactured prod- ucts fl ooded the world, the American consumer could no longer fi nance this expansion.
No problem. The Chinese go v ernment simply lent Americans much of the money we needed each year to fi nance our huge and growing trade defi cit.
During the Japanese industrial revival of the 1950s and 1960s, their manufacturers went head-to-head with ours. In the production of black-and-white TVs, and later, color TVs, the Jap a nese built on our technology, undersold American manufacturers in the vast American market, while the Japanese market remained closed to American TVs. As a result, American TV manufa c turers were driven out of business.
Our trading position with Japan is very much like a colony and a colonial power.
Our trading relationship with the Chinese is very different. We send airplanes, computers, movies, CDs, cars, cigarettes, power-generating equipment, and computer software in exchanges for toys, clothing, shoes, and low-end consumer electronics. Much of what they’re sending to us used to come from Japan back in the 1950s. “Made in Japan” has been replaced by “Made in China.”
Our huge trade defi cit with China will probably continue to grow, but even more importantly, its entire nature is rapidly evolving. We have long assumed this division of
486 C H A P T E R 1 9
labor: The Chinese would focus on lower-skill sectors, while the United States would dominate the knowledge-intensive industries. But as Harvard economist Richard B.
Freeman observed, “What is stunning about China is that for the fi rst time we have a huge, poor country that can compete both with very low wages and in high tech. Combine the two, and America has a problem.”
So far the hardest hit industries have been those that were destined to migrate to low-cost nations anyway. But now China is moving into more advanced industries where America remains competitive, adding state-of-the-art capacity in motor vehicles, spe- cialty steel, petrochemicals, and microchips. In other words, the United States has been losing its lead in the knowledge economy, while China evolves from our sweatshop to our competitor.
Japanese gains in the production of semiconductors, machine tools, steel, autos, TVs, and VCRs led directly to the loss of millions of well-paying American jobs. Although Chinese products may compete on a broader scale with American goods in the future, Chinese exports so far have generally not translated into major job losses in the United States. China’s leading exports are products that have not been produced in large quan- tity by American factories for more than a de c ade.
The Chinese, like the Japanese before them, have insisted on licensing agreements and large-scale transfers of technology as the price for agreeing to imports. These agreements, of course, lead to the eventual elimination of imports from the United States. However, the Chinese have taken this process one step further. Sometimes, instead of entering into licensing agre e ments, Chinese factories simply manufacture pirated versions, or knock-offs, of American videos, CDs, computer software, and designer apparel.
From the mid-1980s through the mid-1990s we engaged in a good deal of Japan- bashing, blaming that country for our growing trade defi cit. To a large degree our com- plaints were justifi ed. Not only were our manufacturing jobs migrating to Japan, but the Japanese market was largely closed to American exports.
In recent years we have shifted much of the blame to China, with whom we now run our largest trade defi cit (see Figure 5). But the nature of our trade defi cit with China today is not, in any sense, like our defi cit with Japan two decades ago. Japan was com- peting in businesses that were at the heart of the American economy. But our imports from China—clothing, toys, shoes, textiles, TVs, and consumer electronics—are mainly merchandise we stopped making here de c ades ago. Furthermore, China is remarkably open to trade. Between 1995 and 2005, our exports to China almost quadrupled. In com- ing years, this rapid growth will continue as the Chinese co n sumer market continues its rapid expansion.
My own prediction is that in just a few more years, not only will we be running still larger trade defi cits with China, but we will be importing more than a million very low-priced Chinese cars each year. By then China bashing may have been elevated from an art form to the national sport.
Final Word
Two major issues have been raised in this chapter. First, that there are clear advantages to free trade . And second, that the United States, which has been a strong free trade advocate, has been running large and growing trade defi cits. Let’s take one more look at both issues.
Free Trade in Word and Deed
Going back to the early 1980s, every president has strongly advocated the principle of free trade and has helped reduce tariffs and other trade barriers throughout the world. Robert Zoellick, the chief trade negotiator during the fi rst term of President George W. Bush, pushed
Free trade is the absence of artifi cial barriers to trade among individuals and fi rms in different nations.
International Trade 487
various proposals within the World Trade Organization to lower tariffs and export subsidies, as well as to remove all barriers to the free fl ow of goods and services across national borders. European Union members, most notably France, have refused to lower subsidies.
Members of the European Union called our free trade advocacy hypocritical when in March 2002, President Bush raised tariffs on imported steel. In fact they brought a case against the United States before the World Trade Court. In December 2003, Presi- dent Bush rescinded the ta r iffs.
Like his immediate predecessor, President Barack Obama has advocated free trade, at least in principle. But just eight months after taking offi ce, he imposed a 35 percent tariff on Ch i nese tires. This was done at the behest of the United Steelworkers Union after the U.S. Intern a tional Trade Commission ruled that a huge increase in tire imports had cost an estimated 5,000 workers their jobs.
A second deviation from our free trade policy is our huge agricultural subsidies—
averaging almost $20 billion a year. The world’s poorer nations, where up to 90 percent of the labor force is engaged in agriculture, have demanded that the United States, the European Union, and other rich nations abolish these subsidies that clearly make it impossible for the poorer nations to sell their agricultural goods on the world market (see the box “Farm Subsidies and the Poorer N a tions”).
On balance, the United States has long been a free trading nation. Zoellick was very active in negotiating free trade agreements with Singapore, Chile, South Africa, and other countries. Our $20 billion in agricultural subsidies are just 6 percent of the annual sub- sidies provided to farmers in the world’s richest countries.
Reducing Our Trade Defi cit
To reduce our overall trade defi cit we need to make a combination of four things happen.
First, we need to maintain our high rate of productivity growth and keep improving the quality of American goods and services. Second, we need to lower our dependence on oil imports, perhaps by raising the federal tax on gasoline. Third, we must reduce our rapidly rising defi cit with China. And fi nally, we need to face up to the fact that we are a nation of consumption junkies. In sum, we consume much more than we produce, and have done so by running up a multitrillion-dollar tab.
No man is an island, entire of itself.
—John Donne The world’s richest countries provide over $300 billion
in subsidies to their farmers. These subs i dies enable farmers from the United States, the European Union, Canada, and Australia to export much of their output at artifi cially low prices. The farmers of the world’s poorer nations cannot match these low prices, so they are largely shut out of world agricultural markets. Conse- quently, these nations cannot export their agricultural surpluses and get foreign exchange.
Mexico is the world’s birthplace of corn. But after the signing of the North American Free Trade Agreement (NAFTA) in 1994, American farmers fl ooded the Mexican market with low-priced corn. Since then, the price of Mexican corn fell more than 70 percent, severely reducing the i n comes of the 15 million Mexicans who depend on corn for their livelihood.
Of the $20 billion a year that American taxpayers shell out in farm subsidies, more than $10 billion goes to corn farmers. This allows them to sell their corn at prices far below what it cost them to produce it. In effect, then, the American taxpayer has subsidized the shipment of cheap corn to Mexico, where it has pushed the poorest farmers out of business.
Japan’s subsidies are 59 percent of the value of production, while those of the European Union are 34 percent of production and in the United States they are 21 percent. Will these n a tions agree to lower or elim- inate these subsidies? Probably not in our lifetime. It would be political suicide. Imagine what would hap- pen to all those senators and representatives from the farm states, not to mention all those presidential elec- toral votes.