Romney’s Red Scare: Is China Really a Problem?

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Mitt Romney brought up China seven times in Tuesday night’s debate, in response to questions about everything from education to George W. Bush. He blamed China’s currency manipulation for the loss of manufacturing jobs, and promised to “crack down on China when they cheat.” Romney is also running ads accusing Obama of “failing to stand up to cheating” from China, and promising to brand China a “currency manipulator” on his first day in office. President Obama has countered with ads saying that “Romney’s never stood up to China. All he has ever done is send them our jobs.”

It's unclear, though, if Romney’s popular new line of attack is a good one. Certainly, there’s something to it. The Economic Policy Institute reports that 2.4 million jobs were lost or displaced from 2001 to 2008 due to competition from and outsourcing to China. Robert Scott, the author of the report, claims that currency manipulation was “a major cause” of this job loss. 

But is the threat from China to America’s middle class growing, as Romney seems to suggest, or diminishing? And is the threat still due primarily to currency manipulation, as Romney insists? I am not an expert of trade flows, but I follow the literature, and I’d say that not only is Romney exaggerating the China threat, but he’s doing so at the expense of more, or equally, pressing economic and social issues.

We still have a large trade deficit with China, but there is some evidence that currency manipulation is no longer at the heart of it. Once believed to be 30 to 40 percent undervalued in relation to the dollar, the Yuan is now thought to be undervalued by about eight percent. According to the Peterson Institute’s Fred Bergsten and Joseph Gagnon, writing in the Financial Times, China has not been “the major perpetrator of late.” As Obama correctly noted, American pressure has been important in getting China to revalue its currency. But as he failed to note, most of the pressure came from Democrats in Congress like Sen. Chuck Schumer and Sherrod Brown and not from the administration.

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China’s currency policy is still a factor in the trade deficit , but probably no longer “the major cause” in America’s trade deficit with China. What are the other factors? First, the costs of producing many kinds of standardized mass production goods, such as apparel, shoes, sporting goods, and toys, have been lower in China, even if costs of transportation and duties are taken into account. Secondly, in producing computers and many kinds of consumer electronics, China enjoys the advantage of being part of an Asian high-tech hub, from which a manufacturer can draw all the different components that go into an iPhone. China also allows a company to mobilize very large numbers of people to produce a new model of a phone or computer quickly. Declaring China a currency manipulator will not alter these advantages.

There have also been studies recently that have suggested the pace of outsourcing to China is slowing, and will continue to slow over the decade. There are two major reasons: First, China’s “total landed costs,” which include wages and benefits, taxes and duties, raw material costs, and transportation and manufacturing costs (including energy), have begun to rise.

According to a recent Boston Consulting Group report, wages and benefits in the average Chinese factory rose 10 percent annually from 2000 to 2005. From 2005 to 2010, they rose 19 percent annually. And the cost of electricity and of transportation has shot up because of the rise in oil prices. At the same time, American labor costs – largely because of the Great Recession – have either stagnated or even fallen, and energy costs have benefited from natural gas discoveries. (The Great Recession probably aided American manufacturing by driving down costs even as it screwed American workers.)

This rise in China’s total costs will still not affect some high-tech producers like Apple who covet Asia’s supply base and Foxconn’s flexibility. And as a study by the Hackett Group indicates, many of these high-volume labor-intensive goods producers will probably leave China, but will end up in countries like Vietnam or Indonesia that offer even lower labor costs, or in Mexico that now enjoys comparable labor costs, but much lower transportation costs. Cracking down on the import of these goods from China will not necessarily improve America’s trade balance or bring back the blue-collar middle class.

But there are manufacturing industries that are already moving back to the United States. These include household tableware, furniture and appliances, flat-screen televisions, specialized apparel and some large durable goods producers. These companies now enjoy only slightly higher costs of production and cheaper transportation and energy costs in the United States.

Companies that might have been tempted to move their production to China will also hesitate. Companies, such as General Mothers, will still build factories in China, but in order to service the Asian market. The Boston Consulting Group says that “over the next five years ... the U.S. will be the optimal choice for many manufacturing investments aimed at serving the North American market.” None of this means that the United States need not worry about its trade deficit with China. It means that it is not remediable, as Romney suggests, by labeling China a currency manipulator. It also means that it is no more worthy of concern than a host of other problems besetting American industry and society, such as decaying infrastructure, inadequate schools, and growing inequality, which will not be reduced by factories moving back from China to Alabama or Tennessee, where they don’t have to worry about unions.

I would compare today’s debate over China’s currency manipulation and cheating with the furor in the ‘80s and early ‘90s over Japan’s unfair practices. There, too, many politicians and voters blamed Japan’s currency manipulation and import barriers for America’s trade deficit and worried that Japan’s industry would soon leave the United States in the dust.

There was certainly a problem with the deficit with Japan, but by the time it became a major issue in presidential politics – in the 1992 contest pitting Bill Clinton, George H.W. Bush, and Ross Perot – it had begun, in fact, to fade. Threats of congressional retaliation had forced Japan to limit its car exports and begin producing here; the Reagan administration had subsidized the American semiconductor industry and forced China to revalue its currency; Japan was beginning to experience its own cost problems; and through the development of Silicon Valley, the United States computer industry had leapfrogged the Japanese. I may be proven wrong, but I suspect today’s debate over China’s currency manipulation may, too, be occurring just as the problem it is addressing has quietly begun to be solved.

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