U.S. TRADE POLICY TOWARD CHINA: LEARNING THE RIGHT LESSONS.

• Author: Lincicome, Scott

Labor market and cultural disruptions in the United States are real and important, as is China's current and unfortunate turn toward illiberalism and empire. But pretending today that there was a better trade policy choice in 2000--when Congress granted China "permanent normal trade relations" (PNTR) status and paved the way for broader engagement--is misguided. It assumes too much, ignores too much, and demands too much. Worse, it could lead to truly bad governance: increasing U.S. protectionism; forgiving the real and important failures of our policymakers, CEOs, and unions over the last two decades; and preventing a political consensus for real policy solutions. Indeed, that is happening now.

China entered the World Trade Organization (WTO) on December 11, 2001, and President George W. Bush signed a proclamation on December 27, that extended PNTR status to the People's Republic of China (White House 2001). The benefits of granting PNTR to China were widely understood at the time. Nicholas Lardy, a respected China scholar, summarized those benefits as follows:

A positive vote [for PNTR with China] would give U.S. companies the same advantages that would accrue to companies from Europe, Japan, and all other WTO member states when China enters the World Trade Organization. It would also provide an important boost to China's leadership, that is taking significant economic and political risks in order to meet the demands of the international community for substantial additional economic reforms as a condition for its WTO membership. A positive vote would strengthen bilateral economic relations more generally [Lardy 2000: 1],

The 20th anniversary of the U.S. law implementing PNTR with China and the Chinese government's numerous recent offenses have caused a bipartisan chorus of American politicians and pundits to question the wisdom of that law. In particular, these critics allege that the Clinton administration and Congress rubberstamped both the law and China's entry into the WTO, and that these events fueled China's rise and the now-famous "China Shock"--the period between 1999 and 2011 during which a sizable increase in Chinese imports supposedly produced the loss of approximately 2.4 million U.S. jobs. In turn, critics have used the "mistake" of past economic engagement with China to justify grand rethinks of current U.S. foreign and economic policy, including withdrawal from the WTO itself.

However, a proper accounting of the relevant literature reveals most of this criticism to be mistaken on the law, economics, and history of PNTR, China's WTO accession, and the China Shock. This analysis instead reveals that new or continued U.S. restrictions on Chinese imports would not have saved most of the U.S. manufacturing jobs destroyed between 1999 and 2011; that China would have joined the WTO and become an export powerhouse regardless of PNTR; that U.S. engagement with China in the 1990s was a gradual and pragmatic policy decision based on numerous supporting facts at the time, and with no better alternatives; and that myriad U.S. policy failures since PNTR actually did enable China or harm American companies and workers. Policymakers should focus on these errors, not PNTR, lest they risk enacting new policies that do nothing to address America's real and serious challenges, including China, and might actually make things worse.

U.S.-China Trade: Amplified Costs and Ignored Benefits

A central flaw in the anti-PNTR thesis is that it ignores the benefits of increased U.S. trade with China over the last two decades--for American consumers, manufacturers, and workers. Economists have found, for example, that Chinese import competition between 2000 and 2007--the peak of the China Shock--had substantial procompetitive effects on U.S. firms and generated over S202 billion in consumer benefits via lower prices. That equals $101,250 in benefits to U.S. consumers per manufacturing job lost (Jaravel and Sager 2018). Another study concludes that Chinese imports "significantly reduced inflation," cutting the price index for consumer goods by 0.19 percentage points per year between 2004 and 2015 through lower prices and an increased variety of goods available (Bai and Stumpner 2019; see also Amiti et al. 2018). Consumer benefits of trade, already tilted toward America's poor and middle class, were even more so for Chinese imports because those consumers frequently shop at places like Target and Walmart that carry such goods (Broda and Romalis 2008; Fajgelbauin and Khandelwal 2014). One can argue that those consumer benefits are cold comfort to someone who lost a job because of Chinese import competition, but they are nevertheless real, widespread, and important.

Chinese imports have also been found to generate substantial benefits for many American companies and their workers. Import competition encouraged many American manufacturing firms to invest and innovate more and ultimately led to net welfare benefits (Gutierrez and Philippon 2017; Caliendo, Dvorkin, and Parro 2019). After accounting for manufacturing supply chains and intermediate inputs, the effect of the China Shock on American jobs and wages has been quite positive overall, and while the China Shock produced losses for certain groups of Americans, it generated overall gains in social welfare (Wang et al. 2018; Galle, Rodriguez-Clare, and Yi 2017). In fact, researchers have estimated that about 56 cents of every dollar that Americans spent on "Made in China" imports in 2019 actually went to American firms and workers (Hale et id. 2019). Such benefits make sense: data show millions more "blue collar" American jobs that might benefit from Chinese imports--in transportation, logistics, construction, maintenance, and repair, for example--than in manufacturing (BLS 2018).

This assessment erroneously assumes, moreover, that all U.S. manufacturing jobs are potentially hurt by Chinese import competition. Yet approximately one-third of all Chinese imports were intermediate goods used by American companies to produce globally competitive products. These imports have helped, not hurt, U.S. manufacturing workers. In fact, U.S. manufacturing firms that increased direct imports from China between 1997 and 2007 experienced growing or steady employment, likely because of the importers' ability to lower prices and raise output (even as non-importing competitors suffered) (Antras, Fort, and Tintelnot 2017). With respect to these types of complex value chains, the WTO estimates that China in 2015 was the third-largest user--behind only Mexico and Canada--of "Made-In-America" manufacturing inputs and the largest source of inputs for American manufacturers (WTO 2020).

Then there are the benefits that American farmers and workers have derived from exporting to China, still the United States' third largest export destination (U.S. Census Bureau 2020). According to the U.S.-China Business Council, exports to China in 2019 supported over 1.1 million American jobs in a wide range of manufacturing, logistics, and services industries (USCBC 2019). The U.S.-China "Phase One" agreement's heavy emphasis on American agriculture sales, as well as the massive expansion of federal farm subsidies during the countries' trade dispute, shows just how much U.S. farmers have benefited from selling to the growing Chinese market.

Beyond the benefits of trade with China, a proper accounting of the China Shock also requires proper context. There is evidence, for example, that many U.S. manufacturers adapted during the shock, and ended up hiring many Americans and increasing output. For example, Fort, Pierce, and Schott (2018: 18-21) find that declines in "manufacturing firm workers" employed in "manufacturing plants" between 1977 and 2012 were more than offset by contemporaneous increases in employees in "non-manufacturing plants" that were owned by many of the same "manufacturing firms."

The evolution of American manufacturing--driven by trade, automation, or other factors--raises further concerns about attempting to isolate the effects of Chinese import competition on low-skill American manufacturing employment. For example, researchers find that the decline in manufacturing employment during the 2000s was a substantial cause of rising American unemployment, especially for less-educated prime-age workers (Charles, Hurst, and Schwartz 2018). However, they also find that these declines were caused by a mix of both import competition and nontrade factors. They further speculate that persistently depressed low-skilled manufacturing employment in the United States was likely caused by nontrade issues like a skills mismatch in the U.S. manufacturing sector (which is becoming more skilled compared to other low-skill professions like retail and construction) and declining cross-region mobility among U.S. workers during the 2000s compared to earlier periods. As a result, "imposing trade barriers against the rest of the world is unlikely to substantially increase the employment prospects of workers with lower levels of accumulated schooling" (ibid.: 63).

Studies have similarly found it difficult to...