The Scapegoat of America’s Lost Jobs
U.S. politicians are eager to blame their trade partners’ “currency manipulations” when the real cause is improved labor efficiency
By Richard Katz
May 20, 2015 12:50 p.m. ET
“Currency manipulation” has become a focus of U.S. politicians determined to block the Trans-Pacific Partnership trade accord, such as New York Democrat Charles Schumer, or those seeking re-election who want to show toughness toward Japan, such as Ohio Republican Rob Portman. One of the currency hawks’ fattest targets is China, even though it isn’t participating in the trade accord and doesn’t meet the International Monetary Fund’s criteria for currency manipulation. Japan, which does participate in the TPP talks, is another target, particularly for the auto caucus. It wants to use the currency issue to torpedo TPP, even though Tokyo has not intervened in the currency markets on a sustained basis for more than a decade.
In justifying their assorted bills to penalize alleged “currency manipulators,” currency hawks often cite Fred Bergsten of the Peterson Institute for International Economics, who claims, “The United States has lost 1 million to 5 million jobs due to this foreign currency manipulation” by 20 countries, of which he says, “China is by far the largest in terms of both economic importance and size of intervention.” (Mr. Bergsten notes this is his personal opinion, not that of the Institute; others at the Institute have publicly taken the opposite view.)
Since Beijing decided in July 2005 to let the yuan gradually appreciate, China’s currency has risen 33% against the dollar. It did this at the same time that the currency index of all of America’s trading partners fell 5% against the dollar. Vis-à-vis China’s own major trading partners, the yuan is up 57% in real terms (i.e. adjusting for the differences in inflation between China and its trading partners). In fact, the IMF is reportedly about to declare that the yuan is no longer undervalued.
Mr. Schumer simply ignores this change. Ten years ago, he claimed the yuan was undervalued by a third, and he says the same today.
It is true that after long being flat at around 17 million, the number of factory jobs in America started a steady decline around 2001, the same time China entered the World Trade Organization. This is the alleged “turning point” cited by commentators such as Robert Scott of the Economic Policy Institute.
But this is like saying the sun rose after the rooster crowed. U.S. factory jobs plunged even when the yuan soared vis-à-vis the dollar. There is simply no correlation between the long-term trend in factory jobs and movements in China’s currency.
The real cause of the lost jobs is improved efficiency. U.S. factory jobs have declined by 30% since 2000 even though manufacturing output rose 20%. Back in 2000 it took almost 11 workers to produce a $1 million worth of manufacturing output per year (as measured in constant 2009 dollars); now it takes just six workers. If 11 workers were still needed, then the U.S. would now employ 21 million manufacturing workers instead of 12 million.
Increased efficiency may mean fewer factory jobs, but it also makes American-made goods more affordable for U.S. consumers, not to mention customers overseas. Efficiency raises living standards, in China as well as the U.S. China produced five times as much industrial output in 2009 as it did in 1995, without adding a single factory worker.
The alleged link between the yuan and American factory jobs is the U.S. trade deficit. Mr. Bergsten claims that each $1 billion increase in the U.S. trade deficit costs the U.S. 5,000 jobs, and that a cheaper yuan increases the U.S. trade deficit by replacing demand for American goods with demand for Chinese-made goods. But over the past five years the U.S. trade deficit in non-oil goods has grown despite the fact that the value of the yuan has risen. No one denies that China’s currency rate will have some impact on demand for certain U.S. factory goods, but that impact is dwarfed by many other factors.
For example, China and U.S. are at very different stages of development and mostly produce complementary rather than competing goods. About 1% of the value of an iPhone comes from the assembly work in China. Most of the real fabrication work is done elsewhere, as in the cases of Japanese or Korean LCD screens or computer chips. Yet U.S. trade statistics count the entire value of the iPhone as an import from China. Moreover, as we’ve seen in textiles and electronics assembly, when the value of the yuan or Chinese wages rise, that doesn’t shift production from China to the U.S., but from China to other developing countries such as Vietnam and Bangladesh.
The irony that Messrs. Bergsten, Schumer et. al. ignore is that U.S. factory jobs regularly do best when the U.S. trade deficit is growing. If their theory were right, that’s exactly when the U.S. should be losing factory jobs at the fastest rate. But in reality as U.S. GDP-growth improves, particularly relative to growth in other countries, higher demand in America sucks in imports faster than America can expand export sales to others. So the U.S. trade deficit gets bigger. Yet improved GDP growth also means more demand for manufactured goods, meaning more U.S. factory jobs than would have otherwise been the case.
Consider the alternative: In 2008 and 2009 the U.S. “enjoyed” a 30% plunge in its trade deficit, but that resulted from a financial crisis that caused a 3% drop in GDP and a loss of 1.6 million factory Jobs.
Rather than searching out scapegoats, the real solution is to find new jobs for workers displaced by productivity gains and technological improvements and to give them the skills needed to fill those jobs. Countries like France and Holland spend 1% to 2% of their GDP on “active labor measures” like retraining, matching employers to employees and even temporary subsidies for on-the-job training. The U.S. spends just 0.1% of GDP on such efforts, the least among developed economies.
Allotting budgets to such programs is easier said than done, particularly in today’s political atmosphere. But it’s a whole lot more helpful than throwing stones at Beijing or Tokyo.
Mr. Katz is editor of the Oriental Economist Report.
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