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October 24, 2003
American Job Exodus to China
Throughout the US, China is now increasingly identified as the villain behind the loss of 2.8 million American manufacturing jobs - one in six - since the Presidential election of 2,000. Although recent economic indicators show an upturn in productivity, there is little improvement in the employment situation. Industries continue shedding jobs and outsourcing them mainly to China, a country that is now acknowledged as the manufacturing floor of the world. Goods manufactured in China have flooded the US market and at prices consumers love and American manufacturers hate; for, they just cannot match those prices. Labor in America costs 25 times more than what it does in China.
China has thus been put in the dock. Some politicians have charged China of cheating in trade by artificially keeping its currency, the Yuan, at an undervalued fixed rate of exchange, making their products much cheaper for American importers. Some question the wisdom of the President’s tax cuts, as the money thus made available is not being plowed back into manufacturing but is largely spent in stores crammed with inexpensive Chinese goods. Wal Mart alone is importing $15 billion worth of merchandise from that country. China is thus being accused of having stolen American jobs and having caused the shuttering of many a small indigenous manufacturing firms.
Fact of the matter is that the situation is not all that simple. Nor, can China be totally blamed for the unsavory effects on the job market of America. It is inherent in the current and controversial system of global economy, called globalization. This system of free trade is a constant competition wherein the efficient keeps trumping the inefficient. In this economic milieu, work of all kinds is bound to be outsourced to the world’s dynamic developing economy.
American leading corporations are doing well out of buying from China, or shifting manufacturing there, but smaller ones are screaming about the ‘deindustrialization of the US’. This is a wild charge. The US manufacturing sector continues to be the largest in the world. The US multinational corporations, taking advantage of the facilities afforded by globalization, have shifted their manufacturing to countries where they have the advantage of the availability of raw or semi-processed materials and cheap labor. They own and profit from these overseas operations.
The chief benefit of investment in China is cheap and skilled labor. That shows up as profit to US companies, not as a loss of American jobs. The large corporations are the biggest contributors of funds to political parties. The parties are thus wary of finding fault with them for shifting their manufacturing sectors to a foreign land.
Jobs constitute an emotional issue that resonates deeply with voters. There is no easier scapegoat than inexpensive imports to explain a weak job market. American jobs have also shifted to Mexico and to India. Economies of both have spurred owing to American investment. Almost all IT giants like Microsoft have set up large units in India, but one rarely hears grumbles against that. For the Indian engineers who were engaged by the software giants in America are now working on the same or similar assignments in their own country but at much lower emoluments. The shift of venue has not caused a massive loss of jobs for the local aspirants.
The situation is entirely different in the case of China. For, the American consumer is daily handling and buying Chinese goods. The Silk Road seems to have rerouted to the US. The difference is that the ownership of the firms operating in China remains with American investors. Mexico is a friendly neighbor, a member of North America Free Trade Agreement (NAFTA). Yet, several American corporations have shifted their manufacturing units from Mexico to China. This is not the result of any unfair trade practice, according to the former World Bank Chief Economist and Nobel Prize winner, Joseph Stiglitz, but of growing efficiencies in China’s economy. “Bush is trying to shift blame from his macro-mismanagement to the Chinese…America has no ground to complain”.
The Bush administration and several members of the Congress have blamed the Chinese authorities for artificially keeping their currency undervalued. The Yuan is pegged at Yuan 8.25 to $1. In point of fact, this rate of exchange has remained unchanged since 1994 - for almost a decade. The Chinese economy is a complex of both the communist and capitalist systems. It has been absorbing capitalist features since 1976 when Chairman Deng Zaopeng gave a right wing shift to the economy. While most of the world currencies are floating, the Chinese Yuan has remained pegged at a fixed rate. The Chinese claim that such a rate gives stability to their economy.
The American administration contends that the Yuan is undervalued by 15%- 40 %. This has made Chinese manufactures that much cheaper vis-à-vis American products and cannot therefore compete. Bilateral trade is being conducted on a ground tilted in favor of China. American authorities would like the Yuan to float like other world currencies, or at least be revalued for the trade to be conducted on a level ground.
With an election on the horizon and the economy continuing to shed jobs - August was the 37th straight month of job losses - President Bush is likely to focus attention on the Chinese trade policy based on an undervalued currency. He has recently created a manufacturing Czar position at the Commerce Department to handle the issue. A month back, in September 2003, he sent his Treasury Secretary, John Snow, to Beijing to persuade the Chinese to revalue their currency if not allow it to float. The Chinese made vague promises and Mr. Snow could hardly report success in his efforts.
On October 20, 2003, Mr. Bush will visit Bangkok to attend the summit of Asia and Pacific Economic Cooperation (APEC). He will meet and discuss this issue with the Chinese President Hu Jintao. He might also return with vague promises of the Chinese easing up on the manipulation of the Yuan.
His administration is faced with a highly delicate task of balancing the interests of the multinationals who are benefiting from trade with China as against the small manufacturing firms who are badly hit by the imports of cheap Chinese products. Then there is his administration’s commitment to free trade and the demands for government intervention in the adverse trend of trade with China. Then there are some foreign policy concerns such as the decision to dissuade North Korea from going nuclear. China is playing a leading role in this respect and Mr. Bush be wary at this juncture to take any step that might deviate the Chinese from their stance.
According to some experts on China, if the Chinese agree to float the Yuan, there is no guarantee that its value will go up. It might go down further.
The reality of the matter is that the Administration will have to seek a local solution to the problem of job losses. In the context of globalization and firm commitment to free trade, seeking a remedy abroad will hardly be a fruitful choice. As several eminent economists have pointed out, even if the Yuan was devalued by 20 per cent, it would hardly make the cost of production at home competitive with Chinese prices. It might slow down production in China without accelerating it in the US. Yet, the issue has a tremendous appeal for election purposes. It will no doubt stir the emotions of the people like the rhetoric of war on Iraq with a quagmire at the end.
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