Why the United States is always the loser in any free-trade deal

April 10, 2015
The YM Bamboo, a container ship operated by the China Ocean Shipping Company (COSCO) is docked at the Port of Oakland in Oakland, California

The YM Bamboo, a container ship operated by the China Ocean Shipping Company docked at the Port of Oakland in Oakland, California, January 14, 2011. REUTERS/Beck Diefenbach

Free trade is an American mantra. The Obama administration’s commitment to winning “fast-track” status for its cherished Trans-Pacific Partnership trade agreement is part of that tradition. But growing evidence shows that granting full trading privileges to low-income countries on the make is usually costly to the United States.

The United States has been in lengthy negotiations with 11 nations around the Pacific Rim, including Australia, Chile, Japan, Singapore and Malaysia. After years of talks, the partners now seem close to an agreement.

That is one reason for the unusual congressional alliance of left-wing Democrats like Senator Elizabeth Warren (D-Mass) with Tea Party Republicans like Representative Walter Jones (R-N.C.) lined up against the trade initiative. Policy-wonk Tea Party fellow travelers, including Representative Paul Ryan (R-Wis.) and Senator Ted Cruz (R-Texas), support the deal — as do many mainstream economists.

Economists cite the great advantage of free trade as a basic doctrine of classical economics. If trading partners concentrate on what they do best, the argument goes, both partners end up better off.

The United States debunked that theory in the 19th century. It sold commodities like iron and cotton to Europe while building high tariff walls to protect its own “infant industries.” By the 1890s, the United States had surpassed Britain in most advanced industries. It was an easy target, because London was dogmatically committed to pure free trade.

Chinese workers arrange socks at a factory in Shanghai.

Chinese workers arrange socks at a factory in Shanghai, August 17, 2005. REUTERS/Aly Song

Recent research helps distinguish between trade and offshoring patterns that have the mutual benefits — and those that don’t. When the trade or offshoring partner is another high-income country, U.S. wages tend to increase. But when its with low-income countries, U.S. wages decline, particularly for unskilled or medium-skilled workers.

These wage effects are not just in manufacturing, but in the same job categories of other industries. Manufacturing generally has higher pay scales than services. Yet as increased imports and offshoring put pressure on manufacturing jobs, there is a domino effect as displaced workers move into lower-paid services. Wages shrink across the board.

The pressure for lower wages when importing from low-income nations has a far greater effect than repercussions from offshoring. It is most striking when China is the partner. For every 10 percent increase in Chinese imports, U.S. wages across the affected jobs fell by 6.6 percent. In almost all cases, the wage reductions hit low-wage workers hardest, particularly non-high school graduates.

U.S. manufacturing employment reached its peak in the late 1970s, and has been generally declining since. There is a clear break in 2000, however, the year China joined the World Trade Organization and began a concentrated, and catastrophic, drive on U.S. product markets.

From 2000 through 2009, the United States lost roughly 6 million factory jobs, or about a third of the total in 2000. There has been a recent modest recovery, 850,000 manufacturing jobs added since 2010 — but too little for much satisfaction.

Daniel DiMicco, chairman of Nucor Corp, speaks during the Steel Success Strategies conference in New York

Daniel DiMicco, chairman of Nucor Corp, speaking in New York, June 19, 2013. REUTERS/Eric Thayer

China’s destructive brand of competition is especially grating. Consider the example of Nucor Corp., one of the world’s most efficient steelmakers. Nucor uses only 0.4 hours of labor to make a ton of steel, says Dan DiMicco, former chief executive, or about $8 to $10 in wages. It relies mostly on scrap steel for its raw material, while China uses iron ore, which is more expensive, and its shipping cost to the United States is about $40 a ton.

Even if Chinese labor were free, DiMicco maintains in his new book, American Made: Why Making Things Will Return Us to Greatness, there is no way the Chinese steel producers could undersell Nucor in its home market. Yet, over much of the past year, low-cost Chinese steel has flooded U.S. markets, which, DiMicco says, is clear evidence of illegal “dumping.” Beijing, of course, says it complies with all fair trade rules.

But China plays by different rules. Its powerful manufacturing enterprises are largely state-owned, and blessed with a host of subsidies, including Party-determined prices for financings, land purchases, taxes and fuel.

Worse than that, in recent years, the Chinese government has been pressuring European and U.S. companies to transfer proprietary technologies as a condition of winning major contracts.

A prime example may be the partnership between the state-owned Commercial Aircraft Corporation of China and a consortium of seven U.S. aerospace companies, led by Boeing Company and General Electric, to build a jumbo jet competitor. All the companies are contributing substantial proprietary technologies to China. GE’s avionics, one of its crown jewels, are a key part of the deal. Advanced avionics, however, are also of keen interest to the Chinese military. GE insists it can prevent any technology leakages to the military, and swears that any evidence to the contrary means termination of the entire project. Sure.

A CRH Harmony bullet inspection train leaves a train station for a railway inspection assignment, in Guiyang

A China Railway High-speed Harmony bullet inspection train leaves a train station in Guiyang, Guizhou province, October 8, 2014. REUTERS/Stringer

Beijing’s record here is not encouraging. China now has the world’s largest high-speed-rail industry, built in record time — after buying equipment from Siemens, Kawasaki Heavy Industries and other Western companies and then reverse-engineering it. China’s state-owned businesses now market their rail systems throughout the world at prices about half that of Western vendors. That’s becoming standard procedure. Most computer deals in China require that the government gets a copy of the vendor’s source code, the key to the success of any technology enterprise.

China is a great country, with extraordinarily talented and industrious people. But the government bureaucracy has been revealed as deeply corrupt, and often pays only lip-service to rules of the road. A few decades ago when a U.S. steel company complained about foreign dumping, one could assume they were seeking protection from more advanced competitors. That is no longer the case, especially with a company like Nucor.

It’s high time that predatory competitors like China are treated with judicious doses of their own medicine. China is not included in the Trans-Pacific Partnership, but its rapid economic progress is a blueprint for every aspiring developing nation. Only when the United States is prepared to ensure fair treatment for its own companies, should Washington offer free trade consideration to yet more budding competitors.

16 comments

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“There is a clear break in 2000, however, the year China was admitted to the World Trade Organization”

Not sure what the distinction is, but China was admitted to the WTO in December 2011, three months after 9-11.

https://www.wto.org/english/thewto_e/cou ntries_e/china_e.htm

The trade deal is a piece of junk, so much so that the negotiations are being held in secret. There’s quite a bit more about this trade deal that we’re not being told, that will work to imperil our future.

Posted by Laster | Report as abusive

A lot of the article is true, but I wouldn’t blame low US wages solely on free trade- the other half is corporations slaving to their stock price and NOT SHARING success with workers. Companies are so desperate to raise their stock a nickel they fail to give raises to their employees who have done the work.

Also, anyone with even half a brain can see that if virtual slave labor is used, like in China where skilled workers make 10% of US workers, the Chinese will have a huge pricing advantage.

Posted by LetBalanceCome | Report as abusive

Chinese factory girls sorting socks – now those are the kind of productive, value adding jobs we need for our American workers! The U.S. needs to develop and build and innovate in the high end of the manufacturing chains, we can’t compete – nor should we – with low wage, low skilled workers in China, Bangladesh, and elsewhere. And China adds little value to most of what they export but rather are assemblers of Ipods, laptops, cell phones, with the high end components made in Japan, the U.S., and elsewhere. The wealth is created in design and engineering of high tech products, and then at the retail/distribution end. The Chinese make little money on the actual manufacturing and assembly.

Posted by Cassiopian | Report as abusive

Free Trade should be emphasizing fair trade.

Fair trade being not putting our defense, markets, or labor to the disadvantaged of other nations.

We should certainly not allow our proprietary technology or military advantages be disclosed or obailed by other nations.

Posted by Flash1022 | Report as abusive

Well said Cassiopian.

Posted by jambrytay | Report as abusive

Free trade is not written correctly. It should be called greed trade.
There is no way the United States can compete with slave labor. This is why our standard of living continues to decline. How do we compete? This is why you don’t work. Or if you do have a job your not paid enough.

Posted by gdlokn | Report as abusive

I would like to know if the author wishes to have their children working in textile mills and toy assembly factories…..you know, because we would be so much better off if we scrapped free trade and kept these jobs for ourselves.

Posted by Pablo_III | Report as abusive

How about having all US politicians wear a bug 24-7 connected to all the world’s news services. Someone pays for their PR and expects things like trade deals, contract, etc. The voters have a right to know.

Posted by SamuelReich | Report as abusive

All dealings with reps of other nations should be bugged, recorded and open to all news services with exception of details joint military actions.

In a nations of millions of people the politicians have to sell favors to finance their PR. WE have a right to know if the favors of US politicians are going to other nations.

Every fool knows trade deals with low wage nations means export of jobs.

Posted by SamuelReich | Report as abusive

Cassiopian – Not all people have the ability or desire to attain the high-end jobs of which you speak. There has to be work for every kind of citizen and manufacturing used to provide thousands of jobs to everyday hard working people. Now they end up in part-time low wage service positions. Is this better than manufacturing? All we did was transfer the manufacturing jobs to China so that their everyday people could work instead of ours. This has worked out well for China and giant corporations, not so much for the American people.

Posted by mycentstoo | Report as abusive

Hey Cassiopian,
Did you read the article?

If they add very little value, then how come China competes with the west in high speed rail after taking the technologies from the west? Not everything they do is making socks.

Meanwhile we have millions of out of work factory workers who will never design an ipod. You cannot have an entire nation, let alone one of the largest nations on earth, working in fancy design and research jobs. The USA needs manufacturing work also. It is the only way any country has ever become rich.

Posted by Benny27 | Report as abusive

Benny27-

You understand that, depending on whose data you look at, the US is the world’s #1 or #2 manufacturer. By manufacturing productivity measures, we’re #1 by a long way.

Posted by jambrytay | Report as abusive

Free trade is great if you don’t like borders, and you believe that our standard of living in America is too high. Keep thinking that.

Posted by AlkalineState | Report as abusive

The so-called free trade deals are designed to allow the big fish to eat the little fish, no more and no less. Most big fish are in the US, but are increasingly in other countries such as China. It is only when inept clauses are included that “the plan” is less than perfect.

Posted by ArghONaught | Report as abusive

Yes – and the US and European countries are handing over their IP and their livelihoods as they vie for scraps like foolish children. The US far more so than Europe with their absurd notions of fairness. It is simply amazing to me how stupid and short sighted we are. Then again as Lennin put forth: “The Capitalists will sell us the rope with which we will hang them.” Unfortunately, the Chinese are quite communists or capitalists, simply ruthless business people with one goal. Winning.

Posted by Subwavelength | Report as abusive

Bring back the tariffs. 20% on all imported manufactured goods. That’s what China charges us. So why do we now charge them 1%?

Posted by AlkalineState | Report as abusive