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 Article Published in The Economic Times  29 November 2003

Is China stealing American jobs?

"Preach the virtues of free trade, while act against it, at home", is the mantra of Bush administration, which recently invoked a protective provision of WTO agreement with China that entitles US to limit the growth of Chinese textile imports to 7.5 percent a year. Restricting half a billion dollar worth of textile imports is indeed a politically motivated, retrograde step for free traders, consumers and the American and the world economy as a whole. Trade restrictions have had a chilling effect on investor confidence; are causing stock-market losses and leading to anti-Americanism.

The fact that Bush's steel tariffs imposed last year were declared illegal by the WTO recently, authorizing European Union to impose tariffs on $2.2 billion worth of American goods, did not deter Bush to bring in another measure of protectionism. US textiles manufacturers have been complaining of 316,000 jobs lost due to Chinese imports, but question is whether imposing restrictions on Chinese imports will at all save jobs in the declining American textile sector without hurting the US economy. Results of safeguard tariffs show 5000 jobs saved in the steel sector, and an additional profit of $240 million made by the steel companies. However these are more than offset by losses of 26,000 jobs and $600 million lost in profits by the downstream steel companies.

America's main grievances have been against China's unfair trade practices and Yuan's peg to the dollar, which is alleged to be responsible for America's huge trade deficit with China (expected deficit in 2003-04 is $120 billion). US policy makers also think that China is the real culprit in stealing jobs from the US manufacturing, as imports of textiles, toys and shoes etc. keep burgeoning. US Congress is also threatening to impose a tariff of 27% on all Chinese-made goods. Further, US manufacturers have a long list of grievances- from China's closed markets, to rampant piracy of intellectual property, forced transfer of technology, trade barriers and closed financial markets.

While American economy has been growing steadily, with the recent quarter growth as high as 7.2%, the recovery in 2.8 million jobs lost since late 2000, is too slow to ensure a second term for Bush. Even though recent trends since August show declining job losses and re-hiring, the situation isn't likely to improve any time soon, as used to happen in past recoveries. However jobs were lost not because of the China factor, but on account of rapid rise in productivity in manufacturing, which grew at 4.2%, against 3.6%, in the overall nonfarm economy, in the last five years. Manufacturers have eliminated jobs ruthlessly in order to cut costs. A study by Alliance Capital shows that productivity improvements have been eliminating jobs around the world, and not just in the US. Far fewer employees churn out the same or even higher number of cars, steel slabs, hi-tech equipments and machine tools. American factories are in fact producing more than they ever had. Even in the traditional steel sector, production went up from 75 million tons in 1982 to 102 tons in 2002, but the numbers employed went down from 289,000 to just 74,000. New steel companies like ISG are thriving, whereas old players like LTV and Bethlehem are struggling against high-cost of pensions and health benefits. But the advantage of the American approach has been to create jobs in other sectors, to compensate for job-losses in manufacturing.

Over-all employment in manufacturing, which is just 11.2%, has come down marginally, to 14.6 million. Recent outlook on manufacturing is however turning positive, as inventories have dipped to a record low and companies want to stock goods by hiring permanent workers. National Association of Manufacturers estimates that only half the factory jobs are lost for good and predicts a rebound in machinery, electronics, computers, transportation gear and fabricated metals. Productivity engine is also likely to slow down to a more sustainable level, boosting hiring of workers in the future. Businesses hired about 125,000 workers each in September and October. Consumer demand is also growing strongly at 3.8%, higher than 0.9% two years ago.

As US economy is picking up, Bush's advisors need not press the alarm bell and force China to retaliate. American exports to china grew @21% last year, against just 2% going elsewhere. China, which has been steadily opening up its economy faster than promised to the WTO, may retaliate by not buying aircrafts, farm products and restrict burgeoning sales of hi-tech products like computers, mobile phones and medical equipments etc from American companies. America has also benefited from Chinese exports to US, as two-thirds of China's exports growth since 1994 has come from subsidiaries or joint ventures of MNCs. American Chamber of Commerce in Beijing is quite optimistic about doing business with China. American companies in China make more money and earn higher profits than elsewhere and are planning to expand their operations. As more and more American companies are becoming dependent on profits from overseas operations, any setback to China or India, the two big markets, may damage a great deal. Further what China earns through trade surpluses (currency reserves stand at $405 billion), it re-invests in Treasury Bonds and mortgage securities in the US, which has been a source of cheap credit to the American government providing financial stability.

India too, which has been gaining service sector jobs through outsourcing, at the cost of workers in the developed world, has been put on notice. Recently Indiana's newly elected governor, Joe Kernan cancelled a $15 million contract awarded to TCS America, by his predecessor. This could sway other governors also, who are similarly facing peoples' protest against outsourcing of jobs to India. Indian IT majors and workers may thus suffer adversely. Even American administration may not hesitate to slap restrictions tomorrow, if the issue of job losses in the service-sector due to outsourcing heats up. The country therefore needs to develop a proper strategy to deal with such an eventuality.

The truth is that globalization picking up in China and India has hugely benefited MNCs, which are salivating at the prospects of huge consumer markets in these two countries. Sales of branded goods to the Indian middle class and increasing number of outlets of McDonalds and Barista bode well for the rich world's economies. The world is truly getting interconnected and the engine of outsourcing jobs in manufacturing as well as in service sector will play a central role in lifting the global economy and number of people below the poverty line. US policy makers therefore should not become shortsighted by promoting protectionism and derail the economic juggernaut.