“We can’t continue to allow China to rape our country. That’s what they’re doing. It’s the greatest theft in the history of the world.” For anyone who thought Donald Trump might soften his approach to China, think again. Trump said this while campaigning in Indiana, right before crossing the primary finish line and firmly positioning himself as the Republican Party’s presumptive candidate. China was a prominent theme during the Trump campaign and the comment in Indiana indicates that Trump is not likely to let up on China any time soon.
Prepare to be disappointed
While the fiery rhetoric captures the attention in the short run, in the long run it will likely be disappointment that characterizes Trump’s position, if in fact he becomes president. Allow me to give you a real world example as to why Donald Trump is unlikely to be satisfied relative to trade with China.
A real world example
A few years ago one of our Chinese suppliers of industrial parts notified us they would no longer accept orders for basic parts. Instead, they would only accept orders for more advanced parts that require more engineering and advanced machining. This was because of the following: 1.) China’s currency had been appreciating for a number of years (in fact the currency had risen about 30% over ten years ending in 2015); 2.) wages in China had also been rising (mostly double digit percentage increases every year since 2007). The supplier’s margins were being squeezed so they had no choice but to focus on higher value-added parts. Toward that end they had acquired a number of advanced machining stations and were implementing management practices aimed at improving efficiency and cost control.
China is not actually manipulating its currency
This example contains the main elements as to why Trump’s position on trade with China is likely to disappoint. First, Trump has said he will stop China from manipulating its currency to support exports. The fact is China’s currency has been rising for years which is the opposite of Trump’s allegations. Over the last year or so, the market has been pushing China’s currency lower and China has actually been supporting the currency, which is also the opposite of Trump’s allegations. Mr. Trump is simply wrong on this point so getting China to stop “manipulating” its currency is unlikely to produce the results Trump wants to see.
China’s economy is in transition
Secondly, over the last decade, as China’s currency and wages have increased, its exports have continued to increase and we have not seen a flood of jobs returning to the US. To be specific, over the last five years or so, China has lost a relatively small amount of market share in low cost products like apparel, shoes, and toys, but has actually gained market share in higher value-added items like computers and appliances. In my example, the basic industrial parts that the supplier will no longer make will not return to the US. Instead they will likely be made in India or Vietnam or a factory in western China (where wages are lower), which is also true of the apparel, shoes, and toys that China no longer makes. Plus, that factory is maintaining its competitiveness in higher-end parts by improving its management and investing in equipment that improves efficiency. This also explains why China remains competitive in many higher value-added products.
Market economics, not manipulation, drives trade with China
Our trade relationship with China is not perfect. There are areas that need to improve. Steel is an example. We also need China to grant more access to its domestic market in a number of industries. But overall our trade relationship with China is a result of natural economic conditions. China is a poor country that began industrializing thirty years ago. We bought more from them because their products are cheap and they can’t afford to buy our products. Over time, as China developed, its costs have risen so its export growth has slowed and its economy has been forced to adapt (for example, many industries in China, including textiles and toys in the past and steel and coal in the near future, have undergone significant downsizing). At the same time, as China has developed, it is now able to import more, which is why our exports to China have basically tripled since 2004. It should also be mentioned that, while in the past, US companies invested heavily in China, now Chinese are investing heavily in the US, which will be good for job creation in the US.
Trade deficits do not equal job losses
It should also be said that trade deficits do not directly translate into lost jobs. Germany and Japan, which do not run trade deficits as large as America’s, have experienced decreases in manufacturing employment as well over the last few decades, support for the notion that it is automation and the transition of an economy from the industrial age to the information age that leads to fewer manufacturing jobs. It is a mistake to blame trade.
Donald Trump is not the first person to suggest we need trade restrictions, including high tariffs, against China. He might be the first to actually push for results. I’m fairly certain he won’t get the kind of results he’s promising. The silver lining might be that, once he tries, maybe everyone else will move on to other ideas as well.