Does the U.S. pay too high a cost for free trade in the TPP pact?

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 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
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

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.

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.

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.

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.

Charles R. Morris, a former banker and lawyer, is the author of The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash (2008) and Comeback: America’s New Economic Boom. He is a fellow at The Century Foundation.

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