Has China single handedly destroyed the U.S. job market? And is there no turning back? For some in manufacturing, the answer to that may be a resounding "yes". To others, China growth means they are hiring at home to support demand overseas.
"American fear of China is reasonable, but they should also look at China with equal parts enthusiasm," says Larry Harding, president of High Street Partners, a consulting firm working with multinational companies. "China has created enormous demand for U.S. companies to build up support services for that market and overall you see fantastic profits of U.S. companies because of China. We didn't even exist six years ago and now we are a firm with 105 employees and hiring," Harding says.
Whether it's a small Americus, Ga., chopsticks makerselling to China, or Johnson & Johnson surgical equipment makers exporting from Raynham, Mass., on balance, China is contributing to job erosion in the U.S.
Even as the U.S. economy slowed into the second quarter, growing under 2%, the trade deficit with China grew to an impressive $26.6 billion in June, the highest monthly trade deficit with China registered this year. And this during a slowdown of both economies. Year-to-date, the U.S. trade deficit with China is $133.4 billion. The more America buys from China, the less it is buying from similar goods manufacturers in the U.S. And the U.S. imports a lot of the same type of goods that it exports to China.
"Is China displacing U.S. jobs?" asks Scott Paul, executive director at the Alliance for American Manufacturers, a trade lobby. "No question about it. A lot the job losses have come from innovative states like Massachusetts, North Carolina, Texas and California, where they do all the innovating, but China does all the manufacturing for them. The problem with that model is that manufacturing and production is where the middle class jobs are. China has had a huge impact on the U.S. economy," Paul says.
The Economic Policy Institute (EPI) in Washington estimates that at least 2.4 million manufacturing jobs were lost between 2001 and 2008 because of China taking over the production of manufactured goods. That number represent 66.9% of all jobs displaced in that seven year period. Durable goods manufacturing jobs displaced during that time account for most of the manufacturing job losses, and for 47.1% of all the total jobs displaced due to trade with China.
Using data from the Bureau of Labor Statistics, EPI estimates that California lost 369,500 jobs in just two years, between 2005 and 2007, due to the trade deficit. Texas came in second with 193,200 jobs lost in just two years.
Between 1979 to around 1997, U.S. manufacturing job levels were stable. Declines were in line with general unemployment, says EPI economist Robert Scott. After 1997, the absolute numbers of manufacturing jobs collapsed due to cheap competition from Chinese labor that flooded the U.S. with "Made in China" imports. It didn't matter in Washington, because the policy was for the U.S. to be the center of innovation and finance, where there are higher salaries, but also lower demand for less skilled workers. It also puts pressure on some states that are not known, or equipped as innovative centers with a highly educated workforce.
Scott estimates that around six million jobs were lost between 1997 and the first quarter of 2011, making that job erosion a slow moving train wreck compared to the officially estimated 9 million jobs lost during the 2008 credit crisis. In other words, long term, China has been eating away at U.S. middle class jobs and most have not been replaced, according to EPI.
"Manufacturing has come back maybe one to two percent since the trough in the business cycle," Scott says, though that doesn't make him optimistic. That's because "China's cheap capital costs keeps prices incredibly low in the U.S. That has come at the expense of the U.S. labor market," he says.
America's job market implosion in 2008 was not because of China. It was because of the crash of the housing market, and subsequent freezing of U.S. lending. In fact, the cry on Main Street is that Wall Street gave us 9% unemployment rate, not Beijing. Then again, China comes in a close second.
The U.S. needs to convene a multilateral meeting to address global imbalances and in particular Chinese mercantilism, says Scott Paul in an Aug. 15 op-ed posted on The Hill.com. "If China doesn't agree to participate, designate it a currency manipulator. China ships fully one-third of its exports to the U.S. and finances less than 10% of our public debt, so we have more leverage than some might suggest," he says.
China holds around $1.2 trillion in U.S. Treasury bonds, far above what U.S. companies have invested in China FDI. Then again, it's hard to make a case that portfolio investment in U.S. government bonds is a job generator. Yet, China is actually investing in job creating enterprises in the U.S., either through greenfield projects, or through mergers and acquisitions with U.S. companies.
According to the Rhodium Group in New York, Chinese direct investment is on the rise. In 2005, Chinese direct investment into U.S. businesses totaled 19 deals worth $1.2 billion. But as the economy got richer, Chinese government enterprises and the private sector increased its purchase of U.S. assets. So by 2010, Chinese companies closed 63 deals worth $5.4 billion, including in sectors that rely heavily on manufacturing and production. In the first quarter of 2011, Chinese companies closed 11 deals worth $758 million, including information technology, industrial machinery and clean technology.
When comparing the two countries' corporate investments in one another, the key is to look at individual deal volume, not dollar value. It is around six times cheaper for the U.S. to invest in China than it is for China to invest in the U.S. The Chinese currency, the renmimbi, is worth around 6.3 RMB to the dollar. So according to the U.S. China Business Council, U.S. companies invested in a massive 1,772 deals in 2008. China invested in 35 deals in the U.S. in 2008.
It is just as easy to find an anti-China business leader as it is to find a pro-China one. Bill Doyle, CEO of Vystar Corp., a small, liquid latext producer in Georgia, says he is hiring because of China.
"My expansion is here. My salaried employees are here and I need to double my staff because of China demand," Doyle says. He is a small enterprise with just five employees. But 96% of Georgia employers are small businesses with 25 staffers or less. Everyone knows that small business drives American employment.
China has a lot of downsides, but it is not without its upsides. This week, vice president Joe Biden told Chinese business leaders to keep investing in the U.S. In simple terms, the more jobs China can invest in here, the more tax revenue the U.S. can collect to pay bondholders like the Chinese government.
"We are the number one destination for foreign direct investment and China is investing more and more in the U.S.," says Daniel Gross, a columnist at Yahoo! Finance. "We want China to get richer so they can invest in the U.S. and keep jobs here. As that trend continues, it's not going to be a one-way street where our money goes to China, and their money goes to the US Treasury. China is good for a lot of companies and a lot of industries. The fact that China keeps buying soybeans is good for the Midwest, for example," he says.
That's fine, but the Alliance for American Manufacturing wants China to buy Johnson & Johnson medical devices, too, and other manufactured, labor intensive widgets rather than export them to the U.S.
China might not be a killer virus for the U.S. job market. It's U.S. companies that make these decisions afterall, helped along by policies in Washington. U.S. companies are going where the growth is. And that growth remains there, and not here. At least for now...