Candidates call time on free trade

Donald Trump wants to slap a 45 per cent tariff on Chinese imports. Picture / AP

The long-held faith in open markets is beginning to fade — and it isn’t just political rhetoric.

For five years, the young man has worked the rolling mill that churns out slab after slab of high-strength steel products bound for auto factories and large construction sites across the country.

His paycheque has risen slowly but steadily, and two years ago he bought a three-bedroom house in a solidly middle-class suburb for himself and his family. And though the steel industry now suffers from overcapacity and is consolidating, he has little fear that his job will be affected. The company he works for is huge and profitable, and the mill in which he works is state of the art.

Cai Jinrong, in other words, is living the great middle-class Chinese dream. The company he works for is Baosteel. The house he owns is in suburban Shanghai. And to hear US presidential candidates tell it, to one degree or another, his relative success has come at the expense of his counterparts in the United States: lunch-bucket workers in industries like steel and auto and machine tools. Those metal-bashing businesses flourished in America after WWII and provided solidly middle-class lifestyles for a couple of generations of families, but that is no longer the case. Manufacturing employed 17.1 million Americans in 2000; it employed 12 million at the end of 2013 (the most recent data available). Manufacturing wages have barely grown for nearly two decades now.

These realities have brought what may be a historic shift in US economic policy: a fracturing of the free-trade consensus that has prevailed since the end of WWII.

Donald Trump, the Republican presidential front-runner, says he'd slap a 45 per cent tariff on all goods imported from China. Democratic front-runner Hillary Clinton, whose husband signed the historic North American Free Trade Agreement when he was in the White House, has disavowed the Trans-Pacific Partnership - which was negotiated by the Obama Administration while she was Secretary of State, and which she once called the "gold standard" of trade agreements.

Even among the also-rans in this political cycle, no one has a good word to say about free trade.

What's behind all this scepticism about free trade? The answer, according to several mainstream (and normally pro-trade) economists, is China - or, to be more precise, China's 2001 accession to the World Trade Organisation and the subsequent economic ascent of what is now the world's second-largest economy.

Among the most influential papers reshaping the received wisdom about how labour markets adjust to trade shocks is one published in January by the National Bureau of Economic Research, which for decades has been at the core of establishment economic thinking in the US. In the study, titled "The China Shock", David Dorn, David Autor and Gordon Hanson conclude an "adjustment in local labour markets [has been] remarkably slow, with wages and labour-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences [in 2001].

"Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in US industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialise." In other words, the only benefit to the US from the surge of Chinese imports - manufactured imports from China have risen from 4.5 per cent of the US total in 1991 to nearly 25 per cent today - is the low price of goods sold at Wal-Mart and elsewhere.

The costs in US manufacturing communities, however, have been substantial: "Our direct estimates," the economists write, "imply that had import penetration from China not grown after 1999, there would have been 560,000 fewer manufacturing jobs lost through the year 2011." They estimate the impact of Chinese imports accounts for approximately 10 per cent of the job decline in manufacturing.

At the same time, Trump's assertion that China has gamed the international trading system does have some basis in reality. China has had 34 complaints filed against it at the WTO over unfair trade practices since 2001, behind only the European Union and the US in that time frame.

And while China has grown as a market for US goods and services, the bilateral trade deficit between the two countries remains massive: a staggering US$365 billion last year, the biggest bilateral deficit on record.

In the past, economic theory held - and reality usually bore out - that over time labour markets adjusted to foreign competition. A fair number of workers displaced would move to other industries, often in more economically vibrant parts of the country. This was especially true in the 1980s and 90s, when America's Sun Belt states grew significantly and Rust Belt cities like Pittsburgh and Detroit saw workers flee.

But this is not evident when it comes to the period coinciding with China's economic rise. "The reallocation of employment appears to be swamped by the overall adverse effect of the surge [in China's imports] since WTO accession in 2001," says the study.

It's not yet clear whether Chinese leaders comprehend what a potentially profound shift in US trade policy is in the wind. They tend to view the Trump campaign as a bit of a joke - and are said to be content to believe that Clinton is just saying what she needs to about trade to get elected; once she gets in the White House, "they don't think much will change," says one US diplomat.

Perhaps so; perhaps not. For several years, the two countries have been working on a bilateral investment treaty. But the notion that it will get done before the end of Obama's last term, and in the current US political climate, is fanciful.

And the possibility that the free-trade consensus in Washington is a thing of the past is all too real. If Beijing doesn't get that now, it probably will soon enough.

- Newsweek