Did China Destroy Globalization?

Or Is Wage Suppression Behind The Rise of Anti-Globalization Populism?

Source: World Bank at https://data.worldbank.org/indicator/NE.TRD.GNFS.ZS?locations=OE

“Did China Destroy Globalization?” was the question posed by The International Economy Magazine to 20 analysts including me. TIE introduced the symposium by saying: “Globalization arrived as a giant paradoxical force that...brought millions of developing-world citizens out of poverty, but in the West led to economic hardship among working-class families. According to this view...China’s failure to play by the rules gradually undermined globalization’s political credibility. Now a deglobalization movement is in full force. China’s representatives respond that they are being unfairly blamed for a failure by American plutocratic elites to protect their working class...”

            To see the whole range of views (each just a few hundred words), click on http://www.international-economy.com/TIE_Su22_ChinaGlobalizationSymp.pdf. Here’s my answer. I added a couple of charts and a few passages for this blog.

So far at least, no one has “destroyed” globalization. The ratio of trade to GDP, for example, has not declined in the United States or Japan, merely leveled off for a few years, and it is still increasing in Europe (see chart above). What has been derailed is the ability of governments in the United States and Europe to pursue new trade agreements and some, including in Washington, have engaged in episodes of outright protectionism.

            Those who say China is the cause of rising protectionism contend that, by keeping its currency, the renminbi, woefully undervalued, Beijing has destroyed jobs and lowered wages in import-competing manufacturing sectors, thereby inciting a backlash. The reality is that, although Beijing has certainly practiced mercantilism at times, China, NAFTA, the European Union, and immigration are being blamed for problems that mainly originate at home.

            Yes, for a while, China’s currency was greatly undervalued, and its global trade surplus soared to a peak of 9 percent of GDP in 2007. However, China reversed that policy years ago. During 2013–2020, its trade surplus averaged just 2 percent of GDP and, last year, JP Morgan rated China’s currency the most overvalued among the thirty-two that it tracks. There is still a very serious problem with China regarding technology and intellectual property rights, but that’s not what’s driving populist politics.

            Technology, not trade, and the rise in services are the main reasons manufacturing jobs have plunged, including in trade surplus countries such as Japan and Germany. Just as it takes fewer farmers these days to feed a whole country, it also takes fewer factory workers. In 2015, it took 30 percent fewer American workers to produce 44 percent more output of autos and auto parts than in 2000 (measured in constant dollars). Even if the US imported not a single car, automotive jobs would have fallen almost as much: 27 percent (see chart below). Chronic trade surpluses in Japan and Germany have not inoculated them from the same decline in factory jobs.

Source: Author calculation based on data from the Bureau of Economic Analysis and Census Bureau

            If one tracks the trend in factory jobs as a share of all American jobs over the past decades, there’s not even a blip in the trend line following China’s entry into the World Trade Organization in 2000. A prediction of the manufacturing share in 2016 based simply on extrapolating the 1967-99 trend—i.e., without even considering China’s WTO entry—is remarkably accurate (see chart below).

Source: Author calculation based on data from http://data.bls.gov/cgi-bin/surveymost?ce

            Why, then, do imports and immigration get so much blame? Mostly because workers don’t want to be told they are losing jobs and wages to some impersonal force; they prefer a more personal target for their outrage. Studies of the United States and Europe show that, in locations where automation is demonstrably the biggest factor in lost jobs and wage cuts, there is an upsurge of nationalist sentiment against imports and immigrants. Across rich countries since the mid-1970s, real wages per hour have not kept up with real GDP per hour of work, as they traditionally did. This is not due to imports but to labor’s mounting loss of political power beginning in the mid-1970s (see chart on US below).

Source: https://www.epi.org/publication/understanding-the-historic-divergence-between-productivity-and-a-typical-workers-pay-why-it-matters-and-why-its-real/

            Moreover, formerly pro-free trade politicians have increasingly abandoned it in order to curry favor with special interest groups. In early 2016, i.e., before Donald Trump’s takeover of the Republican party, GOP leaders in the US Senate threatened the bury the Trans Pacific Partnership (TPP) unless it was changed to include special favors for cigarettes and a special class of pharmaceuticals called biologics. As President, Joseph Biden has substantially increased protectionist “Buy America” policies.

            What is needed are not lectures on free trade but measures that address the real wellsprings of worker anguish. This would include adjustment measures for those who lose their jobs, whether to imports or technological improvements, as well as measures to overcome wage suppression. When employers and politicians who oppose such remedies seek the source of anti-trade populism, they can find the answer by looking in the mirror.